AUTOBYTEL COM INC - 10-K Annual Report

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

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2000

[ ] 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 0-22239
autobytel.com inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 33-0711569
(State of Incorporation) (I.R.S. Employer Identification No.)

18872 MacArthur Boulevard
Irvine, California 92612-1400
Telephone: (949) 225-4500
(Address, including zip code, and telephone number,
including area code, of registrant's principal offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section
12(g) of the Act:

Common Stock, par value $0.001 per share
(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Based on the closing sale price of $1.7188 for our common stock on the
Nasdaq National Market System on March 15, 2001, the aggregate market value of
outstanding shares of common stock held by non-affiliates was approximately
$29.1 million. As of March 15, 2001, 20,364,070 shares of our common stock were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of our Definitive Proxy Statement for the 2001 Annual Meeting,
expected to be filed within 120 days of our fiscal year end, are incorporated by
reference into Part III.

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autobytel.com inc.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

Page
Number
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Index ........................................................................... 2

PART I
Item 1. Business ........................................................................ 3
Item 2. Properties ...................................................................... 27
Item 3. Legal Proceedings ............................................................... 27
Item 4. Submission of Matters to a Vote of Security Holders ............................. 28

PART II

Item 5. Market for the Company's Common Equity and Related
Stockholder Matters ............................................................. 28
Item 6. Selected Financial Data ......................................................... 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ...................................................................... 29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...................... 36
Item 8. Financial Statements and Supplementary Data ..................................... 37
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure ........................................................ 37

PART III

Item 10. Directors and Executive Officers of the Company ................................. 37
Item 11. Executive Compensation .......................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management .................. 37
Item 13. Certain Relationships and Related Transactions .................................. 38

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ................ 38
Signatures ...................................................................... 39

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PART I

ITEM 1. BUSINESS

The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects and make informed investment decisions. This Annual Report and
our proxy statement, parts of which are incorporated herein by reference,
contain such forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Words such as "anticipate,"
"estimate," "expects," "projects," "intends," "plans," "believes" and words of
similar substance used in connection with any discussion of future operations or
financial performance identify forward-looking statements. In particular,
statements regarding expectations and opportunities, new product expectations
and capabilities, our outlook regarding our performance and growth are
forward-looking statements. These forward-looking statements are just
predictions and involve risks and uncertainties such that actual results may
differ materially from these statements. Important factors that could cause
actual results to differ materially from those reflected in forward-looking
statements made in this Annual Report are set forth under the heading "Risk
Factors." Stockholders are urged not to place undo reliance on forward-looking
statements, which speak only as of the date hereof. We are under no obligation,
and expressly disclaim any obligation, to update or alter any forward-looking
statements, whether as a result of new information, future events or otherwise.
All forward-looking statements contained herein are qualified in their entirety
by the foregoing cautionary statements. Unless specified otherwise as used
herein, the terms "we," "us" or "our" refer to autobytel.com inc. and its
subsidiaries.

OVERVIEW

We are an internationally branded online automotive commerce company
that provides consumers with automotive solutions throughout the lifecycle of
vehicle ownership, capturing revenue at multiple stages. We own leading, branded
Internet sites for new and pre-owned vehicle information and automotive services
that link buyers and sellers in an information-rich environment. Through our Web
sites, www.autobytel.com and www.carsmart.com, consumers can research pricing,
specifications and other information regarding new and pre-owned vehicles and
purchase, finance, lease, insure, sell or maintain their vehicles. We believe
that our services provide benefits for consumers by supplying them with
information to make informed and intelligent vehicle decisions throughout the
lifecycle of vehicle ownership.

Consumers can purchase new vehicles through our dealer referral network
and our locate-to-order service, AutobytelDIRECT(SM). When consumers indicate
they are ready to buy a vehicle, they can be connected to our network of over
4,800 participating dealers in North America, of which over 3,500 are
Autobytel.com(R) dealers and over 1,300 are CarSmart.com(SM) dealers, with each
dealer representing a particular vehicle make. Approximately 400 dealers
subscribe to both the Autobytel.com and CarSmart.com services. Dealers
participate in our network by entering into non-exclusive contracts with us. We
expect our dealers to promptly provide a haggle-free, competitive offer. Fees
paid by our participating dealers constitute the majority of our revenues.

AutobytelDIRECT is a locate-to-order service offering a real-time online
inventory of thousands of new vehicles, instant up-front pricing, multiple
trade-in options, competitive financing and insurance and at-home or office
delivery. Consumers can search for the vehicle they need, assisted by a variety
of filters, such as make, model, series, engine, transmission and color. Once
consumers locate their vehicle of choice, AutobytelDIRECT's Customer Care Center
assists the consumer in the purchase process.

Consumers can purchase pre-owned vehicles through our Pre-Owned
CyberStore. The Pre-Owned CyberStore allows consumers to search for a pre-owned
vehicle according to the price, make, model, color, year and location of the
vehicle. The CyberStore locates and displays the description, location and, if
available, actual photograph of vehicles that satisfy the consumer's search
parameters.

Our MyGarage service area is designed to empower consumers by providing
cost effective and efficient processes for dealing with common service and
maintenance issues. The site enhances consumer personalization and includes key
components such as access to Autobytel.com Accredited Service Centers, the
ability to schedule service and maintenance appointments online and receive
information such as service reminders and recall information.

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Consumers can also apply for and receive insurance, financing, leasing
and warranty proposals as well as other services and information through our Web
sites. In an arrangement with Peoplefirst we provide consumers with access to
competitive loan rates. We also provide a link on our Web sites so consumers can
receive real-time quotes for insurance coverage from Channelpoint Corporation
and submit quote applications online. Participants in the program include The
Hartford (Hartford Financial Services Group, Inc.), The GE Auto Insurance
Program and Ekemper.

In January 2001, we introduced iManager(R), a multi-functional dealer
management system and an upgrade of our Dealer Real Time(R) system. We are
converting the Autobytel.com dealers from the Dealer Real Time system to
iManager. The iManager system provides dealers with immediate purchase request
information for new and pre-owned vehicles, the ability to track multiple
customers and purchase requests, turnkey customer retention programs, automatic
uploading of new and pre-owned vehicle inventory into our database, reporting
systems, including transaction status, customer information and Internet
department performance, and other features. The CarSmart.com dealers use a
dealer system called SmarTrack.

In February 2001, we signed an agreement with General Motors Corporation
(GM) to conduct a 90-day test of a new GM online locate-to-order business model.
The model involves modification of our existing Autobytel.com Web site for
consumers from the Washington, D.C. metropolitan area. The test program will
combine the independent all makes, all models capability of Autobytel.com with a
dealer-set online e-price and locate-to-order vehicle inventory model for
Chevrolet vehicles.

In 1999 and 2000, we established joint ventures and entered into
licensing agreements in Europe, Japan and Australia and are exploring additional
opportunities in Europe, Asia and Latin America. We receive fees from each
licensing agreement.

In February 2000, Autobytel.com acquired A.I.N. Corporation, the owner
of CarSmart.com, one of the leading online buying sites for new and pre-owned
vehicles, for 1.8 million shares of Autobytel.com common stock and $3 million in
cash. As of February 28, 2001, CarSmart.com had over 1,300 dealers, established
relationships with more than 200 credit unions and strategic marketing
agreements with several of the top Internet portals, including AOL.com, Alta
Vista and GO2Net. A.I.N. Corporation is referred to herein as A.I.N. or
CarSmart.com. See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations." We are currently in the process of
integrating the executive and administrative personnel of CarSmart.com. We
continue to operate CarSmart.com as a separate Web site, and we have not yet
determined whether we will integrate it into our Autobytel.com Web site in the
future.

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

BACKGROUND

Growth of the Internet and Online Commerce. The Web and online services
have emerged as significant global communications and commercial media enabling
millions of people worldwide to share information, communicate and conduct
business electronically. We believe that the number of Web users will grow based
on a number of factors, including the large and growing base of installed
personal computers in the home and workplace, the decreasing cost of personal
computers, easier, faster and cheaper access to the Internet, the distribution
of broadband applications, the proliferation of Internet content and the
increasing familiarity and acceptance of the Internet by businesses and
consumers.

The growth in the use of the Internet has also led to a rapid growth of
online commerce. Web commerce sites are enabling businesses to target and manage
a broad customer base and establish and maintain ongoing direct customer
relationships. As a growing number of businesses and information providers have
begun marketing on the Web, it has rapidly become a medium in which consumers
can access a vast amount of information regarding the pricing, quality and
specification of products. Additionally, online transactions can be faster, less
expensive and more convenient than transactions conducted in person or over the
telephone.

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The Automotive Vehicle Market. Automotive dealers operate in localized
markets and face significant state regulations and increasing business
pressures. These fragmented markets, with approximately 47,000 dealers in
aggregate, are characterized by:

- a perceived overabundance of dealerships,

- competitive sales within regional markets,

- increasing advertising and marketing costs that continue to
reduce dealer profits,

- high-pressure sales tactics with consumers, and

- large investments by dealers in real estate, construction,
personnel and other overhead expenses.

In addition, consumers have traditionally entered into the highly
negotiated sales process with relatively little information regarding
manufacturer's costs, leasing costs, financing costs, relative specifications
and other important information. Buying a vehicle is considered to be one of the
most significant purchases a United States consumer makes. According to Manheim
Auctions, approximately $744 billion and $702 billion was spent on new and
pre-owned vehicles in the United States representing the sale of approximately
59 million and 58 million vehicles in 2000 and 1999, respectively. Although
automotive retailing attracts significant consumer dollars, we believe that
consumers associate the traditional vehicle buying experience with high-pressure
sales tactics.

THE AUTOBYTEL.COM SOLUTION

We believe that our online products and services improve the vehicle
purchasing process for both consumers and dealers. We offer consumers
information-rich Web sites, numerous tools to configure this information, and a
quality fulfillment experience. As part of the fulfillment experience, we expect
our dealers to provide competitive price quotes for new and pre-owned vehicles.
We believe our services enable dealers to reduce personnel and marketing costs,
increase consumer satisfaction and increase customer volume.

Benefits to Consumers. Our Web sites provide consumers free of charge
up-to-date specifications and pricing information on vehicles. In addition, our
consumers gain easy access to valuable automotive information, such as dealer
invoice pricing and tools consisting of a lease calculator, a loan calculator to
determine monthly payments and a lease or buy decision assistant. Our database
of articles allows consumers to perform online library research by accessing
documents such as weekly automotive reports, consumer reviews and manufacturer
brochures. Various automotive information service providers, such as Edmund's,
Kelley Blue Book, Pace Publication's Carprice.com and IntelliChoice, are also
available on Autobytel.com's Web site to assist consumers with specific vehicle
and related automotive decisions such as insurance and financing. Armed with
such information, the consumer should be more confident and capable of making an
informed and intelligent vehicle buying decision.

We believe we offer consumers a significantly different vehicle
purchasing experience from that of traditional methods. Consumers using our Web
sites are able to shop for a vehicle, and make financing and insurance decisions
from the convenience of their own home or office. We expect dealers to provide
consumers a haggle-free price quote within 24 hours and a high level of customer
service. We form our dealer relationships after careful analysis of automotive
sales and demographic data in each region. We seek to include in our dealer
network the highest quality dealers within defined territories.

Benefits to Dealers. We believe we benefit dealers by reducing the
dealers' incremental personnel and marketing costs, increasing consumer
satisfaction and increasing sales volume. Through our investment in national
advertising and brand recognition of Autobytel.com and CarSmart.com, we attract
consumers to our Web sites and, based on the consumers' preference, we either
direct them to dealers in their local area or facilitate the purchase process
for consumers through AutobytelDIRECT. We believe this provides dealers access
to a larger number of prequalified consumers or outsourced purchase
transactions. We believe dealers' personnel costs should be reduced because we
provide dealers access to potential purchasers who have completed their research
and should be ready to buy or lease a vehicle or provide dealers with
outsourcing of the vehicle purchase process through AutobytelDIRECT. As a
result, reaching these consumers and selling or leasing them vehicles costs the
dealer little or no additional overhead expense other than the fees paid to us
and the personnel costs of a dedicated manager. Through our iManager and

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Dealer Real Time systems, Autobytel.com provides dealers with on-site technology
to better track sales, inventory, customer solicitations, responses and other
communications.

By providing consumers a quality fulfillment experience, we seek to
provide our dealers a large number of consumers, which allows them to compete
more effectively. Our solution includes a network of over 4,800 participating
dealers in the United States and Canada representing every major domestic and
imported make of vehicles and light trucks.

To incent a dealer to participate in the Autobytel.com or CarSmart.com
network, we allocate each dealer an exclusive geographic territory in such
network based upon specific vehicle make. A territory allocated by us to a
dealer is generally larger than a territory assigned to a dealer by a
manufacturer.

Our Web Sites. Because Web sites can be continually updated and provide
a large quantity of quality information, we believe the Internet offers the most
efficient medium for consumers to learn about and shop for vehicles. The
Internet's global reach to consumers allows us to leverage our investment in
branding and marketing across a very large national and international audience
to create qualified purchase requests for vehicles and outsourced purchase
transactions of vehicles. For these reasons, we also believe that the Internet
represents the most efficient method of directing purchase requests to local
markets and dealers.

Autobytel.com currently provides the following services on its Web site:

[FLOW CHART]

CarSmart.com currently provides the following services on its Web site:

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[FLOW CHART]

STRATEGY

Our primary objective is to connect buyers and sellers in an
information-rich environment throughout the vehicle ownership lifecycle. We
intend to achieve this objective through the following principal strategies:

Continue to Build Brand Equity. We believe that due to our focus on both
online and traditional marketing, we own two of the leading brand names in our
sector. We intend to continue to aggressively market and advertise to enhance
our brand recognition with consumers. We believe that continuing to strengthen
brand awareness of the Autobytel.com and CarSmart.com names among consumers is
critical to attract vehicle buyers, increase purchase requests and outsourced
purchase transactions and, in turn, maintain and increase the size of our dealer
base. We intend to continue advertising on the Internet and through traditional
media, such as television, radio and print publications.

Ensure the Highest Quality Consumer Experience. We believe that consumer
satisfaction and loyalty is heavily influenced by the consumer's experience with
our sites and with our dealers. In order to enhance our appeal to consumers, we
intend to continue developing our Web sites by enhancing vehicle information and
personalization. We formed I-Net Training Technologies LLC with third parties to
provide dealers with more extensive training and tools to facilitate Internet
selling of vehicles. In addition, we plan to continue compiling high quality
content from third party sources on our sites, including information from
Edmund's, IntelliChoice, Carprices.com and Kelley Blue Book. We believe that
consumer satisfaction with the vehicle purchasing experience is also essential
to our success and the differentiation of our services from those of our
competitors. We intend to continue to invest in our dealer training and support
services to ensure a consistent, high-quality alternative to the traditional
vehicle buying process.

Increase Purchase Requests and Purchases. We believe that increasing the
volume and quality of purchase requests and purchases directed from our Web
sites to our dealer networks is crucial to the long-term growth and success of
our business. By augmenting the volume of quality purchase requests and
purchases, we expect to attract additional dealers to our networks, increase
fees paid by dealers, and solidify our relationships with participating dealers.
Our strategy for increasing traffic to our sites and the number of purchase
requests and purchases includes forming and maintaining online sponsorships and
alliances with Internet portals and with Internet automotive information
providers. As part of our strategy to improve the quality of purchase requests,
we continue to expand the breadth and depth of information and services
available through our Web sites so that well informed, ready-to-buy consumers
can be directed to participating dealers. In addition, we established
AutobytelDIRECT to attract consumers who prefer to complete the purchase of a
vehicle with our assistance and limited dealer contact. The service provides
dealers with outsourcing of the purchase process of a vehicle for a fixed fee
and the added convenience to consumers of completing the purchase process online
with our assistance.

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Expand and Improve Dealer Network. We believe that strengthening the
size and quality of our dealer networks is important to the success and growth
of our business. Our strategy is to increase the size of our dealer networks by
attracting new dealers and strengthening relationships with existing dealers by:

- increasing the volume and quality of purchase requests and
purchases,

- advertising in trade publications aimed at dealers and
participating in industry trade shows,

- maintaining our extensive training and support programs to
participating dealers, and

- providing our iManager, Dealer Real Time or SmarTrack systems,
as applicable, to all participating dealers.

Invest in Related Products and Services. We believe that expanding our
products and services to both consumers and dealers is critical to establish
ourselves as the premier provider of online automotive products and services.
Our strategy is to continue to enhance personalization features and invest in
related products and services, such as the CyberStore, maintenance and service,
and warranty, finance and insurance services. The iManager, Dealer Real Time and
SmarTrack systems will allow us to launch new products and services for our
dealers. We also allow dealers to offer accessories directly through our Web
sites. We expanded the advertising sales on our Web sites and marketed the
information in our database in accordance with our privacy policy. We expect to
further expand these businesses.

Expand Internationally. We intend to continue our international
expansion through licensing agreements and joint ventures with local strategic
investors. In January 2000, Autobytel.Europe LLC and Autobytel.com entered into
an operating agreement with Inchcape plc, Pon Holdings B.V. and GE Capital
Equity Holdings, Inc. to expand our existing operations and business throughout
Europe. We licensed our technology, business processes and trade name to
Autobytel.Europe on a royalty free perpetual basis and contributed to
Autobytel.Europe our existing license agreements for the United Kingdom and
Scandinavia and Finland. In turn, Autobytel.Europe intends to license such
technology, business processes and trade name to other national operating
companies in European countries. Autobytel.Europe will usually invest in such
national operating companies or obtain options to acquire equity positions in
such companies. Autobytel.Europe currently has licensing agreements for the
United Kingdom, Sweden, Spain and The Netherlands and intends to establish
licensing agreements in Germany, France and Italy as well as certain other
countries in Western and Eastern Europe. We have also established joint ventures
in Japan and Australia with several strategic investors. We are currently
exploring additional opportunities in Asia and Latin America.

PRODUCTS, PROGRAMS AND SERVICES

New Vehicle Purchasing Service. Our new vehicle purchasing service
enables consumers to shop for and select a new vehicle through our Web sites by
providing research on new vehicles such as pricing, features, specifications and
colors. When consumers indicate they are ready to buy a vehicle, a consumer can
complete a purchase request online, which specifies the type of vehicle and
accessories the consumer desires, along with the consumer's contact information.
The purchase request is then routed by us to the nearest participating dealer
that sells the type of vehicle requested, and we promptly return an e-mail
message to the consumer with the dealership's name and phone number and the name
of the dedicated manager at the dealership. Dealers agree in their contracts to
contact the consumer within 24 hours of receiving the purchase request with a
firm, haggle-free price quote for the requested vehicle. When consumers complete
their purchase, they usually take delivery of their vehicle at the dealership
showroom. Generally, within 14 days of the submission of a consumer's purchase
request, we contact the consumer again by e-mail to conduct a quality assurance
survey that allows us to evaluate the sales process at participating dealers and
improve the quality of dealer service.

Our network had over 4,800 dealers as of February 28, 2001, which
represents a modest decline from the number of dealers we had as of December 31,
2000, of which over 3,500 are Autobytel.com dealers and over 1,300 are
CarSmart.com dealers. Approximately 400 dealers subscribe to both the
Autobytel.com and CarSmart.com services. These dealers represent every major
domestic and imported make of vehicle and light truck sold in the United States
and Canada. Dealerships are charged initial subscription fees and on-going fees,
principally on a monthly basis.

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New Vehicle Locate-to-Order Service. We launched our locate-to-order
service in January 2000. AutobytelDIRECT is a direct-to-consumer new vehicle
buying service offering a real-time online inventory of thousands of vehicles,
instant up-front pricing, multiple trade-in options, competitive financing and
insurance and at-home or office delivery. Consumers can search for the vehicle
they desire assisted by a variety of filters, such as make, model, service,
engine, transmission and color. Once consumers locate their vehicle of choice,
AutobytelDIRECT's Customer Care Center can assist in the purchase process.

AutobytelDIRECT allows dealers to outsource the closing of the vehicle
purchase for a fixed fee. In most states, upon the completion of a sale,
AutobytelDIRECT dealers will pay fees ranging from $100-$1,000, depending on the
gross selling price of the vehicle. As of February 28, 2001, AutobytelDIRECT had
611 participating dealers.

Pre-Owned CyberStore. We launched our CyberStore program in April 1997.
The CyberStore allows consumers to search for a certified or non-certified
pre-owned vehicle according to specific search parameters such as the price,
make, model, mileage, year and location of the vehicle. CyberStore locates and
displays the description, location and, if available, actual digital photograph
of vehicles that satisfy the search parameters. The consumer can then complete a
formal purchase request for a specific vehicle and is contacted by the dealer to
conclude the sale. To be listed in the CyberStore a certified pre-owned vehicle
must pass an extensive inspection and be covered by a 72-hour money-back
guarantee and a three-month, 3,000-mile warranty, which is honored nationally by
certified Pre-Owned CyberStore dealers. We charge each vehicle dealer that
participates in the CyberStore program a separate additional monthly fee. The
CyberStore program uses the iManager and Dealer Real Time systems to provide
participating dealers online purchase requests shortly after submission by
consumers as well as the ability to track their inventory on a real-time basis.

Service and Maintenance. In June 1999, we launched a comprehensive site
designed to facilitate the service process for consumers. The site is designed
to empower consumers with cost effective and efficient processes for dealing
with common service and maintenance issues. The site enhances consumer
personalization. It includes key components such as access to Autobytel.com
Accredited Service Centers and the ability to schedule service and maintenance
appointments online. At the My Garage area consumers can store and receive
information about their cars and trucks, such as service reminders, recall
information and a lease watch to help keep track of mileage on a leased vehicle.
The site offers "Ask the Expert", a section that offers answers to frequently
asked service and maintenance questions. In addition, the site offers travel and
weather information as well as maps.

Participating service centers must commit to respond to consumers within
24 hours with competitive no-haggle service prices. The site enables dealers to
use the Internet to further serve their customers. As of February 28, 2001, we
had 349 Autobytel.com Accredited Service Centers.

Other Related Products and Services. We offer a number of related
products and services that we market to consumers through our Web sites and the
linked Web sites of participating third party providers. We make purchase and
lease financing available to consumers through Peoplefirst that allow consumers
to research and apply for vehicle financing online in a secure manner. Consumers
can apply for a loan or lease online at the time they submit their purchase
request for either a new or pre-owned vehicle. Consumers are able to arrive at
the dealership with their loan pre-approved and their credit verification
documents in hand. We believe that the convenience of pre-approved purchase or
lease financing, combined with a firm, competitive price, enables dealers more
easily to consummate purchase requests. Peoplefirst pays us a referral fee and
an origination fee for most loans.

We provide a link on our Web sites so consumers can receive real-time
quotes for insurance coverage from Channelpoint Corporation and submit quote
applications online. Participants in the program include The Hartford (Hartford
Financial Services Group, Inc.), The GE Auto Insurance Program and Ekemper. As
of February 28, 2001, the service was available to consumers in 37 states and
the District of Columbia. We typically receive a marketing fee for every quote
application sent to a participating insurance company or agent by a consumer
accessing the Channelpoint Web site through our Web sites. In addition, we
provide Warrantybynet Inc.'s warranty products and receive fees per warranty
sold.

We offer information concerning all aspects of owning and leasing new
and pre-owned vehicles that we believe makes our Web sites valuable resources to
consumers. We also offer a lease calculator, a loan calculator to determine
monthly payments and a lease or buy decision tool.

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The iManager System. In 1997, we launched a proprietary technology and
software system called the Dealer Real Time system. The Dealer Real Time system
is an Internet-based communications platform that gives dealers a competitive
advantage compared to delivering purchase requests by fax. In January 2001 we
launched iManager, an upgrade of the Dealer Real Time system.

Using Internet technology, the iManager system enables the dealer to:

- instantaneously access a consumer's vehicle purchase request as
soon as the consumer submits it online,

- consolidate Internet leads from multiple sources and showroom
traffic in a single application,

- track all interaction with the consumer,

- accelerate dealer response time to consumers' online vehicle
purchase requests,

- send e-mail to consumers using a variety of predetermined
templates,

- access purchase requests through web-enabled cellular phones and
wireless handheld devices,

- input new and used vehicle inventory information for immediate
display to consumers on Autobytel.com Web pages,

- track dealership performance through a series of reports
available online,

- access Autobytel.com "news" and product information online, and

- contact Autobytel.com technical support personnel via e-mail
links.

CarSmart.com dealers use the SmarTrack dealer system. We are currently
evaluating whether to standardize all of our dealers on a single system.

INTERNATIONAL ACTIVITIES

We have established and intend to further expand our presence in foreign
markets through licensing agreements and by establishing relationships with
vehicle dealers and strategic investors located in foreign markets.

Europe. We established Autobytel.Europe with strategic investors to
expand our operations in Europe. We licensed our technology, business processes
and trade name to Autobytel.Europe on a royalty free perpetual basis and
contributed to Autobytel.Europe our existing license agreements for the United
Kingdom and Scandinavia and Finland. Autobytel.Europe intends to license such
technology, business processes and trade name to national operating companies in
European countries. Autobytel.Europe will generally invest in such national
operating companies or obtain options to acquire equity positions in such
companies. Autobytel.Europe also intends to offer joint services to such
companies to localize the Autobytel.com offerings while building its brand name
among consumers in individual countries as well as on a Pan-European and
regional basis. The strategic investors in Autobytel.Europe are GE Capital
Equity Holdings, Inc., Inchcape plc, the United Kingdom's largest independent
importer and distributor of motor vehicles, Pon Holdings B.V., a major
distributor of vehicles in The Netherlands, e-LaSer, a leader in customer
services and e-commerce in Europe and a subsidiary of Galeries Lafayette Group
and Continental AG, a major tire manufacturer. As of February 28, 2001, we owned
78% of Autobytel.Europe.

The license agreement with Auto-by-Tel UK limited, a subsidiary of
Inchcape plc, is a 20-year exclusive agreement to license our technology,
business processes and trade name in the United Kingdom, as well as provide
maintenance and development for such technology. The license agreement with
Auto-By-Tel AB is a similar 10-year exclusive agreement for Sweden. The United
Kingdom and Swedish sites were launched in April 1999. As of February 28, 2001,
Autobytel.Europe owned 15% of Auto-By-Tel AB. Autobytel.Europe entered into
10-year exclusive license agreements for The Netherlands and Spain. The
Netherlands and Spanish sites were launched in

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February 2001. Autobytel.Europe intends to establish licensing agreements in
Germany, France and Italy as well as other countries in Western and Eastern
Europe.

Japan. In June 1999 we established Autobytel Japan Kabushiki Kaisha with
six Japanese investors. We entered into a 10-year exclusive agreement with
Autobytel Japan to license our technology, business processes and trade name in
Japan. The strategic investors in Autobytel Japan are ITOCHU Corporation, a
global trading company with approximately $110 billion in revenue; Intec, Inc.,
a leading independent systems integrator and network service provider with its
own infrastructure in Japan; e-solutions, inc., an e-commerce solutions provider
from business plan to implementation; Recruit Co., Ltd., the publisher of
Japan's most widely recognized auto-related magazine; Orient Corporation, a
leading consumer finance company in Japan; and TransCosmos, a leading network
services company in Japan. GE Capital is also an investor in Autobytel Japan.
Autobytel Japan launched its Web site in November 1999. As of February 28, 2001,
we owned 26% of Autobytel Japan.

Australia. In February 2000 we established autobytel Australia Pty
Limited with six Australian investors. We entered into a 10-year exclusive
agreement with Autobytel Australia to license our technology, business processes
and trade name in Australia as well as to localize the Autobytel.com offerings
for the Australian market. The strategic investors in Australia are St. George
Bank Limited, one of Australia's largest banks with over 20 years experience in
the automotive finance industry; Trading Post, Australia's largest print and
online used car market; Astre Automotive, Australia's largest vehicle
distributor and importer; RACV (Royal Automobile Club of Victoria), with
approximately 1.3 million members; Fortis Insurance, one of Australia's largest
automotive insurance companies; and Strathfield E-Ventures, a technology based
company specializing in e-commerce sales of auto accessories with extensive
automotive e-commerce knowledge. Autobytel Australia launched its Web site in
October 2000. As of February 28, 2001, we owned 30% of Autobytel Australia.

Canada. Through our wholly-owned subsidiary, Autobytel.ca inc., we
launched Autobytel.ca in Canada in 1998. As of February 28, 2001, approximately
176 Canadian dealerships belonged to our network.

Expansion Opportunities. We are currently exploring additional
opportunities in Europe, Asia and Latin America.

Revenues from our customers outside of the United States were less than
10% of total revenues for the years ended December 31, 2000 and December 31,
1999.

MARKETING AND SALES

Our ability to enhance the recognition of our brand names, domestically
and internationally, and position ourselves as a leading Internet-based vehicle
information and automotive services provider is important to our efforts to
increase the number of vehicle purchase requests, outsourced purchases and
requests for ancillary services, as well as the number and quality of
subscribing dealerships. Over the past several years, we have been the subject
of numerous newspaper, magazine, radio and television stories. Articles about
our new vehicle program have appeared in Business Week, Fortune, Forbes, Time,
and The Wall Street Journal, among other publications. Television stories
featuring us have been aired nationally on all major television networks. We
believe that ongoing media coverage is an important element in creating consumer
awareness of our brand names and has contributed to dealership awareness of, and
participation in, our programs.

We have established marketing and advertising programs with many of the
leading automotive information providers on the Internet, including Edmund's,
IntelliChoice and Kelley Blue Book which direct traffic to our Web site and
increase purchase requests. Our agreements with automotive information providers
typically have a term of one year.

In 2000, approximately 17% of our total purchase requests originated
from StoneAge Corporation. Our agreement with StoneAge, pursuant to which we
receive referrals from StoneAge's Web site, is scheduled to expire in March
2002. StoneAge provides us with the largest number of purchase requests other
than consumers visiting the Autobytel.com Web site directly. We pay StoneAge
based on a per purchase request basis.

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Our agreement with NBC Internet provides for anchor tenancy in the New
Car Center on its Web site, NBCi.com, as well as other promotions on its Web
site. The agreement also provides for a co-branded Web site. The agreement is
for a term of three years expiring in March 2002. We pay NBCi annual and monthly
fees.

As of December 31, 2000, the aggregate minimum future payments under our
agreements with Internet portals was $10.9 million.

During 2000, our total Internet marketing and advertising costs incurred
were $20.6 million, including set-up and initial, annual, monthly and variable
fees of $0.5 million, $0.6 million, $7.5 million and $12.0 million,
respectively.

We supplement our Internet presence with television, radio and print
advertising. In late 1996, we began to broaden our marketing efforts with a
campaign to accelerate consumer awareness of the Autobytel.com brand name and
drive traffic to our Web site through cable television advertisements featured
on CNN and CNET, Inc. and network television advertisements featured on NBC and
MSNBC. We expect to continue to use television advertising to strengthen our
brand awareness.

In addition to our consumer-oriented marketing activities, we also
market our programs directly to dealerships, participate in trade shows,
advertise in trade publications and major automotive magazines and encourage
subscribing dealerships to recommend our program to other dealerships.

INTELLECTUAL PROPERTY

We have registered service marks, including Auto-By-Tel, Autobytel.com
and our Autobytel.com logo and have applied for additional service marks and
numerous patents. We regard our trademarks, service marks and brand names as
important to our business.

DEALER RELATIONSHIPS AND SERVICES

Dealer Network. Dealers participate in our networks by entering into
contracts with us. Autobytel.com is converting its dealers to new contracts with
one-year terms that are terminable on 30 days' notice by either party. Our
dealerships are located in most major metropolitan areas in the United States
and Canada. As of February 28, 2001, the Autobytel.com participating dealership
base totaled over 3,500 dealers. Dealerships pay initiation and monthly fees to
subscribe to our online marketing program. Both the initial and monthly
subscription fees are established in the contract and are based upon many
business factors including the type and location of the franchise. We reserve
the right to raise our fees to dealers upon 30 days notice after the first six
months of the term. We do not prevent dealers from entering into agreements with
our competitors.

CarSmart.com's dealer agreements are generally for a term of three years
and are terminable on 30 days' notice by CarSmart.com. As of February 28, 2001,
the CarSmart.com participating dealership base totaled over 1,300 dealers.
CarSmart.com's dealers pay initial, annual and monthly subscription fees.
CarSmart.com reserves the right to revise fees after six months. CarSmart.com is
converting its dealers to new contracts with one year terms and no annual fees.

As of February 28, 2001, dealers that participated in both the
Autobytel.com and CarSmart.com new vehicle purchasing services totaled
approximately 400.

As of February 28, 2001, 611 dealers participated in our AutobytelDIRECT
service. Dealer agreements for the AutobytelDIRECT service provide for a fixed
fee of $100-$1,000 for each vehicle sold through the service, depending on the
gross sales price of the vehicle. Such agreements are cancelable by either party
upon 30 days notice.

Customer Support. We actively monitor subscribing dealers through
ongoing customer surveys, and research conducted by our internal dealer support
group. Generally, within 14 days after a consumer submits a purchase request
through one of our Web sites, we re-contact the consumer by e-mail requesting
completion of a quality assurance survey that allows us to evaluate the sales
process at participating dealers. Additionally, we perform telephone surveys of
our customers to further support the information gained from the written quality
assurance surveys. Dealerships that fail to abide by our program guidelines or
who generate repeated consumer complaints are

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reviewed and, if appropriate, terminated. In return for requiring a high level
of consumer service, we assign participating dealerships exclusive territories.
We try to assign dealers attractive territories in order to increase
participation in our program.

Each dealer agreement obligates the dealers to adhere to our policy of
providing prompt responses to customers, no haggle pricing and full disclosure
regarding vehicle availability, add-ons and related matters. We require each
dealer to have a manager whose principal responsibility is supervising our
system, similar to the way in which most dealers have a new vehicle sales
manager, pre-owned vehicle sales manager and service and parts department
managers who are responsible for those dealership functions. We reserve the
right to reduce or modify each dealer's assigned territory after the first six
months, although there can be no assurance that a dealer whose territory is
reduced or modified will not contest such a change or terminate its
subscription. We cannot be sure that dealers whose territories are reduced or
modified by us will not pursue legal action against us in an effort to prevent
the change or recover damages.

Training. We believe that dealers and their employees require
specialized training to learn the skills necessary to serve the Internet user
and take full advantage of our proprietary systems. Therefore, we have developed
an extensive training program for our dealers. We believe that this training is
critical to enhancing our brand and reputation. We require participating
dealerships to have their representatives trained on our system. Training is
conducted at our headquarters in Irvine, California, at regional training
centers and at dealerships' premises. In training our dealers, we de-emphasize
traditional vehicle selling techniques and emphasize the Autobytel.com approach.
To increase consumer satisfaction and reduce costs, we seek to discourage
dealerships from using commissioned and multiple salespersons to interface with
our customers. In October 1999, we formed I-Net Training Technologies LLC with
third parties to provide dealers with more extensive training and tools to
facilitate Internet selling of vehicles. Such services are provided for a fee.

COMPETITION

We believe that the principal competitive factors affecting the market
for Internet-based vehicle marketing services include:

- brand name recognition,

- speed and quality of fulfillment,

- variety of related products and services,

- ease of use,

- customer satisfaction,

- quality of service, and

- technical expertise.

Our vehicle purchasing services compete against a variety of Internet
and traditional vehicle buying services, automotive brokers and classifieds.
Many of such competitors are substantially better financed than we are. In the
Internet-based market, we compete with other entities which maintain similar
commercial Web sites including Autoweb.com, AutoVantage, Microsoft Corporation's
CarPoint, CarsDirect.com, Cars.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 vehicle manufacturers have their own Web sites and
many have launched online buying services, such as General Motors Corporation's
BuyPower and Ford Motor Company's FordDirect.com.

We also compete with vehicle insurers, lenders and lessors as well as
individual dealerships. Such companies may already maintain or may introduce Web
sites which compete with ours. We cannot assure that we can compete

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successfully against current or future competitors, many of which have
substantially more capital, resources and access to additional financing than we
do, nor can there be any assurance that competitive pressures faced by us will
not result in increased marketing costs, decreased Web site traffic or loss of
market share or otherwise will not materially and adversely affect our business,
results of operations and financial condition. We compete primarily on brand
name recognition acquired through early entry into the Internet-based automotive
purchase referral market and through customer and dealer satisfaction.

OPERATIONS AND TECHNOLOGY

We believe that our future success is significantly dependent upon our
ability to continue to deliver high-performance and reliable Web sites, enhance
consumer/dealer communications, maintain the highest levels of information
privacy and ensure transactional security. Autobytel.com currently hosts its Web
site at our data center. Our data center includes redundant infrastructure and
network connections and is located at our headquarters in Irvine, California. In
the future, we may host our infrastructure at a leading Application Service
Provider. Our network and computer systems are built on the leading industry
standards. Network security is provided by utilizing standard products.
CarSmart.com's site is hosted by a third party.

System enhancements are primarily intended to accommodate increased
traffic across our Web sites, improve the speed in which purchase requests are
processed and introduce new and enhanced products and services. System
enhancements entail the implementation of sophisticated new technology and
system processes.

GOVERNMENT REGULATION

Currently few laws or regulations have been adopted that apply directly
to Internet business activities. The adoption of additional local, state,
national or international laws or regulations may decrease the growth of
Internet usage or the acceptance of Internet commerce.

We believe that our dealer marketing services do not constitute
franchising or, other than our AutobytelDIRECT service, vehicle brokerage
activity in a way that makes franchise, motor vehicle dealer, or vehicle broker
licensing laws applicable to us. Through a subsidiary, we are licensed as a
motor vehicle dealer and broker. However, if individual state regulatory
requirements change or additional requirements are imposed on us, we may be
required to modify our service programs in such a state in a manner which may
undermine our program's attractiveness to consumers or dealers or not offer such
service or terminate our operations in such a state. As we introduce new
services, we may need to comply with additional licensing regulations and
regulatory requirements.

Our services may result in changes in the way vehicles are currently
sold or may be viewed as threatening by new and pre-owned 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 that, if adopted, could impact our evolving marketing and
distribution model.

Other countries to which we expand our operations may have laws or be
subject to treaties that regulate the marketing, distribution, and sale of
vehicles. As we consider specific foreign operations, we will need to determine
whether the laws of the countries in which we seek to operate require us to
modify our program or otherwise change the Autobytel.com system or prohibit the
use of the system in such country entirely. In addition, the laws of a foreign
country may impose licensing, bonding or similar requirements on us as a
condition to doing business there.

To date, we have not expended significant resources on lobbying or
related government affairs issues but may be required to do so in the future.

Franchise Classification. If our relationship or written agreement with
our dealers was found to be a " franchise" under federal or state franchise
laws, we could be subjected to additional regulations, including but not limited
to licensing, increased reporting and disclosure requirements. Compliance with
varied laws, regulations, and enforcement characteristics found in each state
may require us to allocate both staff time and monetary resources, each of which
may have an adverse affect on our results of operations. As an additional risk,
if our dealer relationship or subscription agreement is determined to establish
a franchise, we may be subject to limitations on our ability to quickly and
efficiently effect changes in our dealer relationships in response to changing
market trends, which may negatively impact our ability to compete in the
marketplace.

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We believe that neither our relationship with our subscribing dealers
nor our dealer subscription agreements themselves constitute "franchises" under
federal or state franchise laws. This belief has been upheld by a Federal
Appeals Court in Michigan that ruled our business relationship and our dealer
subscription agreement does not rise to the level of a "franchise" under
Michigan law.

Vehicle Brokerage Activities. We believe that, except in respect of the
AutobytelDIRECT service, state motor vehicles dealer or broker licensing laws do
not apply to us. Through a wholly-owned subsidiary, we are licensed as a motor
vehicle dealer and broker. We may be required to pay administrative fees, fines,
and penalties for failure to comply with such licensing requirements. We believe
that our dealer marketing referral service model does not qualify as an
automobile brokerage activity.

In response to concerns about our marketing referral program raised by
the Texas Department of Transportation, we modified our program in that state to
achieve compliance. These modifications included a unique pricing model under
which all subscribing dealerships in Texas are charged uniform fees based on the
population density of their particular geographic area and opening our program
to all dealerships who wish to apply.

In the event that any other state's regulatory requirements impose state
specific 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 may undermine the program's attractiveness to consumers or dealers.
In the alternative, if we determine that the licensing and related requirements
are overly burdensome, we may elect to terminate operations in such state. In
each case, our business, results of operations and financial condition could be
materially and adversely affected.

Financing Related Activities. We provide a connection through our Web
sites that allows a consumer to obtain finance information and loan approval. We
do not demand nor do we receive any fees from consumers for this service. In the
event states require us to be licensed as a financial broker, we intend to
obtain such licenses. We may be unable to comply with a state's regulations
affecting our current operations or newly introduced services, or we could be
required to incur significant fees and expenses to license or be compelled to
discontinue finance operations in those states.

Insurance Related Activities. We provide a link on our Web sites so
consumers can receive real time quotes for insurance coverage from Channelpoint
Corporation and submit quote applications online. Participants in the program
include The Hartford (Hartford Financial Services Group, Inc.), The GE Auto
Insurance Program and Ekemper. We typically receive a marketing fee for every
quote application sent to a participating insurance company or agent by a
consumer accessing the Channelpoint Web site through our Web sites. We receive
no premiums from consumers nor do we charge consumers fees for our services. All
applications are completed on Channelpoint's Website.

We do not believe that our activity requires 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 this uncertainty, we have proactively applied for and currently hold,
through a wholly-owned subsidiary, insurance agent licenses or are otherwise
authorized to transact insurance in 47 states and the District of Columbia.

EMPLOYEES

As of February 28, 2001, we had a total of 276 employees, including 34
employees of CarSmart.com and 14 employees of Autobytel.Europe. We also utilize
independent contractors as required. None of our employees are represented by a
labor union. We have not experienced any work stoppages and consider our
employee relations to be good.

RISK FACTORS

In addition to the factors discussed in the "Overview" and "Liquidity
and Capital Resources" sections of Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in this Annual Report on Form
10-K, the following additional factors may affect our future results.

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WE HAVE A HISTORY OF NET LOSSES AND CAN NOT ASSURE THAT WE WILL BE PROFITABLE.
IF WE CONTINUE TO LOSE MONEY, OUR OPERATIONS WILL NOT BE FINANCIALLY VIABLE.

We were formed in January 1995 as Auto-By-Tel LLC, and first received
revenues from operations in March 1995. We, therefore, have a limited operating
history upon which an investor may evaluate our operations and future prospects.
Because of the recent emergence of the Internet-based vehicle information and
purchasing industry, none of our senior executives has significant experience in
the industry. This limited operating history and management experience means it
is difficult for us to predict future operating results.

We have incurred losses every quarter since inception and expect to
continue to incur losses until the second half of 2001. However, we can not
assure that we will be profitable during such period or thereafter.
Autobytel.com, including CarSmart.com from the date of acquisition, had an
accumulated deficit of $95.6 million and $66.6 million as of December 31, 2000
and 1999, respectively. CarSmart.com had an accumulated deficit of $3.2 million
as of December 31, 1999.

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. To achieve
profitability, we must, among other things:

- generate increased vehicle buyer traffic to our Web sites,

- successfully introduce new products and services,

- continue to send new and pre-owned vehicle purchase requests to
dealers that result in sufficient dealer transactions to justify
our fees,

- continue to expand the number of dealers in our network and
enhance the quality of dealers,

- respond to competitive developments,

- maintain a high degree of customer satisfaction,

- provide secure and easy to use Web sites for customers,

- increase our brand name visibility,

- continue to attract, retain and motivate qualified personnel,
and

- 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.

IF OUR DEALER TURNOVER 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 subscribing dealers. If dealer turnover increases and we are unable to add
new dealers to mitigate any turnover, our revenues will decrease as our network
of dealers decreases. 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 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. All of our subscribing dealers have entered into written
marketing agreements with us having a stated term of one year, three years or
five years, but the Autobytel.com dealer agreements are cancelable by the dealer
upon 30 days notice. A

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significant number of the agreements are for a one year term. We cannot assure
that dealers will not terminate their agreements with us. Subscribing dealers
may terminate their relationship with Autobytel.com 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 pre-owned vehicle dealers. During 2000, we
added approximately 3,500 subscribing dealers to our North American dealer
networks, including approximately 1,500 which were added as a part of the
CarSmart.com acquisition, and approximately 1,800 subscribing dealers terminated
their affiliation with us or were terminated by us. In order for us to grow or
maintain our dealer networks, we need to reduce dealer turnover.

WE MAY LOSE SUBSCRIBING DEALERS IF WE RECONFIGURE DEALER TERRITORIES. IF WE LOSE
DEALERS, WE WILL LOSE THE REVENUES ASSOCIATED WITH THOSE DEALERS.

If the volume of purchase requests increases, we may reduce or
reconfigure the exclusive territories currently assigned to dealers in order 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.
The loss of dealers will cause a subsequent reduction in revenues unless we are
able to mitigate this loss by adding new dealers or increasing the fees we
receive from other dealers. A dealer also could sue us 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 subscribing to our network
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 brand 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 name 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
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 classifieds.
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. Many of our competitors are substantially
better financed than we are. Our business is characterized by minimal barriers
to entry, and new competitors can launch a competitive service at relatively low
cost. To compete successfully as an Internet-based commercial entity, we must
significantly increase awareness of our services and brand name. Failure to
achieve these objectives 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 Autoweb.com, AutoVantage, Microsoft Corporation's Carpoint,
CarsDirect.com, Cars.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 vehicle manufacturers have their own Web sites and many have
launched online buying services, such as General Motors Corporation's BuyPower
and Ford Motor Company's FordDirect.com. We also compete with vehicle insurers,
lenders and lessors as well as other dealers that are not part of our network.
Such companies may already maintain or may introduce Web sites which compete
with ours.

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

- brand recognition,

- speed and quality of fulfillment,

- variety of related products and services,

- ease of use,

- customer satisfaction,

- quality of service, and

- 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 may fluctuate due to many factors. Our
expense levels are based in part on our expectations of future revenues which
may vary significantly. We plan our business operations based on increased
revenues and if our revenues do not increase faster than our 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:

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

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

- our ability to joint venture with investors in the development
of Autobytel branded companies internationally,

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

- 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,

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

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

- technical difficulties, system downtime or Internet brownouts,

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

- governmental regulation, and

- unforeseen events affecting the industry.

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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.

Generally our quarter to quarter growth in revenues have offset any
effects due to seasonality. However, we expect our business to experience
seasonality as it matures. If this 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 anticipate that
purchase requests will typically increase during the first and third quarters
when new vehicle models are introduced and will typically decline during the
second and fourth quarters. Internet and commercial online service usage and the
growth rate of such usage typically declines during the summer.

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 DECLINES, OUR PARTICIPATING DEALERS MAY NOT BE
SATISFIED WITH OUR SERVICES AND MAY TERMINATE THEIR RELATIONSHIP 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 to decline.
Since our dealers would be receiving fewer purchase requests, they 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 relationship 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.
During 2000, approximately 17% of our purchase requests came through
StoneAge.com. The agreement with StoneAge Corporation expires in March 2002 and
unless terminated by either party, automatically renews for a term of up to 12
months. 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. A number of our agreements with online service providers may
be terminated without cause.

IF WE CANNOT BUILD 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 and CarSmart.com brands will depend largely on our ability
to obtain a leadership position in Internet commerce. If dealers 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 pre-owned
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 will need to hire a significant number
of personnel. Competition for such personnel is intense, and 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, some of whom are
employed on an at-will basis and all of whom have worked together for only a
short

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period of time. We maintain "key person" life insurance in the amount of $3.0
million on the life of Mark W. Lorimer, our Chief Executive Officer and
President. The loss of the services of Mr. Lorimer or one or more of our other
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 are constantly expanding our operations and introducing new services
to consumers and dealers in order to establish ourselves as a leader in the
evolving market for Internet-based vehicle purchasing and related services. We
also intend to enter into new markets overseas. The growth of our operations
requires us to increase expenditures before we generate revenues. For example,
we 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.
As of February 28, 2001, we had 276 employees.

We believe establishing industry leadership also requires us to:

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

- expand the breadth of products and services offered,

- expand our market presence through relationships with third
parties, and

- 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 and that, other than our AutobytelDIRECT service, we are not subject to the
coverage of state motor vehicle dealer licensing laws. Through a subsidiary, we
are licensed as a motor vehicle dealer and broker. 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 we become subject to fines or other penalties or if we determine
that the licensing 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.

A federal court of appeals in Michigan has ruled that our dealer
subscription agreement is not a "franchise" under Michigan law. However, 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. We also believe that, other than our AutobytelDIRECT service, our
dealer marketing service does not qualify as an automobile brokerage activity
and, therefore, state 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 include a pricing model under which all subscribing
dealers in Texas are charged uniform fees based on the population density of
their particular geographic area and to make our program open to all dealers who
wish to apply.

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.

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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, and our business,
results of operations and financial condition could be materially and adversely
affected.

We provide a link on our Web sites so consumers can receive real time
quotes for insurance coverage from Channelpoint Corporation and submit quote
applications online. Participants in the program include The Hartford (Hartford
Financial Services Group, Inc.), The GE Auto Insurance Program and Ekemper. We
receive fees from such participants in connection with this advertising
activity.

We do not believe that the above 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 47 states and the District of Columbia.

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, 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 A.I.N. in February 2000. Acquisitions involve numerous
risks. For example:

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

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

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

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

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

- 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
amortize expenses related to 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 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.

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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, insurance
licensing laws, and motor vehicle dealership licensing 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. 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, Dealer Real Time 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, Dealer Real Time 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 BECAUSE THE MAJORITY OF OUR PRIMARY SERVERS ARE LOCATED IN A
SINGLE LOCATION. IF ELECTRICITY OR COMMUNICATIONS TO THAT LOCATION WERE
INTERRUPTED, OUR OPERATIONS COULD BE ADVERSELY AFFECTED.

We host all of Autobytel.com production Web sites including
Autobytel.com, Dealer Real Time and iManager systems at our corporate
headquarters in Irvine, California. Although offsite backup servers are
available from outside sources, all of Autobytel.com's primary servers are
located at our corporate headquarters and 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 is not sufficient to meet
demand at all times in some areas, and these constraints are projected to
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. To
date, we have not been affected by rolling black-outs or other interruptions in
service

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related to the constraints on supply, and we have a backup generator available
to protect ourselves against rolling blackouts that last for a limited amount of
time. We maintain business interruption insurance which pays up to $6 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. The CarSmart.com Web site is hosted by a third party service
provider.

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 can not 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.

IF CONSUMERS DO NOT ADOPT INTERNET COMMERCE AS A MAINSTREAM MEDIUM OF COMMERCE,
OUR REVENUES MAY NOT GROW AND OUR EARNINGS MAY SUFFER.

The success of our services will depend upon the adoption of the
Internet by consumers and dealers as a mainstream medium for commerce. 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. 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. In addition, dealers must be persuaded to adopt new selling models
and be trained to use and invest in developing technologies. Moreover, critical
issues concerning the commercial use of the Internet, such as, ease of access,
security, reliability, cost, and quality of service, remain unresolved and may
impact the growth of Internet use. If the market for Internet-based vehicle
marketing services fails to develop, develops slower than expected 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.

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. 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:

- actual or anticipated variations in our quarterly operating
results,

- announcements of new product or service offerings,

- technological innovations,

- competitive developments, including actions by automotive
manufacturers,

- changes in financial estimates by securities analysts,

- conditions and trends in the Internet and electronic commerce
industries,

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

- general market conditions and other factors.

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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 or
international currency fluctuations, 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, if instituted, 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.

WE FACE UNCERTAINTIES WITH CHANGING LEGISLATION IN THE AUTOMOTIVE INDUSTRY WHICH
COULD REQUIRE INCREASED REGULATORY AND LOBBYING COSTS AND MAY HARM OUR BUSINESS.

Our purchasing 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 INTERNATIONAL EXPANSION MAY REQUIRE US TO COMPLY WITH BURDENSOME REGULATORY,
TARIFF AND LICENSING REQUIREMENTS. OUR NEED TO COMPLY WITH BURDENSOME
GOVERNMENTAL REQUIREMENTS MAY ADVERSELY AFFECT OUR ABILITY TO GROW OUR BUSINESS.

Our licensees have launched Web sites in the United Kingdom, Sweden, The
Netherlands, Spain, Australia and Japan. We intend to expand our brand into
other foreign markets through licensing our technology, business processes and
trade names and by establishing relationships with vehicle dealers and strategic
investors located in foreign markets.

By expanding our operations to various other countries, we may become
subject to laws or treaties that regulate the marketing, distribution and sale
of motor vehicles. We will need to spend our resources to determine whether the
laws of the countries in which we seek to operate require us to modify, or
prohibit the use of, our Autobytel.com system. In addition, the laws of other
countries may impose licensing, bonding or similar requirements on us as a
condition to doing business in these countries.

WE MAY NOT BE SUCCESSFUL IN EXPANDING OUR BUSINESS ABROAD WHICH MAY LIMIT OUR
FUTURE GROWTH.

We have had limited experience in providing our service abroad and we
cannot be certain that we will be successful in introducing or marketing our
services abroad. In addition, there are risks inherent in conducting business in
international markets, such as:

- changes in political conditions,

- regulatory requirements,

- potentially weaker intellectual property protections,

- tariffs and other trade barriers, fluctuations in currency
exchange rates, or potentially adverse tax consequences,

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- difficulties in managing or overseeing foreign operations, and

- educating consumers and dealers who may be unfamiliar with the
benefits of online marketing and commerce.

One or more of such factors may have a material adverse effect on our
current or future international operations and, consequently, on our business,
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. Any of these events would have a material adverse effect on our
business, results of operations and financial condition. 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 insurance does not
currently protect against such losses.

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.

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 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 brand. 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. Misappropriation of our intellectual property or potential
litigation would have a material adverse effect on our business, results of
operations and financial condition. 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

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to defend against claims or infringement or invalidity. 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.

OUR FOUNDERS, OFFICERS AND DIRECTORS AND THEIR AFFILIATES HAVE SUBSTANTIAL
CONTROL OF OUR VOTING STOCK AND HAVE THE ABILITY TO SIGNIFICANTLY INFLUENCE AND
IN ALL LIKELIHOOD MAKE DECISIONS THAT COULD ADVERSELY AFFECT STOCKHOLDERS. SUCH
DECISIONS COULD ADVERSELY AFFECT OUR STOCK PRICE.

The control of a large amount of our stock by insiders could have an
adverse effect on the market price of our common stock. As of February 28, 2001,
our executive officers and directors beneficially own or control approximately
3.0 million shares or 13.2% of the outstanding shares of our common stock. In
addition, as of such date, based on information available to us, our founders,
Peter Ellis and John Bedrosian beneficially own or control approximately 7.8%
and 12.3%, respectively, of the outstanding shares of our common stock. Our
officers, directors, founders and their affiliates, assuming they vote together,
have the ability to significantly influence and substantially control the
election of our board of directors and the outcome of corporate actions
requiring stockholder approval, including mergers and other changes of corporate
control, going private transactions and other extraordinary transactions.

SALES OR THE PERCEPTION OF FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR
STOCK PRICE. SINCE THE MARKET PRICES FOR INTERNET-RELATED STOCKS ARE LIKELY TO
REMAIN VOLATILE, OUR STOCK PRICE MAY BE MORE ADVERSELY AFFECTED THAN OTHER
COMPANIES BY SUCH FUTURE SALES.

Sale of substantial numbers of shares of common stock in the public
market could adversely affect the market price of our common stock and make it
more difficult for us to raise funds through equity offerings in the future. Of
the 20,364,070 shares that were outstanding as of February 28, 2001,
approximately 15.5 million shares are eligible for sale in the public market
without restriction and approximately 4.9 million shares are subject to
restrictions on sale in the public market in accordance with the provisions of
Rule 144 under the Securities Act of 1933, of which approximately 1.4 million
shares are subject to the volume limitations of Rule 144 by virtue of Rule 145.
In addition, holders of approximately 8.3 million shares of common stock are
entitled to certain registration rights with respect to such shares until such
time as the holders of such common stock may sell such shares under Rule 144 of
the Securities Act.

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. 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

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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 Annual 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 Annual Report. The cautionary statements made in this Annual
Report should be read as being applicable to all forward-looking statements
wherever they appear in this Annual Report.

ITEM 2. PROPERTIES

Our Autobytel.com operation is located in a single office building in
Irvine, California. We occupy four floors, for a total of approximately 49,000
square feet. Each floor is leased with expiration dates ranging from September
2001 through February 2002. We have options to renew the leases on each floor
for an additional 5-year term. Our CarSmart.com operation occupies approximately
6,500 square feet in a single office building in San Ramon, California. The
lease for this office space expires in March 2003. Autobytel.Europe is located
in a single office building in The Netherlands and occupies approximately 1,800
square meters. The lease expires in August 2005.

ITEM 3. LEGAL PROCEEDINGS

A.I.N. 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 contains causes of action for breach of written and oral
contracts, promissory estoppel, breach of fiduciary duty and fraud, and seeks
damages and equitable relief. The plaintiff contends he is 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 has been transferred to Contra Costa County and the two cases
have been consolidated. Autobytel.com was added as a cross defendant in such
action. The lawsuit is and will be vigorously contested on behalf of
Autobytel.com, A.I.N. and individual co-defendant Michael Gorun, former
President of A.I.N.

The selling shareholders of A.I.N. are obligated to fully indemnify
Autobytel.com for all losses, including attorney's fees, expenses, settlements
and judgments, arising out of the lawsuit. The indemnification obligation was
initially secured by 450,000 shares of Autobytel.com 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 February 28, 2001, the obligation was secured by the
450,000 shares of common stock and $95,000 in cash after expenses.

On July 15, 1998, Autobytel.com and certain of its past and current
officers were sued by former employee Thomas Heshion in a lawsuit entitled
Thomas Heshion, et al. v. Auto-By-Tel Corporation, et al. in Orange County
Superior Court. Plaintiff claimed that he was wrongfully terminated and that
Autobytel.com and its officers interfered with an oral agreement between
plaintiff and another co-worker for the purchase of the co-worker's
Autobytel.com stock. Summary judgment was granted on the claims alleging
interference with the alleged stock agreement. The remaining claims for wrongful
termination were tried to a jury which returned a verdict in December 2000 in
favor of plaintiff in the amount of $1.9 million.

We believe the judgement is in error and we have retained new counsel to
handle the post-trial motions and, if necessary, the appeal. We intend to
vigorously contest the judgement.

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From time to time, we are involved in other litigation matters relating to
claims arising out of the ordinary course of business. We are involved in at
least one such case currently. 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 that include
punitive damages, such ruling could have a material and adverse effect on our
business, results of operations and financial condition.

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

No matters were submitted to a vote of security holders during the
fourth quarter of 2000.

PART II

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

Our common stock, par value $0.001 per share, has been quoted on the
Nasdaq National Market under the symbol "ABTL" since March 26, 1999. Prior to
this time, there was no public market for our common stock. The following table
sets forth, for the calendar quarters indicated, the range of high and low
closing sales prices of our common stock as reported on the Nasdaq National
Market.

YEAR HIGH LOW
-------- --------

1999
First Quarter (from March 26, 1999) .. $ 41.88 $ 35.38
Second Quarter ....................... $ 39.94 $ 15.75
Third Quarter ........................ $ 23.25 $ 11.56
Fourth Quarter ....................... $ 19.50 $ 11.72
2000
First Quarter ........................ $ 16.88 $ 7.88
Second Quarter ....................... $ 8.50 $ 5.78
Third Quarter ........................ $ 6.88 $ 4.06
Fourth Quarter ....................... $ 6.38 $ 2.13
2001
First Quarter (through March 23, 2001) $ 3.00 $ 1.72

As of February 28, 2001, there were 147 holders of record of our common
stock. We have never declared or paid any cash dividends on our common stock. We
intend to retain all of our future earnings, if any, for use in our business,
and therefore we do not expect to pay any cash dividends on our common stock in
the foreseeable future.

We have no specific plans at this time for the use of the balance of the
proceeds received from the initial public offering and expect to use such
proceeds for potential acquisitions, investments in businesses and for general
corporate purposes.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Annual Report on Form 10-K. The
statement of operations data for the years ended December 31, 2000, 1999, 1998,
1997 and 1996 and the balance sheet data as of December 31, 2000, 1999, 1998,
1997 and 1996 are derived from our consolidated financial statements which have
been audited by Arthur Andersen LLP, independent auditors.

YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------

STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $ 66,532 $ 40,298 $ 23,826 $ 15,338 $ 5,025
--------- -------- -------- -------- --------
Operating expenses:
Sales and marketing .......................... 65,266 44,176 30,033 21,454 7,790
Product and technology development ........... 22,847 14,262 8,528 5,448 1,753
General and administrative ................... 13,797 8,595 5,908 5,851 1,641
--------- -------- -------- -------- --------
Total operating expenses ................. 101,910 67,033 44,469 32,753 11,184
--------- -------- -------- -------- --------
Loss from operations ......................... (35,378) (26,735) (20,643) (17,415) (6,159)
Other income, net ................................ 6,017 3,468 1,280 620 124
--------- -------- -------- -------- --------
Loss before minority interest losses and
provision for income taxes ................ (29,361) (23,267) (19,363) (16,795) (6,035)
Minority interest losses ......................... 369 -- -- -- --
--------- -------- -------- -------- --------
Loss before provision for income taxes ....... (28,992) (23,267) (19,363) (16,795) (6,035)
Provision for income taxes ....................... 42 53 35 15 --
--------- -------- -------- -------- --------
Net loss ..................................... $ (29,034) $(23,320) $(19,398) $(16,810) $ (6,035)
========= ======== ======== ======== ========
Basic and diluted net loss per share ............. $ (1.45) $ (1.48) $ (2.30) $ (2.03) $ (0.73)
========= ======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share ........................... 20,047 15,766 8,423 8,291 8,252
========= ======== ======== ======== ========

DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
--------- -------- -------- -------- --------

BALANCE SHEET DATA:
Cash and cash equivalents .... $ 81,945 $ 85,457 $ 27,984 $ 15,813 $ 9,062
Working capital .............. 68,447 74,756 23,436 10,938 5,977
Total assets ................. 124,309 94,872 34,207 20,513 12,298
Accumulated deficit .......... (95,627) (66,593) (43,273) (23,875) (7,065)
Stockholders' equity ......... 91,806 76,706 25,868 13,259 7,996

ITEM 7. 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 Annual Report on Form
10-K. 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" in Item 1 "Business" in this Annual
Report on Form 10-K.

OVERVIEW

We are an internationally branded online automotive commerce company
that connects buyers and sellers together in an information-rich environment
throughout the vehicle ownership lifecycle, capturing revenue at multiple
stages. Through our Web sites, www.autobytel.com and www.carsmart.com, consumers
can research pricing, specifications and other information regarding new and
pre-owned vehicles and can purchase, finance, lease, insure, sell or maintain
their vehicles. We believe that our services provide benefits for consumers by
supplying them with information to make informed and intelligent vehicle
decisions throughout the lifecycle of

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vehicle ownership. Consumers can purchase new vehicles through our dealer
referral networks and our locate-to-order service, AutobytelDIRECT. In addition,
consumers can purchase pre-owned vehicles through our Pre-Owned CyberStore.

In January 2000, we launched AutobytelDIRECT, a locate-to-order service
offering a real-time online inventory of thousands of new vehicles, instant
up-front pricing, multiple trade-in options, competitive financing and insurance
and at-home or office delivery.

Also in January 2000, we announced the formation of Autobytel.Europe
with initial investment from Inchcape plc, Pon Holdings B.V., GE Capital and
e-LaSer. The Netherlands-based Autobytel.Europe plans to license, invest in and
offer joint services to national operating companies throughout Europe to
localize the Autobytel.com offerings. In February 2000, we, St. George Bank
Limited and others joined in the formation of Autobytel Australia. The
Australian investors joining Autobytel.com in the online venture are Trading
Post, Astre Automotive, RACV (Royal Automobile Club of Victoria), Fortis
Insurance and Strathfield E-Ventures.

In February 2000, we acquired A.I.N., the owner of CarSmart.com, a
leading online buying site for new and pre-owned vehicles, for 1.8 million
shares of Autobytel.com common stock and $3 million in cash. As of February 28,
2001, CarSmart.com had over 1,300 dealers, established relationships with more
than 200 credit unions and strategic marketing agreements with several of the
top Internet portals, including AOL.com, Alta Vista and G02Net. For the years
ended December 31, 1999 and 1998 CarSmart.com's unaudited revenues were $6.4
million and $3.1 million, respectively. For the years ended December 31, 1999
and 1998, CarSmart.com's operating expenses were $7.6 million and $4.2 million,
respectively. CarSmart.com's unaudited net loss for the years ended December 31,
1999 and 1998 was $1.3 million and $1.2 million, respectively.

In June 2000, we launched our MyGarage service area designed to empower
consumers by providing cost effective and efficient processes for dealing with
common service and maintenance issues. The site enhances consumer
personalization and includes key components such as access to Autobytel.com
Accredited Service Centers, the ability to schedule service and maintenance
appointments online and receive information such as service reminders and recall
information.

In January 2001, we introduced iManager, a multi-functional dealer
management system and an upgrade of our Dealer Real Time system. The iManager
system provides dealers with immediate purchase request information for new and
pre-owned vehicles, the ability to track multiple customers and purchase
requests, turnkey customer retention programs, automatic uploading of new and
pre-owned vehicle inventory into our database, reporting systems, including
transaction status, customer information and Internet department performance,
and other features.

In February 2001, we signed an agreement with General Motors Corporation
to conduct a 90-day test of a new GM online locate-to-order business model. The
model involves modification of our existing Autobytel.com Web site for consumers
from the Washington, D.C. metropolitan area. The test program will combine the
independent all makes, all models capability of Autobytel.com with a dealer-set
online e-price and locate-to-order vehicle inventory model for Chevrolet
vehicles.

We derive the majority of our revenues from fees paid by subscribing
dealers, and we expect to be primarily dependent on our dealer networks for
revenues in the foreseeable future. Dealers using our services pay initial
subscription fees, as well as ongoing monthly fees based, among other things, on
the size of territory, demographics and the, indirectly, transmittal of purchase
requests to them. In addition, in most states, dealers who participate in
AutobytelDIRECT pay a fee of between $100 and $1,000 per vehicle sold through
AutobytelDIRECT. The fee is based on the gross selling price of the vehicle.
Overall program fees were $54.0 million, $35.8 million and $22.9 million in
2000, 1999 and 1998, respectively. Average monthly program fees per dealer were
$949, $1,045 and $948 in 2000, 1999 and 1998, respectively.

Our dealer contract terms generally range from one to three years. The
majority of our contracts are for a one year term. We are converting our
remaining dealers primarily to new contracts with a one year term. The initial
subscription fee from the dealer is recognized ratably over the first twelve
months of the dealer's contract in order to match the costs of integrating and
training the dealer with revenues earned. Amortized revenues from initial
subscription fees were $2.8 million, $2.5 million and $2.4 million in 2000, 1999
and 1998, respectively. Monthly fees are recognized in the period the service is
provided. Monthly fee revenues were $50.9 million, $32.8 million

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and $18.2 million in 2000, 1999 and 1998, respectively. The amortized revenues
from annual fees were $22,400, $0.5 million and $2.3 million in 2000, 1999 and
1998, respectively.

We also derive a portion of our revenues from related products and
services on a monthly fee and per transaction basis and from international
licensing agreements. In 2000, 1999 and 1998, revenues from related products and
services, including international licensing agreements, were $12.5 million, $4.5
million and $0.9 million or 19%, 11% and 4% of total revenues, respectively.

We believe our ability to increase our revenues is directly related to
the number of subscribing dealers in our networks and the average monthly fees
paid by those dealers and indirectly related to the volume of purchase requests
routed through our Web sites. Vehicle purchase requests routed through our
online systems were approximately 2.9 million, 2.1 million and 1.3 million in
2000, 1999 and 1998, respectively, or an increase of 39%, 56% and 74%
sequentially. From inception through December 31, 2000, we have directed
approximately 7.4 million purchase requests to dealers.

Our revenue growth has been primarily dependent on our ability to:

- increase the number of dealers,

- increase the average monthly fees paid by each dealer,

- deliver quality purchase requests to our dealer network and

- improve the sales conversion rate of dealer leads.

We believe our revenue growth in the foreseeable future will be
dependent on the above factors as well as our ability to generate revenues from
related products and services, including international licensing agreements.

In 2000, approximately 3,500 dealers were added to our North American
dealer networks, including approximately 1,500 which were added as a part of the
CarSmart acquisition, and approximately 1,800 dealers either terminated their
affiliation with us or were terminated by us. The net number of dealers as of
December 31, 2000 increased by 52% over 1999. As of December 31, 2000,
approximately 400 dealers subscribed to both the Autobytel.com and CarSmart.com
services. The number of our dealers fluctuates from time to time and as of
February 28, 2001, we had approximately 4,800 dealers. Our inability or failure
to reduce dealer turnover could have a material adverse effect on our business,
results of operations and financial condition.

Dealer participation in our programs may terminate for various reasons
including:

- extinction of the manufacturer brand,

- selling of the dealer franchise,

- termination of the franchise by the dealer and

- termination by us.

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 site are sold by dealers; therefore we derive
no direct revenues from the sale of a vehicle (other than through our
AutobytelDIRECT service) and have no significant cost of goods sold, no
procurement, carrying or shipping costs and no inventory risk.

Sales and marketing costs consist primarily of:

- Internet marketing and advertising expenses,

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- fees paid to our Internet affiliate network of purchase request
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 network.

We use Internet advertising, as well as traditional media, such as
television, radio and print. The majority of our Internet advertising is
comprised of:

- bounty fees paid to our affiliate network,

- sponsorship and alliance agreements with Internet portals and

- advertising and marketing affiliations with online automotive
information providers.

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

- Set-up fees are incurred for the development of the link between
Autobytel.com and the Internet portal or online information
provider and are expensed in the period the link is established.

- Initial and 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 set-up, initial,
annual, monthly and variable fees, were $20.6 million, $14.3 million and $11.1
million in 2000, 1999 and 1998, respectively. Also included in sales and
marketing expenses are the costs associated 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.

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RESULTS OF OPERATIONS

The following table sets forth our results of operations as a percentage
of revenues:

YEARS ENDED DECEMBER 31,
----------------------------
2000 1999 1998
---- ---- ----

STATEMENT OF OPERATIONS DATA:
Revenues:
Program fees ................................. 81% 89% 96%
Related products and services ................ 19 11 4
---- ---- ----
Total revenues ........................... 100 100 100
Operating expenses:
Sales and marketing .......................... 98 110 126
Product and technology development ........... 34 35 36
General and administrative ................... 20 17 25
Stock-based compensation ..................... 1 3 --
Non-recurring expenses ....................... -- 1 --
---- ---- ----
Total operating expenses ................. 153 166 187
---- ---- ----
Loss from operations ......................... (53) (66) (87)
Other income, net ................................ 9 8 5
---- ---- ----
Loss before minority interest losses and
provision for income taxes ............... (44) (58) (81)
Minority interest losses ......................... -- -- --
---- ---- ----
Loss before provision for income taxes ....... (44) (58) (81)
Provision for income taxes ....................... -- -- --
---- ---- ----
Net loss ..................................... (44)% (58)% (81)%
==== ==== ====

2000 COMPARED TO 1999

Revenues. Our revenues increased $26.2 million, or 65%, to $66.5 million
in 2000, compared to $40.3 million in 1999. The growth in revenues was primarily
attributable to a $18.3 million, or 51%, increase in program fees from paying
dealers, including program fees of $6.1 million from CarSmart.com dealers. Our
revenues from related products and services accounted for approximately 19% of
revenues in 2000 and 11% of revenues in 1999. The increase was primarily due to
additional fees from our international license agreements, Web site advertising,
database marketing and finance and insurance products.

Sales and Marketing. Sales and marketing expense increased by $21.1
million, or 48%, to $65.3 million in 2000 compared to $44.2 million in 1999. The
increase was primarily due to a $9.0 million, or 57%, increase in print,
television and radio advertising to build brand awareness, a $6.3 million, or
44%, increase in online advertising for increased purchase requests and
agreements with additional Internet affiliates, and a $1.3 million, or 53%,
increase in other marketing and advertising expenses. The increase in sales and
marketing was further attributable to a $4.5 million, or 39%, increase in sales,
dealer support and call center personnel to support the growth of our business.

Product and Technology Development. Product and technology development
expense increased by $8.5 million, or 60%, to $22.8 million in 2000 compared to
$14.3 million in 1999. The increase was primarily due to $6.1 million for
international software development costs, and a $2.4 million, or 18%, increase
for additional personnel and retention costs, both domestic and international,
and Web site data content and licensing fees. We capitalized $3.3 million of
product and technology costs incurred in 2000.

General and Administrative. General and administrative expense was $13.8
million and $8.6 million for 2000 and 1999, respectively. General and
administrative expense increased by $5.2 million, or 61%. The increase was
primarily due to a $2.7 million, or 78%, increase in recruiting and personnel
costs, $1.5 million for goodwill amortization related to our acquisition of
CarSmart.com, and a $1.0 million, or 145%, increase in legal and general
corporate expenses.

Interest Income, Net. In 2000, interest income increased by $2.2
million, or 56%, compared to 1999. Interest income increased due to higher cash
balances resulting from the initial public offering late in the first quarter of
1999 and the funding of Autobytel.Europe early in the first quarter of 2000.

Foreign Currency Exchange Loss, Net. Autobytel.Europe, a subsidiary of
Autobytel.com, operates its business in Europe. As such, it incurs general
operating expenses and enters into transactions, including investments in joint

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ventures and licensees, which require the use of local currencies. Accordingly,
Autobytel.Europe engaged in foreign currency exchange transactions. Due to
foreign exchange rate fluctuations, a $0.7 million loss on cash held in foreign
currency was realized in 2000. Also, based on the six month forward exchange
rate at December 31, 2000, an unrealized loss of $0.1 million was recognized on
foreign exchange forward contracts expiring in June 2001. From inception through
December 31, 2000, Autobytel.Europe's functional currency was the U.S. dollar.
On January 1, 2001, Autobytel.Europe adopted the Euro as its functional
currency. Foreign exchange transaction gains and losses in Canada were minimal.
In the future, we may experience gains or losses attributable to fluctuations in
foreign currency exchange rates.

Other Income (Expense), Net. In 2000, there were no significant
transactions included in other income (expense). Other expense in 1999 of $0.3
million consisted primarily of costs related to our Japanese joint venture.

Minority Interest Losses. Minority interest losses represent the share
of net losses attributable to the minority shareholders in majority owned
subsidiaries. In 2000, $0.4 million in losses related to our subsidiary,
Autobytel.Europe, were allocated to the minority shareholders. Autobytel.Europe
was wholly-owned in 1999.

Income Taxes. No provision for federal income taxes has been recorded as
we incurred net operating losses through December 31, 2000. As of December 31,
2000, we had approximately $76.7 million of federal and $38.2 million of state
net operating loss carryforwards that we believe are available to offset future
taxable income. These carryforwards expire in various years through 2020. Under
the Tax Reform Act of 1986, the amounts of and benefits from our net operating
loss carryforwards will be limited due to a cumulative ownership change of more
than 50% over a three year period. Based on preliminary estimates, we believe
the effect of such limitation will not have a material adverse effect on our
business, results of operations and financial condition.

1999 Compared to 1998

Revenues. Our revenues increased $16.5 million, or 69%, to $40.3 million
in 1999, compared to $23.8 million in 1998. The growth in revenues was primarily
attributable to an increase in the net number of paying dealers and a $97, or
10%, increase in the average monthly program fee charged to paying dealers. The
number of paying dealers increased by 937, or 39%, to 3,323 as of December 31,
1999, compared to 2,386 as of December 31, 1998. Revenues from related products
and services accounted for approximately 11% of revenues in 1999 and 4% of
revenues in 1998.

Sales and Marketing. Sales and marketing expenses primarily include
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 sales, training and support. Sales and marketing expense increased by $14.2
million, or 47%, to $44.2 million in 1999 compared to $30.0 million in 1998. The
increase was primarily due to a $3.5 million, or 43%, increase in sales expenses
due to additional sales and dealer support personnel, a $3.2 million, or 29%,
increase in fees related to information search aggregators resulting from a
higher number of purchase requests, a $3.1 million, or 52%, increase in
television and radio advertising, and a $4.4 million, or 89%, increase in other
advertising and marketing expenses to build brand awareness. We expect to
continue to increase our sales, advertising and marketing expenses in the
foreseeable future.

Product and Technology Development. Product and technology development
expense primarily includes personnel costs relating to enhancing the features,
content and functionality of our Web site and Dealer Real Time system, as well
as expenses associated with telecommunications and computer infrastructure.
Product and technology development expense increased by $5.8 million, or 67%, to
$14.3 million in 1999, compared to $8.5 million in 1998. The increase was
primarily due to a $3.6 million, or 68%, increase for additional personnel,
recruiting and retention costs, both domestic and international, a $1.0 million,
or 89%, increase in technological infrastructure costs, a $0.8 million, or 217%,
increase in start up and legal expenses related to the development of
international joint ventures, and a $0.4 million, or 21%, increase related to
the development of new products and services.

General and Administrative. General and administrative expense was $8.6
million and $5.9 million in 1999 and 1998, respectively. General and
administrative expense increased by $2.7 million, or 45%. The increase was
primarily due to a $1.2 million increase in non-cash compensation expense
associated with stock options granted in the first quarter of 1999 and the
exercise of a warrant in the fourth quarter of 1999, a $0.9 million, or 420%,
increase

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in accounting and other public company infrastructure costs, and a non-
recurring expense of $0.6 million related to the termination of the agreement to
acquire W. G. Nichols.

Interest Income, Net. In 1999, interest income of $3.9 million increased
486% as compared to 1998 due to higher cash balances resulting from the sale of
preferred stock late in the fourth quarter of 1998 and the initial public
offering late in the first quarter of 1999.

Equity Losses in Unconsolidated Subsidiary. Equity losses in an
unconsolidated subsidiary represents our share of losses in our Japanese joint
venture. The losses recognized have been limited to the amount of our
investment.

Other Income (Expense), Net. In 1999, other income (expense) consists
primarily of $0.4 million of costs related to our Japanese joint venture as
compared to a $1.4 million gain realized from the sale of Auto-by-Tel UK, offset
in part by a $0.8 million charge for the value of warrants issued to investors
in 1998.

Income Taxes. No provision for federal income taxes has been recorded as
we incurred net operating losses through December 31, 1999. As of December 31,
1999, we had approximately $55.5 million of federal and $27.9 million of state
net operating loss carryforwards that we believe are available to offset future
taxable income; such carryforwards expire in various years through 2019. Under
the Tax Reform Act of 1986, the amounts of and benefits from our net operating
loss carryforwards will be limited due to a cumulative ownership change of more
than 50% over a three year period. Based on preliminary estimates, we believe
the effect of such limitation will not have a material adverse effect on our
business, results of operations and financial condition.

STOCK-BASED COMPENSATION

In the first quarter of 1999, stock options were granted to employees
and directors at exercise prices of $13.20 and $16 per share which were below
the fair market value at the date of grant. In relation to these grants, we will
recognize estimated compensation expense of approximately $2.6 million ratably
over the vesting terms of one to four years. Compensation expense of $0.4
million and $1.1 million was classified as general and administrative expense in
2000 and 1999, respectively, and approximately $0.5 million, $0.5 million and
$40,000 will be classified as general and administrative expense in the years
ending 2001, 2002 and 2003, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $23.7 million in 2000, $14.5
million in 1999 and $16.3 million in 1998. Net cash used in 2000 resulted
primarily from the net loss for the year and increased accounts receivable
offset by increased accounts payable for sales and marketing, product and
technology development and general and administrative expenditures, provision
for bad debt and additional depreciation and goodwill amortization related to
the acquisition of A.I.N.

Net cash used in operating activities in 1999 resulted primarily from
the net loss for the year, increased accounts receivable and prepaid expenses,
partially offset by increased deferred revenues related to growth in the number
of our paying dealers, accounts payable and accrued expenses for sales and
marketing, product and technology development and general and administrative
expenditures, non-cash stock-based compensation expense related to options
granted in March 1999 and depreciation expense.

Net cash used in operating activities in 1998 resulted primarily from
the net loss for the year and increased accounts receivable, partially offset by
depreciation and other non-cash expenses.

Net cash used in investing activities was $12.0 million in 2000, $0.9
million in 1999 and $1.1 million in 1998. Cash used in investing in 2000 was
related to the acquisition of A.I.N., expenditures for capitalized software,
investments in our joint ventures in Spain, Sweden and France, notes receivable
from our joint venture in France and the purchase of property and equipment.
Cash for investing activities in 1999 and 1998 was primarily used for the
purchase of property and equipment, including computer hardware,
telecommunications equipment and furniture.

Net cash provided by financing activities was $32.3 million in 2000,
$72.9 million in 1999 and $29.6 million in 1998. Cash provided by financing
activities in 2000 was primarily due to funding received from strategic
investors for investment in Autobytel.Europe. In January 2000, we invested $5
million in Autobytel.Europe which has been

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eliminated in consolidation. Cash for financing activities in 1999 and 1998 was
primarily provided by the consummation of our initial public offering in March
1999 and the issuance of preferred stock in 1998. We intend to use the remaining
net proceeds from our initial public offering for potential acquisitions,
investments in businesses and for general corporate purposes. Proceeds of $29.4
million from the sale of preferred stock in 1998 were used primarily to finance
operations prior to the initial public offering.

As of February 28, 2001, we had approximately $77.5 million in cash and
cash equivalents, of which $33.2 million represents funds of Autobytel.Europe
and is reserved for the operations of Autobytel.Europe. 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 fiscal 2001, we may be required to raise
additional capital to meet our long term operating requirements. Since
inception, our expenses have exceeded our revenues. We do not expect to be able
to fund our operations from internally generated funds until the second half of
2001 when we expect our revenues to exceed our expenses. However, we cannot
assure that our revenues will exceed our expenses during such period or
thereafter.

Our cash requirements depend on several factors, including:

- the level of expenditures on marketing and advertising,

- the level of expenditures on product and technology development,

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

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

- the level of investments in joint ventures and licensees, and

- the cash portion of acquisition transactions.

We cannot predict the timing and amount of 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 our operations or
our anticipated expansion, which could have a material adverse effect on our
business, results of operations and financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 2000 (as amended by SFAS No. 137 and 138). SFAS No. 133
establishes accounting and reporting standards for derivative instruments.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Autobytel.Europe, which operates in Europe, is a subsidiary of
Autobytel.com. Autobytel.Europe incurs general operating expenses and enters
into transactions, including investments in joint ventures and licensees, which
require the use of local foreign currencies. As a result of these transactions,
Autobytel.com is exposed to gains and losses resulting from changes in foreign
currency exchange rates. These fluctuations may adversely affect Autobytel.com's
consolidated results of operations and financial position. In certain
circumstances, Autobytel.Europe enters into

36
37

foreign currency forward contracts in an effort to minimize the risks and costs
associated with these fluctuations. Neither Autobytel.com nor Autobytel.Europe
enters into foreign currency forward contracts or other financial instruments
for trading or speculative purposes.

In July 2000, Autobytel.Europe entered into foreign currency forward
exchange contracts with maturity dates of September 26, 2000 and June 26, 2001.
These contracts obligate Autobytel.Europe to exchange U. S. dollars for
predetermined amounts of Netherlands guilders at specified exchange rates on
specified dates. Included in Autobytel.com's consolidated statements of
operations are realized and unrealized losses of $0.7 million and $0.1 million,
respectively, resulting from changes in the spot exchange rate, including those
from settled and open contracts.

As of January 1, 2001, the notional value of the open foreign currency
forward contracts was matched by an equivalent amount of cash as recorded on our
balance sheet. Therefore, in accordance with SFAS No. 133, these open contracts
are considered hedged contracts. As such, on an ongoing basis, we will not incur
any additional foreign currency financial exposure from potential volatility in
exchange rates on these foreign currency forward contracts.

A sensitivity analysis indicates that for each 5% change in exchange
rates on foreign currencies utilized by Autobytel.Europe, Autobytel.com would
incur no additional losses on open foreign currency forward contracts and $0.3
million on foreign currency cash balances at December 31, 2000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Balance Sheets as of December 31, 2000 and 1999 and our Statements
of Operations, Stockholders' Equity and Cash Flows for each of the years in the
three-year period ended December 31, 2000, together with the reports of Arthur
Andersen LLP, independent auditors, begin on page F-1 of this Annual Report on
Form 10-K and are incorporated herein by reference.

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information called for in this item shall be filed not later than
120 days after our fiscal year end (December 31, 2000) in our definitive Proxy
Statement in connection with our 2001 Annual Meeting of Stockholders pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an
amendment to this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION

The information called for in this item shall be filed not later than
120 days after our fiscal year end (December 31, 2000) in our definitive Proxy
Statement in connection with our 2001 Annual Meeting of Stockholders pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an
amendment to this Annual Report on Form 10-K.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for in this item shall be filed not later than
120 days after our fiscal year end (December 31, 2000) in our definitive Proxy
Statement in connection with our 2001 Annual Meeting of Stockholders pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an
amendment to this Annual Report on Form 10-K.

37
38

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for in this item shall be filed not later than
120 days after our fiscal year end (December 31, 2000) in our definitive Proxy
Statement in connection with our 2001 Annual Meeting of Stockholders pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, or in an
amendment to this Annual Report on Form 10-K.

PART IV

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

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

(1) Financial Statements:

Page
------

Index...................................................................................................................... F-1
Report of Independent Public Accountants................................................................................... F-2
Consolidated Balance Sheets................................................................................................ F-3
Consolidated Statements of Operations...................................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................................ F-5
Consolidated Statements of Cash Flows...................................................................................... F-6
Notes to Consolidated Financial Statements................................................................................. F-8

(2) Financial Statement Schedules:

All schedules have been omitted since the required information
is presented in the financial statements and the related notes or is not
applicable.

(3) Exhibits:

The exhibits filed as part of this Annual Report are listed in
the Index to Exhibits immediately preceding such exhibits, which Index
to Exhibits is incorporated herein by reference.

(b) Reports on Form 8-K:

The following reports on Form 8-K were filed during the last quarter of
the period covered by this Annual Report:

On October 27, 2000 we filed a Form 8-K under Item 5 announcing
our financial results for the third quarter of 2000.

38
39

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March 2001.

autobytel.com inc.

By: /s/ MARK W. LORIMER
-------------------------------------
Mark W. Lorimer
Chief Executive Officer,
President and Director

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of autobytel.com inc., a
Delaware corporation, and the undersigned Directors and Officers of
autobytel.com inc. hereby constitute and appoint Mark W. Lorimer, Dennis Benner
or Ariel Amir as its, his or her true and lawful attorneys-in-fact and agents,
for it, him or her and in its, his or her name, place and stead, in any and all
capacities, with full power to act alone, to sign any and all amendments to this
report, and to file each such amendment to this report, with all exhibits
thereto, and any and all documents in connection therewith, with the Securities
and Exchange Commission, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in connection therewith, as fully
to all intents and purposes as it, he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ MICHAEL FUCHS Chairman of the Board and Director March 28, 2001
- -----------------------------------------
Michael Fuchs

/s/ MARK W. LORIMER Chief Executive Officer, President and March 28, 2001
- ----------------------------------------- Director (Principal Executive Officer)
Mark W. Lorimer

/s/ AMIT KOTHARI Vice President, Interim Chief Financial Officer March 28, 2001
- ----------------------------------------- and Controller
Amit Kothari (Principal Financial and Accounting Officer)

/s/ JEFFREY H. COATS Director March 28, 2001
- -----------------------------------------
Jeffrey H. Coats

/s/ MARK N. KAPLAN Director March 28, 2001
- -----------------------------------------
Mark N. Kaplan

/s/ KENNETH J. ORTON Director March 28, 2001
- -----------------------------------------
Kenneth J. Orton

/s/ ROBERT S. GRIMES Director March 28, 2001
- -----------------------------------------
Robert S. Grimes

/s/ PETER TITZ Director March 28, 2001
- -----------------------------------------
Peter Titz

/s/ RICHARD POST Director March 28, 2001
- -----------------------------------------
Richard Post

39
40

AUTOBYTEL.COM INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page
----

Report of Independent Public Accountants................................................................................... F-2
Consolidated Balance Sheets................................................................................................ F-3
Consolidated Statements of Operations...................................................................................... F-4
Consolidated Statements of Stockholders' Equity............................................................................ F-5
Consolidated Statements of Cash Flows...................................................................................... F-6
Notes to Consolidated Financial Statements................................................................................. F-8

F-1
41

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of autobytel.com inc.:

We have audited the accompanying consolidated balance sheets of
autobytel.com inc., a Delaware corporation, and subsidiaries as of December 31,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 2000, 1999
and 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
autobytel.com inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for the years ended December
31, 2000, 1999 and 1998 in conformity with accounting principles generally
accepted in the United States.

ARTHUR ANDERSEN LLP

Los Angeles, California
February 6, 2001

F-2
42

AUTOBYTEL.COM INC.

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

December 31, December 31,
2000 1999
------------ ------------

Current assets:
Cash and cash equivalents, includes restricted amounts of
$15,029 and $206, respectively.................................................. $ 81,945 $ 85,457
Accounts receivable, net of allowance for doubtful accounts of
$1,494 and $439, respectively .................................................. 6,638 4,593
Prepaid expenses and other current assets ........................................... 4,127 2,819
--------- ---------
Total current assets ............................................................ 92,710 92,869
Property and equipment, net ......................................................... 2,537 1,630
Investments ......................................................................... 1,353 --
Goodwill, net ....................................................................... 23,755 10
Capitalized software in process ..................................................... 3,338 --
Notes receivable .................................................................... 530 287
Other assets ........................................................................ 86 76
--------- ---------
Total assets .............................................................. $ 124,309 $ 94,872
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 9,828 $ 4,277
Accrued expenses ................................................................ 7,519 6,772
Deferred revenues ............................................................... 6,360 6,147
Customer deposits ............................................................... 185 716
Other current liabilities ....................................................... 371 201
--------- ---------
Total current liabilities ................................................. 24,263 18,113
Other long-term liabilities ..................................................... 47 53
--------- ---------
Total liabilities ......................................................... 24,310 18,166
--------- ---------

Minority Interest ................................................................... 8,193 --

Commitments and contingencies

Stockholders' equity:
Common stock, $0.001 par value; 200,000,000 shares authorized;
20,336,083 and 18,234,613 shares issued and outstanding, respectively ....... 20 18
Warrants ........................................................................ 1,332 1,332
Additional paid-in capital ...................................................... 186,097 141,957
Accumulated other comprehensive loss ............................................ (16) (8)
Accumulated deficit ............................................................. (95,627) (66,593)
--------- ---------
Total stockholders' equity ................................................ 91,806 76,706
--------- ---------
Total liabilities and stockholders' equity ................................ $ 124,309 $ 94,872
========= =========

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

F-3
43

AUTOBYTEL.COM INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Years Ended December 31,
-------------------------------------------------
2000 1999 1998
------------ ------------ -----------

Revenues ......................................... $ 66,532 $ 40,298 $ 23,826
Operating expenses:
Sales and marketing ........................... 65,266 44,176 30,033
Product and technology development ............ 22,847 14,262 8,528
General and administrative .................... 13,797 8,595 5,908
------------ ------------ -----------
Total operating expenses ................. 101,910 67,033 44,469
------------ ------------ -----------
Loss from operations .......................... (35,378) (26,735) (20,643)
Interest income, net ............................. 6,114 3,922 669
Foreign currency exchange loss, net .............. (106) (6) (4)
Equity losses in unconsolidated subsidiary ....... -- (126) --
Other income (expense) ........................... 9 (322) 615
------------ ------------ -----------
Loss before minority interest losses and
provision for income taxes ................ (29,361) (23,267) (19,363)
Minority interest losses ......................... 369 -- --
------------ ------------ -----------
Loss before provision for income taxes ........ (28,992) (23,267) (19,363)
Provision for income taxes ....................... 42 53 35
------------ ------------ -----------
Net loss ...................................... $ (29,034) $ (23,320) $ (19,398)
============ ============ ===========

Basic and diluted net loss per share ............. $ (1.45) $ (1.48) $ (2.30)
============ ============ ===========
Shares used in computing basic and diluted
net loss per share ............................ 20,047,173 15,766,406 8,423,038
============ ============ ===========

Other comprehensive income (loss):
Net loss ...................................... $ (29,034) $ (23,320) $ (19,398)
Cumulative translation adjustment ............. (8) 11 (19)
------------ ------------ -----------
Comprehensive loss ....................... $ (29,042) $ (23,309) $ (19,417)
============ ============ ===========

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

F-4
44

AUTOBYTEL.COM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

CONVERTIBLE
PREFERRED STOCK COMMON STOCK
----------------------- ----------------------
NUMBER NUMBER PAID-IN
OF SHARES AMOUNT OF SHARES AMOUNT WARRANTS CAPITAL
---------- ---------- ---------- ---------- ---------- ----------

Balance, December 31, 1997 .............................. 3,945,189 $ 4 8,324,443 $ 8 $ -- $ 37,123
Issuance of Series C convertible preferred
stock at $8.80 per share .......................... 3,370,455 3 -- -- -- 29,443
Issuance of Series C convertible preferred
stock at $8.80 per share in exchange for
advertising ....................................... 121,009 -- -- -- -- 1,065
Issuance of warrants in exchange for start-up
costs for a Pan-European entity ................... -- -- -- -- 792 --
Issuance of warrant in exchange for involvement
in a broadband application project ................ -- -- -- -- 540 --
Issuance of common stock upon exercise of stock
options ........................................... -- -- 181,012 -- -- 169
Issuance of common stock at $13.20 per share ......... -- -- 1,000 -- -- 13
Amortization of deferred compensation ................ -- -- -- -- -- --
Foreign currency translation adjustment .............. -- -- -- -- -- --
Net loss ............................................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998 .............................. 7,436,653 7 8,506,455 8 1,332 67,813
Conversion of Series A, B and C convertible
preferred stock to common stock ................... (7,436,653) (7) 5,852,290 6 -- 1
Issuance of common stock in initial public
offering, net of issuance cost .................... -- -- 3,500,000 4 -- 72,080
Issuance of common stock upon exercise of stock
options ........................................... -- -- 362,630 -- -- 790
Issuance of common stock under employee stock
purchase plan ..................................... -- -- 3,161 -- -- 48
Compensation expense recorded for fair market
value of warrant in excess of exercise price ...... -- -- 10,077 -- -- 162
Compensation expense recorded for fair market
value of stock options in excess of exercise
price ............................................. -- -- -- -- -- 1,063
Foreign currency translation adjustment .............. -- -- -- -- -- --
Net loss ............................................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1999 .............................. -- -- 18,234,613 18 1,332 141,957
Issuance of common stock upon acquisition of
A.I.N. Corporation ................................ -- -- 1,800,000 2 -- 19,690
Issuance of common stock upon exercise of stock
options ........................................... -- -- 280,000 -- -- 646
Issuance of common stock under employee stock
purchase plan ..................................... -- -- 21,470 -- -- 134
Compensation expense recorded for fair market
value of stock options in excess of exercise ...... --
price ............................................. -- -- -- -- -- 393
Net gain on sale of subsidiary stock ................. -- -- -- -- -- 23,277
Foreign currency translation adjustment .............. -- -- -- -- -- --
Net Loss ............................................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2000 .............................. -- $ -- 20,336,083 $ 20 $ 1,332 $ 186,097
========== ========== ========== ========== ========== ==========

ADDITIONAL CUMULATIVE
DEFERRED TRANSLATION ACCUMULATED
COMPENSATION ADJUSTMENT DEFICIT TOTAL
----------- ----------- ----------- ----------

Balance, December 31, 1997 .............................. $ (1) $ -- $ (23,875) $ 13,259
Issuance of Series C convertible preferred
stock at $8.80 per share .......................... -- -- -- 29,446
Issuance of Series C convertible preferred
stock at $8.80 per share in exchange for
advertising ....................................... -- -- -- 1,065
Issuance of warrants in exchange for start-up
costs for a Pan-European entity ................... -- -- -- 792
Issuance of warrant in exchange for involvement
in a broadband application project ................ -- -- -- 540
Issuance of common stock upon exercise of stock
options ........................................... -- -- -- 169
Issuance of common stock at $13.20 per share ......... -- -- -- 13
Amortization of deferred compensation ................ 1 -- -- 1
Foreign currency translation adjustment .............. -- (19) -- (19)
Net loss ............................................. -- -- (19,398) (19,398)
---------- ---------- ---------- ----------
Balance, December 31, 1998 .............................. -- (19) (43,273) 25,868
Conversion of Series A, B and C convertible
preferred stock to common stock ................... -- -- -- --
Issuance of common stock in initial public
offering, net of issuance cost .................... -- -- -- 72,084
Issuance of common stock upon exercise of stock
options ........................................... -- -- -- 790
Issuance of common stock under employee stock
purchase plan ..................................... -- -- -- 48
Compensation expense recorded for fair market
value of warrant in excess of exercise price ...... -- -- -- 162
Compensation expense recorded for fair market
value of stock options in excess of exercise
price ............................................. -- -- -- 1,063
Foreign currency translation adjustment .............. -- 11 -- 11
Net loss ............................................. -- -- (23,320) (23,320)
---------- ---------- ---------- ----------
Balance, December 31, 1999 .............................. -- (8) (66,593) 76,706
Issuance of common stock upon acquisition of
A.I.N. Corporation ................................ -- -- -- 19,692
Issuance of common stock upon exercise of stock
options ........................................... -- -- -- 646
Issuance of common stock under employee stock
purchase plan ..................................... -- -- -- 134
Compensation expense recorded for fair market
value of stock options in excess of exercise ......
price ............................................. -- -- -- 393
Net gain on sale of subsidiary stock ................. -- -- -- 23,277
Foreign currency translation adjustment .............. -- (8) -- (8)
Net Loss ............................................. -- -- (29,034) (29,034)
---------- ---------- ---------- ----------
Balance, December 31, 2000 .............................. $ -- $ (16) $ (95,627) $ 91,806
========== ========== ========== ==========

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

F-5
45

AUTOBYTEL.COM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

Years Ended December 31,
--------------------------------------
2000 1999 1998
-------- -------- --------

Cash flows from operating activities:
Net loss ................................................................ $(29,034) $(23,320) $(19,398)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 2,752 1,298 1,255
Provision for bad debt .................................................. 1,409 189 187
Loss on disposal of property and equipment .............................. 30 103 1
Reserve for foreign currency exchange loss .............................. 132 -- --
Amortization of deferred compensation ................................... -- -- 1
Issuance of Series C convertible preferred stock in exchange
for advertising ....................................................... -- -- 1,065
Issuance of warrants in exchange for start-up costs for a
Pan-European entity ................................................... -- -- 792
Issuance of warrants in exchange for involvement in
broadband application project ......................................... -- -- 540
Compensation expense recorded for fair market value of
stock options in excess of exercise price ............................. 393 1,063 --
Compensation expense recorded for fair market value of
warrant in excess of exercise price ................................... -- 162 --
Equity losses in unconsolidated subsidiary .............................. -- 126 --
Changes in assets and liabilities:
Accounts receivable ................................................... (3,137) (2,467) (1,009)
Prepaid expenses and other current assets ............................. (670) (1,466) (558)
Other assets .......................................................... 289 (26) (252)
Accounts payable ...................................................... 4,518 1,362 692
Accrued expenses ...................................................... 576 5,857 (132)
Deferred revenues ..................................................... 213 2,139 308
Customer deposits ..................................................... (531) 371 218
Other current liabilities ............................................. (613) 168 (33)
Other long-term liabilities ........................................... (69) (70) 32
-------- -------- --------
Net cash used in operating activities ............................ (23,742) (14,511) (16,291)
-------- -------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired ........................... (4,374) -- --
Investment in foreign entities .......................................... (1,353) -- --
Investment in debt security of foreign entities ......................... (830) -- --
Investment in unconsolidated subsidiary ................................. -- (126) --
Notes receivable from foreign entity .................................... (268) -- --
Purchases of property and equipment ..................................... (1,849) (823) (1,147)
Capitalized software costs .............................................. (3,338) -- --
-------- -------- --------
Net cash used in investing activities ............................ (12,012) (949) (1,147)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from sale of common stock to employees ..................... 780 72,922 182
Net proceeds from sale of subsidiary company stock ...................... 31,470 -- --
Net proceeds from issuance of Series C convertible preferred stock ...... -- -- 29,446
-------- -------- --------
Net cash provided by financing activities ........................ 32,250 72,922 29,628
Effect of foreign currency exchange rates on cash ......................... (8) 11 (19)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ...................... (3,512) 57,473 12,171
Cash and cash equivalents, beginning of period ............................ 85,457 27,984 15,813
-------- -------- --------
Cash and cash equivalents, end of period .................................. $ 81,945 $ 85,457 $ 27,984
======== ======== ========

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............................ $ 42 $ 53 $ 35
======== ======== ========
Cash paid during the period for interest ................................ $ 51 $ 2 $ 3
======== ======== ========

Supplemental disclosure of non-cash financing activities (See Note 8):

- In April 1998, 56,776 shares of Series C convertible preferred
stock with a fair market value of $8.80 per share convertible
into common stock at the conversion price of $13.20 per share
were issued for advertising.

- In October 1998, 64,233 shares of Series C convertible preferred
stock with a fair market value of $8.80 per share convertible
into common stock at the conversion price of $13.20 per share
were issued for advertising.

F-6
46

- In November and December 1998, warrants to purchase 439,800
shares of common stock at $13.20 per share were issued to
investors in Series C convertible preferred stock in exchange
for commitment to fund start-up activities of a Pan-European
entity.

- In December 1998, a warrant to purchase 300,000 shares of common
stock at $13.20 per share was issued to an investor in exchange
for involvement in a broadband application project.

- In December 1999, a warrant to purchase 33,333 shares of common
stock at $11.25 per share was exercised in a cashless exercise.
Under the warrant, 25,235 shares were exchanged for an aggregate
fair market value of $375 to pay for the exercise.

- In February 2000, Autobytel.com acquired all of the outstanding
stock of A.I.N. Corporation, the owner of CarSmart.com. The
components of the purchase price were as follows:

Cash paid $ 3,000
1.8 million shares of Autobytel.com stock
at an agreed upon price 19,692
Acquisition costs 1,561
Assumption of net stockholders' deficit 973
-------
$25,226
=======

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

F-7
47

AUTOBYTEL.COM.INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.)

1. ORGANIZATION AND OPERATIONS OF AUTOBYTEL.COM

autobytel.com inc., along with its subsidiaries (collectively
Autobytel.com), is an internationally branded online automotive commerce company
that provides consumers with automotive solutions throughout the lifecycle of
vehicle ownership. Autobytel.com owns branded Internet sites for new and
pre-owned vehicle information and automotive services that link buyers and
sellers in an information-rich environment. Through its Web sites
(www.autobytel.com and www.carsmart.com), consumers can research pricing,
specifications and other information related to new and pre-owned vehicles and
purchase, finance, lease, insure, sell or maintain their vehicles. When
consumers indicate they are ready to buy a vehicle, they can be connected to
participating dealers in the United States and Canada, or to other sellers
through its classified ads.

Autobytel.com has also established international joint ventures and/or
licensing agreements to market new and used vehicles in the United Kingdom,
Sweden, Japan, Australia, The Netherlands and Spain.

Since its inception in January 1995, Autobytel.com has invested in
marketing its brand name and developing infrastructure to support anticipated
future operating growth. As a result, Autobytel.com has experienced significant
operating losses and has an accumulated deficit of $95,627 as of December 31,
2000. Management 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

Principles of Consolidation

The accompanying consolidated financial statements include the accounts
of autobytel.com and its wholly and majority owned direct and indirect
subsidiaries. Autobytel.com's wholly and majority owned subsidiaries include:
Autobytel Services Corporation, Auto-By-Tel Acceptance Corporation, Auto-By-Tel
Insurance Services, Inc., Autobytel.ca inc., Kre8.net, inc., e-autosdirect.com
inc., Autobytel.Europe LLC (formerly Auto-By-Tel International LLC),
Autobytel.Europe Investment B.V., Autobytel.Europe Holdings B.V., I-Net Training
Technologies, LLC, Autobytel Acquisition I Corp., Autobytel Information Services
Inc., AutoVisions Communications, Inc. and A.I.N. Corporation.

Investments in which Autobytel.com has the ability to exercise
significant influence, but not control, are accounted for using the equity
method. Autobytel.com accounts for its investments in Autobytel Japan and
Autobytel Australia under the equity method. The application of the equity
method against its investment in Autobytel Japan has been suspended, as its
original investment of $126 was fully expensed in 1999. Autobytel.com has no
basis in its equity investment in Autobytel Australia and, accordingly, has not
recorded any losses. Autobytel.com will resume application of the equity method
when its share of net income equals its share of net losses unrecognized during
the suspension period.

All other investments in affiliates are carried at cost. Autobytel.com
accounts for its investments in Auto-By-Tel AB, Automoviles Bytel S.A.,
Autoatnet S.A. and Autobytel France S.A. using the cost method.

All intercompany transactions and balances have been eliminated in
consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and

F-8
48

disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

For the purposes of the consolidated balance sheets and the consolidated
statements of cash flows, Autobytel.com considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents.

As of December 31, 2000, $15,000 is held in a restricted interest
bearing account as a reserve for three foreign exchange forward contracts
expiring in June 2001.

Financial Instruments

Autobytel.com does not hold or issue financial instruments for
speculative purposes. Autobytel.com enters into off-balance sheet foreign
currency forward exchange instruments in order to hedge certain financing and
investment transactions denominated in foreign currencies. Gains and losses on
the investing and financing transactions are included in other income(expense).

Concentration of Credit Risk

Financial instruments that potentially subject Autobytel.com to
significant concentrations of credit risk consist primarily of accounts
receivable. Accounts receivable are primarily derived from fees billed to
subscribing dealers and international licencees. Autobytel.com generally
requires no collateral to support customer receivables and maintains reserves
for potential credit losses. Historically, such losses have been minor and
within management's expectations. As of December 31, 2000 and 1999, no
subscribing dealer, international licensee or other customer accounted for
greater than 10% of accounts receivable.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the respective
assets, generally three years. Amortization of leasehold improvements is
provided using the straight-line method over the shorter of the remaining lease
term or the estimated useful lives of the improvements.

Goodwill

Goodwill is amortized using the straight-line method over its estimated
useful life, generally 15 years. Amortization expense for the year ended
December 31, 2000 was $1,482.

Capitalized Software in Process

In accordance with Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed", Autobytel.com
expenses software development costs until technological feasibility has been
established. Costs incurred subsequent to technological feasibility are
capitalized on a product by product basis. Amortization is provided using (i)
the ratio that current gross revenues for a product bear to the total of current
anticipated future gross revenues from that product or (ii) the straight-line
method over the remaining estimated economic life of the product, whichever is
greater. As of December 31, 2000, capitalized software in process costs totaled
$3,338. Related amortization expense will be recorded when the product is
available for general release to customers.

Stock-Based Compensation

Autobytel.com accounts for stock-based compensation in accordance with
the provisions of Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees." Under APB No. 25,

F-9
49

compensation expense is recognized over the vesting period based on the excess
of the fair market value over the exercise price on the grant date. (See Note
9.)

In 1996, Autobytel.com adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." Autobytel.com has elected to continue accounting for stock-based
compensation issued to employees using APB No. 25 and, accordingly, proforma
disclosures required under SFAS No. 123 have been presented. (See Note 9.)

Revenue Recognition

Autobytel.com's revenues primarily consist of fees paid by subscribing
dealers located in the United States and Canada. These fees are comprised of an
initial fee and a monthly fee. The initial fee is recognized ratably over the
service period of 12 months. The monthly fee is recognized in the period
services are provided.

Autobytel.com also derives revenues from license and service agreements
with international licensees. These agreements grant the licensees the right to
use Autobytel.com's proprietary software, technology and other business
procedures to market new and used vehicles in exchange for certain fees.
Revenues from these fees are recognized in accordance with the provisions of
Statement of Position (SOP) 97-2, "Software Revenue Recognition." These fees
include: (i) orientation fees, which are recognized on the effective date of the
license and service agreements, (ii) localization and development fees and
minimum annual maintenance fees, which are recognized as services are provided,
and (iii) minimum annual license fees, which are recognized ratably over a 12
month period beginning on the date the international Web site is launched.

Deferred revenues are comprised of unearned fees.

Risks Due to Concentration of Significant Customers and Export Sales

For all periods presented in the accompanying consolidated statements of
operations, no subscribing dealer, international licensee or other customer
accounted for greater than 10% of revenues.

Autobytel.com conducts its business within one industry segment.
Revenues from customers outside of the United States were less than 10% of total
revenues for all periods presented in the accompanying consolidated statements
of operations.

Sales and Marketing

Sales and marketing expense primarily includes Internet marketing and
advertising expenses, fees paid to purchase request providers, promotion and
advertising expenses to build brand awareness and encourage potential customers
to visit Autobytel.com's Web sites and personnel and other costs associated with
sales, marketing, training and support of Autobytel.com's dealer networks. Sales
and marketing costs are recorded as expenses as incurred. For the years ended
December 31, 2000, 1999 and 1998, Internet marketing and advertising costs were
$20,564, $14,288 and $11,090 and television advertising expenses were $10,720,
$8,485 and $5,296 respectively.

Product and Technology Development

Product and technology development expense primarily includes personnel
costs related to enhancing the features, content and functionality of
Autobytel.com's Web sites and its Internet-based dealer communications platform.
It also includes expenses associated with the customization of Autobytel.com's
software for international licensees and telecommunications and computer
infrastructure. Product and technology development expenditures are expensed as
incurred or capitalized as appropriate.

General and Administrative

General and administrative expense primarily consists of executive,
financial and legal personnel expenses, costs related to being a public company
and non-cash compensation charges related to stock options granted in 1999.
Non-cash compensation expense in 2000 and 1999 was $393 and $1,063,
respectively. (See Note 9.) A non-

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recurring charge of $601 associated with an aborted acquisition was charged to
general and administrative expense in 1999.

Foreign Currency Translation

The assets and liabilities of Autobytel.com's foreign subsidiaries are
translated into United States dollars at the current exchange rate as of the
applicable balance sheet date. Revenues and expenses are translated at the
average exchange rate prevailing during the period. Gains and losses resulting
from the translation of the financial statements are reported as a separate
component of stockholders' equity.

Transaction gains and losses arising from exchange rate fluctuations on
transactions denominated in a currency other than the functional currency,
except those transactions which operate as a hedge of an identifiable foreign
currency commitment or as a hedge of a foreign currency investment position, are
included in other income (expense).

Computation of Basic and Diluted Net Loss Per Share

Net loss per share has been calculated under 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 years ended December 31, 2000, 1999 and 1998, diluted
net loss per share is equal to basic net loss per share since potential common
shares from the conversion of preferred stock, stock options and warrants are
antidilutive. Autobytel.com 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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 2000 (as amended by SFAS No. 137 and 138). SFAS No. 133
establishes accounting and reporting standards for derivative instruments.
Autobytel.com adopted SFAS No. 133 in January 2001.

3. Acquisition of A.I.N. Corporation

On February 15, 2000, Autobytel.com acquired all of the outstanding
stock of A.I.N. Corporation, the owner of CarSmart.com, an online buying site
for new and used vehicles, for $3,000 in cash and 1.8 million shares of its
common stock with an agreed upon value of $19,690. The acquisition has been
accounted for using the purchase method of accounting. The purchase price has
been allocated to the assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition date.

The excess of the purchase price over the fair value of the assets
acquired and liabilities assumed has been recorded as goodwill in the amount of
$25,226 and will be amortized over a 15 year period.

A.I.N. Corporation's results of operations from the date of acquisition
through December 31, 2000 have been included in the accompanying consolidated
statements of operations.

The following summarized unaudited pro forma consolidated results of
operation are presented as if the acquisition of A.I.N. Corporation had been
made at the beginning of 1999. The unaudited pro forma results are not

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necessarily indicative of future earnings or earnings that would have been
reported had the acquisition been completed as presented.

For the Years Ended
December 31,
-----------------------
2000 1999
-------- --------
(Unaudited)

Revenue $ 67,806 $ 45,120
Net loss before provision for income taxes (30,095) (27,181)
Provision for income taxes 42 56
Net loss (30,137) (27,237)
Basic and diluted net loss per share $ (1.50) $ (1.55)

4. AUTOBYTEL.EUROPE LLC

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

In January 2000, Autobytel.Europe and Autobytel.com 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
in exchange for a 22.5% minority interest. Autobytel.com contributed $5,000, 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. Autobytel.com retains a 77.5% controlling interest.

Autobytel.Europe is considered a start-up company. In accordance with
Staff Accounting Bulletin 51, the difference between Autobytel.com's carrying
amount of the investment in Autobytel.Europe and the underlying net book value
of Autobytel.Europe immediately after the investment was reflected as a capital
transaction and credited directly to Autobytel.com's equity.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

For the Years Ended
December 31,
---------------------
2000 1999
------- -------

Computer software and hardware $ 4,639 $ 3,294
Furniture and equipment 1,614 1,073
Leasehold improvements 806 558
------- -------
7,059 4,925
Less -- Accumulated depreciation and amortization (4,522) (3,295)
------- -------
$ 2,537 $ 1,630
======= =======

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6. COMMITMENTS AND CONTINGENCIES

Operating Leases

Autobytel.com leases its facilities and certain office equipment under
operating leases which expire on various dates through 2005. At December 31,
2000, future minimum lease payments are as follows:

Years Ending December 31,
-------------------------

2001...................................... $ 1,428
2002...................................... 593
2003...................................... 374
2004...................................... 289
2005...................................... 233
Thereafter................................ --
--------
$ 2,917
========

Rent expense was $1,202, $756 and $509 for the years ended December 31,
2000, 1999 and 1998, respectively.

Marketing and Advertising Agreements

In March 2000, Autobytel.com entered into a three year Internet
marketing agreement with NBCi, a company that operates a search engine. The
agreement permits Autobytel.com to maintain certain promotional rights and
linkage with NBCi, and provides for certain advertising. The payments under the
agreement consist of an annual fee and a monthly fee. Autobytel.com expenses the
annual fee ratably over a 12-month period and the monthly fee in the period
advertising is provided. As of December 31, 2000, the minimum future payments
under the agreement amounted to approximately $8,900.

Autobytel.com has agreements with other search engines, Internet service
and automotive information providers, including Prodigy, AT&T WorldNet,
Edmund's, Kelley Blue Book and Intellichoice, that make available to consumers
vehicle research data over the Internet. These agreements are generally for a
term of one to four years and require that Autobytel.com pay a combination of
set-up, initial, annual, monthly and variable fees based on the volume of
purchase requests received by Autobytel.com. The set-up fees are expensed as
incurred, the initial fees and annual fees are amortized over the period they
relate to. The monthly fees are expensed in the month they relate to and
variable fees are expensed in the period purchase requests are received. As of
December 31, 2000, the minimum future commitments under these agreements were
approximately $10,900.

Autobytel.com has agreements with network and cable television stations
under which it has the right to purchase television advertising. As of December
31, 2000, there were no minimum future commitments under these agreements.
Amounts incurred for television advertising are expensed as advertisements are
aired.

Employment Agreements

Autobytel.com has agreements with Mark W. Lorimer, Chief Executive
Officer, Dennis Benner, Executive Vice President-Corporate Development, Ariel
Amir, Executive Vice President and General Counsel, and Andrew F. Donchak,
Senior Vice President and Chief Marketing Officer. In the event of termination
without cause each executive is entitled to receive a lump sum severance payment
equal to the greater of the base salary plus, in certain cases, bonus that would
have been received by the executive over the remaining term of the agreement or
for one to two years as specified in the applicable agreement, except that Mr.
Donchak's payment is equal to one year base salary. Messrs. Lorimer, Benner and
Amir are also entitled to additional severance payments in the event of
termination within a specified time period of a change of control. The terms of
Messrs. Lorimer, Benner and Amir's agreements range from two to three years with
one year renewals or an extension upon mutual agreement.

Autobytel.Europe has employment agreements with Max Rens, Chief
Executive Officer, and Peter Oostenenk, Chief Financial Officer. The agreements
provide for one year's annual salary in the event of termination without cause.
These agreements may be terminated by Autobytel.Europe upon three months notice.

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Litigation

Autobytel.com may become subject to legal proceedings from time to time
in the normal course of business. Autobytel.com is not currently involved in any
litigation that management believes will have a material adverse effect on its
financial position or results of operations.

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 contains causes of action for breach of written
and oral contracts, promissory estoppel, breach of fiduciary duty and fraud, and
seeks damages and equitable relief. The plaintiff contends he is entitled to a
49.9% ownership interest in A.I.N. Corporation'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. Corporation filed a complaint for
declaratory relief on the subject of Mr. Martins' lawsuit in Contra Costa County
Superior Court. The Los Angeles action has been transferred to Contra Costa
County and the two cases have been consolidated. Autobytel.com was added as a
cross defendant in such action. The lawsuit is and will be vigorously contested
on behalf of Autobytel.com, A.I.N. Corporation and individual co-defendant
Michael Gorun.

The selling shareholders of A.I.N. Corporation are obligated to fully
indemnify Autobytel.com for all losses, including attorney's fees, expenses,
settlements and judgements, arising out of the lawsuit. The indemnification
obligation was initially secured by 450,000 shares of Autobytel.com common stock
transferred to the selling shareholders as part of the acquisition of A.I.N.
Corporation, as well as $250 in cash. As of December 31, 2000, the obligation
was secured by the 450,000 shares of common stock and $95 in cash after
expenses.

In July 1998, Autobytel.com and certain of its past and current officers
were sued by a former employee. The plaintiff claimed, among other things, that
he was wrongfully terminated. In December 2000, a verdict in favor of plaintiff
in the amount of $1.9 million was rendered. Autobytel.com intends to vigorously
contest the judgement.

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

7. RETIREMENT SAVINGS PLAN

Autobytel.com has a retirement savings plan which qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code
(the 401(k) Plan.) The 401(k) Plan covers all full time employees of
Autobytel.com who are over 21 years of age and have worked for Autobytel.com for
at least 3 months. Under the 401(k) Plan, participating employees are allowed to
defer up to 15% of their pretax salaries up to a maximum of $10.5 per year.
Company contributions to the 401(k) Plan are discretionary. In January 2000,
Autobytel.com began to match employee contributions 50 cents per dollar up to a
maximum of $3 per year in Autobytel.com common stock. During 2000, Autobytel.com
matched employee contributions by contributing $326 or 68,686 shares of common
stock at the current fair market value on the date the shares were issued.

8. STOCKHOLDERS' EQUITY

Initial Public Offering

In March 1999, Autobytel.com consummated its initial public offering and
issued 3,500,000 shares of common stock at a price of $23 per share. An
additional 1,000,000 shares of common stock were offered by selling stockholders
at a price of $23 per share. Autobytel.com received proceeds of approximately
$72,084, net of underwriting discounts, fees and other initial public offering
costs.

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At the closing of the offering, outstanding shares of Series A, Series B
and Series C convertible preferred stock were automatically converted to an
aggregate total of 5,852,290 shares of common stock.

In addition, the selling stockholders granted the underwriters a 30-day
option to purchase up to an additional 637,500 shares of common stock to cover
over-allotments. The underwriters exercised this option in April 1999.

Preferred Stock

As of December 31, 2000, 11,445,187 shares of preferred stock with a
$0.001 par value were authorized and undesignated.

Warrants

In November 1998, Autobytel.com issued a warrant to purchase 150,000
shares of common stock to Invision AG, an investor in its Series C convertible
preferred stock (Series C Preferred), in exchange for their commitment to assist
Autobytel.com with organizational and start-up activities related to a
Pan-European entity in which Autobytel.com may invest with them. The warrant is
exercisable at $13.20 per share and expires in November 2001. The warrant was
valued at $270, which was expensed in 1998, as Invision AG has fulfilled its
commitment and has no further obligation to Autobytel.com.

In December 1998, Autobytel.com issued warrants to purchase 289,800
shares of common stock to Aureus Private Equity AG (Aureus), an investor in its
Series C Preferred, in exchange for their commitment to assist Autobytel.com
with organizational and start-up activities related to a Pan-European entity in
which Autobytel.com may invest with them. The warrants are exercisable at $13.20
per share and expire in December 2001. The warrants were valued at $522, which
was expensed in 1998, as Aureus has fulfilled its commitment and has no further
obligation to Autobytel.com.

In December 1998, Autobytel.com issued a warrant to purchase 300,000
shares of common stock to MediaOne Interactive Services, Inc. in exchange for
the right to participate in the development of broadband application technology.
The warrant is exercisable at $13.20 per share and expires in December 2001. The
warrant was valued at $540, and was amortized to expense in 1999.

The fair value of each of these warrants was estimated using the
Black-Scholes option-pricing model and the following assumptions: (1) no
dividend yield, (2) volatility of 0.10%, (3) risk-free interest rate of 4.90%,
and (4) expected life of three years.

9. STOCK OPTION PLANS

1996 Stock Option Plan

Autobytel.com's 1996 Stock Option Plan (the Option Plan) was approved by
the Board of Directors in May 1996. The Option Plan was terminated by a
resolution of the Board of Directors in October 1996, at which time 870,555
options had been issued. The Option Plan provided for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the Code), and for the granting to employees,
consultants and directors of nonstatutory stock options. Autobytel.com reserved
1,194,444 shares of common stock for exercise of stock options under the Option
Plan. The exercise price of incentive stock options granted under the Option
Plan could not be lower than the fair market value of the common stock, and the
exercise price of nonstatutory stock options could not be less than 85% of the
fair market value of the common stock, as determined by the Board of Directors,
on the date of grant. With respect to any participants who, at the time of
grant, owned stock that possessed more than 10% of the voting power of all
classes of stock of Autobytel.com, the exercise price of any stock option
granted to such person was to be at least 110% of the fair market value on the
grant date, and the maximum term of such option was five years. The term of all
other options granted under the Option Plan did not exceed 10 years. Stock
options granted under the Option Plan vest according to vesting schedules
determined by the Board of Directors.

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1996 Stock Incentive Plan

Autobytel.com's 1996 Stock Incentive Plan (the Incentive Plan) was
approved by the Board of Directors in October 1996, and was amended in November
1996. The Incentive Plan provides for the granting to employees of incentive
stock options within the meaning of Section 422 of the Code, and for the
granting to employees, directors and consultants of nonstatutory stock options
and stock purchase rights. Autobytel.com has reserved a total of 833,333 shares
of common stock for issuance under the Incentive Plan. The exercise price of
stock options granted under the Incentive Plan cannot be lower than the fair
market value of the common stock, as determined by the Board of Directors, on
the date of grant. With respect to any participants who, at the time of grant,
own stock possessing more than 10% of the voting power of all classes of stock
of Autobytel.com, the exercise price of stock options granted to such person
must be at least 110% of the fair market value on the grant date, and the
maximum term of such options is five years. The term of all other options
granted under the Incentive Plan may be up to 10 years. Stock options granted
under the Incentive Plan vest according to vesting schedules determined by the
Board of Directors.

1998 Stock Option Plan

Autobytel.com's 1998 Stock Option Plan (the 1998 Option Plan) was
adopted in December 1998 and amended in September 1999. Autobytel.com has
reserved 1,500,000 shares under the 1998 Option Plan. The 1998 Option Plan
provides for the granting to employees of incentive stock options within the
meaning of the Code, and for the granting to employees of nonstatutory stock
options.

The exercise price of non-statutory options granted under the 1998
Option Plan cannot be lower than 85% of the fair market value of the common
stock on the date of grant. The exercise price of all incentive stock options
granted cannot be lower than the fair market value on the grant date. With
respect to any participants who beneficially own more than 10% of the voting
power of all classes of stock of Autobytel.com, the exercise price of any stock
option granted to such person must be at least 110% of the fair market value on
the grant date, and the maximum term of such option is five years. The term of
all other options granted under the 1998 Option Plan may be up to 10 years.
Under the 1998 Option Plan, certain nonstatutory stock options (Performance
Options) vest over a time period determined by the Board of Directors, however,
the vesting could be accelerated based on the performance of Autobytel.com's
common stock.

In December 1998, the Board of Directors granted Performance Options to
purchase 700,000 shares of common stock to certain executives at an exercise
price of $13.20 per share, which represents the fair market value on the date of
grant. These options vest over a seven-year period, but the vesting could be
accelerated based on the performance of Autobytel.com's common stock. The
accelerated vesting schedule provides that the grants will vest in six
installments, one installment vesting each six months over a three-year period
if pre-established average trading prices of the common stock are achieved.
Those installments will vest if the average trading price exceeds the exercise
price by $6.60, $13.20, $19.80, $26.40, $33.00 and $39.60, respectively, in the
applicable six month period after the date of grant. All other stock options
granted under the 1998 Option Plan vest according to vesting schedules
determined by the Board of Directors.

The 1998 Option Plan provides that, unless otherwise provided in the
stock option agreement, in the event of any merger, consolidation, or sale or
transfer of all or any part of Autobytel.com's business or assets, all rights of
the optionee with respect to the unexercised portion of any option will become
immediately vested and may be exercised immediately, except to the extent that
any agreement or undertaking of any party to any such merger, consolidation, or
sale or transfer of assets makes specific provisions for the assumption of the
obligations of Autobytel.com with respect to the 1998 Option Plan.

1999 Stock Option Plan

Autobytel.com's 1999 Stock Option Plan (the 1999 Option Plan) was
adopted in January 1999 and amended in September 1999. Autobytel.com has
reserved 1,800,000 shares under the 1999 Option Plan. The 1999 Option Plan
provides for the granting of stock options to key employees of Autobytel.com.
Under the 1999 Option Plan, not more than 1,000,000 shares may be issued
pursuant to options granted after March 31, 1999.

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The 1999 Option Plan provides for an automatic grant of an option to
purchase 20,000 shares of common stock to each non-employee director on the date
on which the person first becomes a non-employee director. In each successive
year the non-employee director will automatically be granted an option to
purchase 5,000 shares on November 1 of each subsequent year provided the
non-employee director has served on the Board for at least six months. Each
option will have a term of 10 years and will be granted at the fair market value
of Autobytel.com's common stock on the date of grant. The options vest in their
entirety and become exercisable on the first anniversary of the grant date,
provided that the optionee continues to serve as a director on such date.

The 1999 Option Plan is similar in all other material respects to the
1998 Option Plan.

Rescission Offer for Stock Options Granted in Excess of the 1996 Incentive Plan
Limit

From May 1997 to January 1999, Autobytel.com issued grants of incentive
stock options in excess of the Incentive Plan limit of 833,333 shares.
Subsequent to December 31, 1998, Autobytel.com offered to exchange the affected
options for a cash payment or a new grant of incentive stock options under the
1999 Option Plan. In 1999, Autobytel.com resolved this matter without a material
impact on its financial statements. Total cash payments were less than $10. The
new stock options were granted at the fair market value at the date of the new
grant, which equaled the exercise price of the original options. All other
significant provisions associated with the options remained the same.

1999 Employee and Acquisition Related Stock Option Plan

Autobytel.com's 1999 Employee and Acquisition Related Stock Option Plan
(the Employee and Acquisition Option Plan) was approved by the Board of
Directors in September 1999. Autobytel.com has reserved a total of 1,500,000
shares of common stock for issuance under the Employee and Acquisition Option
Plan. The Employee and Acquisition Option Plan provides for the granting to
employees and acquired employees of incentive stock options within the meaning
of the Code, and for the granting to employees, acquired employees and service
providers of nonstatutory stock options. The exercise price of incentive stock
options granted can not be lower than the fair market value on the date of grant
and the exercise price of nonstatutory stock options can not be less than 85% of
the fair market value of the common stock on the date of grant. The exercise
price of stock options granted to individuals beneficially owning more than 10%
of the voting power of all classes of Autobytel.com stock must be at least 110%
of the fair market value on the grant date and have a maximum term of five
years. The term of all other options granted under the Employee and Acquisition
Option Plan may be up to 10 years. Stock options granted under the Employee and
Acquisition Option Plan vest according to vesting schedules determined by the
Board of Directors.

2000 Stock Option Plan

Autobytel.com's 2000 Stock Option Plan (the 2000 Option Plan) was
approved by the Board of Directors in April 2000 and the stockholders at the
Annual Meeting held on June 15, 2000. The 2000 Option Plan provides for the
granting of both incentive stock options and nonqualified stock options to
eligible employees, consultants and outside directors of Autobytel.com.
Autobytel.com has reserved 3 million shares under the 2000 Option Plan.

In May 2000, the Board of Directors granted Performance Options to
purchase 250,000 shares of common stock to a certain executive at an exercise
price of $6.19 per share, which represents the fair market value on the date of
grant. These options vest over a five year period, but the vesting could be
accelerated based on the performance of Autobytel.com's common stock. The
accelerated vesting schedule provides that the grants will vest in five
installments, the first installment on the eight month anniversary of the grant
date and the remaining installments on each subsequent seven month anniversary
period, if pre-established average trading prices of the common stock are
achieved. These installments will vest if the average trading price exceeds
$11.00, $16.00, $21.00, $26.00 and $31.00, respectively, in the applicable
period after the date of grant. All other stock options granted under the 2000
Option Plan vest according to vesting schedules determined by the Board of
Directors.

The 2000 Option Plan is similar in all other material respects to the
1999 Option Plan.

F-17
57

Stock Option Changes

A summary of the status of Autobytel.com's stock options as of December
31, 1998, 1999 and 2000, and changes during the years then ended is presented
below:

NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------

Outstanding at December 31, 1997 ........................... 2,177,745 $ 6.92
Granted .................................................. 1,630,340 13.20
Exercised ................................................ (181,012) 0.94
Canceled ................................................. (767,733) 6.93
---------- ----------
Outstanding at December 31, 1998 ........................... 2,859,340 10.87
Granted .................................................. 2,235,598 12.51
Exercised ................................................ (362,630) 2.19
Canceled ................................................. (813,747) 13.25
---------- ----------
Outstanding at December 31, 1999 ........................... 3,918,561 12.12
Granted .................................................. 4,653,244 7.08
Exercised ................................................ (280,000) 2.29
Canceled ................................................. (1,612,025) 11.14
---------- ----------
Outstanding at December 31, 2000 ........................... 6,679,780 $ 9.26
========== ==========

Exercisable at December 31, 1998 ........................... 738,860 $ 6.42
========== ==========
Exercisable at December 31, 1999 ........................... 1,331,924 $ 8.90
========== ==========
Exercisable at December 31, 2000 ........................... 2,160,318 $ 10.89
========== ==========
Weighted-average fair value of options granted during
1998 (1,630,340 options) ................................. $ 3.25
Weighted-average fair value of options granted during
1999 (2,235,598 options) ................................. $ 3.81
Weighted-average fair value of options granted during
2000 (4,653,244 options) ................................. $ 4.82

The fair value of each option granted through December 31, 2000 is
estimated using the Black-Scholes option-pricing model on the date of grant
using the following assumptions: (i) no dividend yield, (ii) volatility of
102.71% and 55.90% for the years ended December 31, 2000 and 1999, respectively,
and effectively zero for the year ended December 31, 1998, (iii)
weighted-average risk-free interest rate of approximately 6.07%, 5.36% and 4.80%
for the years ended December 31, 2000, 1999 and 1998, respectively, and (iv) an
expected life of four to seven years.

The following table summarizes information about stock options
outstanding at December 31, 2000:

Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------
Weighted Average
Range of Number of Remaining Life Weighted Average Number of Weighted Average
Exercise Price Options (in years) Exercise Price Options Exercise Price
- -------------- -------- ---------------- ---------------- --------- ----------------

Less than $1.00............... 18,444 5.51 $0.90 18,444 $0.90
$1.00 - $5.99................. 886,555 8.22 4.15 355,555 4.50
$6.00 - $10.99................ 3,236,820 8.74 7.24 432,348 7.82
$11.00 - $15.99............... 2,271,961 6.40 13.20 1,232,859 13.28
$16.00 - $19.99............... 266,000 8.42 17.68 121,112 17.85
------- ---- ----- ------- -----
Less than $1.00 - $19.99...... 6,679,780 7.85 $9.26 2,160,318 $10.89
========= ==== ===== ========= ======

Stock-Based Compensation

From January to March 1999, Autobytel.com granted stock options to
purchase 388,236 shares of common stock under the 1999 Stock Option Plan. These
stock options were granted to employees and directors at exercise prices of
$13.20 and $16.00 per share which were below the fair market value at the date
of grant. In relation to these grants, Autobytel.com will recognize non-cash
compensation expense of approximately $2,600 ratably over the vesting term of
one to four years. Compensation expense of approximately $393 and $1,063 was
recognized as operating expense in 2000 and 1999, respectively.

F-18
58

Pro Forma Disclosure

Had compensation cost for Autobytel.com's stock option grants for its
stock-based compensation plans been determined consistent with SFAS No. 123,
Autobytel.com's net loss and net loss per share for the years ended December 31,
2000, 1999 and 1998 would approximate the pro forma amounts below:

Years Ended December 31,
--------------------------------------------
2000 1999 1998
---------- ---------- ----------

Net loss, as reported ......... $ (29,034) $ (23,320) $ (19,398)
Net loss per share, as reported (1.45) (1.48) (2.30)
Net loss, pro forma ........... (36,901) (27,850) (21,109)
Net loss per share, pro forma . (1.84) (1.77) (2.51)

The effects of applying SFAS No. 123 in this pro forma disclosure are
not indicative of future amounts.

10. STOCK PURCHASE PLAN

1996 Employee Stock Purchase Plan

Autobytel.com's 1996 Employee Stock Purchase Plan (the Purchase Plan)
was adopted by the Board of Directors in November 1996. The Purchase Plan, which
is intended to qualify under Section 423 of the Code, permits eligible employees
of Autobytel.com to purchase shares of common stock through payroll deductions
of up to ten percent of their compensation, up to a certain maximum amount for
all purchase periods ending within any calendar year. Autobytel.com has reserved
a total of 444,444 shares of common stock for issuance under the Purchase Plan.
The price of common stock purchased under the Purchase Plan will be 85% of the
lower of the fair market value of the common stock on the first or last day of
each six month purchase period. Employees may end their participation in the
Purchase Plan at any time during an offering period, and they will be paid their
payroll deductions to date. Participation ends automatically upon termination of
employment with Autobytel.com.

During the years ended December 31, 2000 and 1999, 21,740 and 3,161
shares of common stock were issued under the Purchase Plan, respectively.

11. INCOME TAXES

No provision for federal income taxes has been recorded as Autobytel.com
incurred net operating losses through December 31, 2000. Provision for income
taxes primarily consists of franchise taxes paid to the state of Delaware. As of
December 31, 2000, Autobytel.com had approximately $76,700 and $38,200 of
federal and state net operating loss carryforwards available to offset future
taxable income. These net operating loss carryforwards expire in various years
through 2020. Under the Tax Reform Act of 1986, the amounts of and benefits from
Autobytel.com's net operating loss carryforwards will be limited under the
provisions of Internal Revenue Code Section 382. Based on estimates, management
believes the effect of such limitation will not have a material adverse effect
on Autobytel.com.

Autobytel.com accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income tax assets
and liabilities are determined based on the differences between the book and tax
basis of assets and liabilities and are measured using the currently enacted tax
rates and laws. Net deferred income tax assets, totaling approximately $35,900
as of December 31, 2000 and $24,700 as of December 31, 1999, consist primarily
of the tax effect of net operating loss carryforwards, reserves and accrued
expenses which are not yet deductible for tax purposes. Autobytel.com has
provided a full valuation allowance on these deferred income tax assets because
of uncertainty regarding their realization.

12. RELATED PARTY TRANSACTIONS

Peter R. Ellis

In March 1998, Autobytel.com extended to co-founding member and
stockholder, Peter R. Ellis a $250 loan bearing interest at 8% per annum
compounded quarterly with principal and accrued interest due in full in March

F-19
59

2003. The loan was secured by Mr. Ellis's stock in Autobytel.com. Mr. Ellis
repaid the loan, including accrued interest, in January 2000.

In June 1998, Mr. Ellis resigned from Autobytel.com as Chief Executive
Officer. In August 1998, Autobytel.com executed a two year agreement with Mr.
Ellis to provide advisory services. Under the agreement, Mr. Ellis received $40,
$20 and $500 in 2000, 1999 and 1998, respectively. The amounts paid to Mr. Ellis
under this agreement are included in operating expenses in the accompanying
consolidated statements of operations. In January 2000, Mr. Ellis gave
Autobytel.com a 90-day termination notice of the agreement.

Consulting Agreement

Autobytel.com and Robert Grimes, a current director and a former
Executive Vice President of Autobytel.com, are parties to a two year consulting
services agreement dated April 1, 2000. During the term of the consulting
agreement, Mr. Grimes will receive $50 per year payable on a monthly basis and a
$2.5 monthly office expense allowance. Mr. Grimes will make himself available to
the executive officers of Autobytel.com for up to 16 hours a month for
consultation and other activities related to formulating and implementing
business strategies and relationships. Autobytel.com may terminate the agreement
upon Mr. Grimes' breach of contract. If Mr. Grimes' agreement is terminated
without breach, Mr. Grimes is entitled to either a pro rated or a lump sum
payment equal to the salary that would have been received by Mr. Grimes if he
had remained a consultant for the remaining balance of the two year term. In the
event of death or disability, Autobytel.com will pay to Mr. Grimes or his
successors and assigns the amount that Mr. Grimes would have received for the
remainder of the term of the agreement. Mr. Grimes has the right to terminate
the agreement upon 90 days notice to Autobytel.com. During the term of the
agreement, Mr. Grimes will be entitled to participate in all of Autobytel.com's
employee welfare benefit plans at Autobytel.com's expense.

13. BUSINESS SEGMENT

Autobytel.com conducts its business within one business segment, which
is defined as providing online vehicle purchasing and other related services.

14. SUBSEQUENT EVENTS (UNAUDITED)

Change in Functional Currency

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

F-20
60

EXHIBIT INDEX

SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------

2.1 Agreement and Plan of Merger dated October 14, 1999, entered into
among autobytel.com inc., Autobytel Acquisition I Corp., A.I.N.
Corporation, and shareholders of A.I.N. Corporation is
incorporated herein by reference to Exhibit 2.1 of the Form 8-K
filed with the Securities and Exchange Commission (the "SEC") on
February 15, 2000

2.2 Amendment to Agreement and Plan of Merger dated January 25, 2000,
entered into among autobytel.com inc., Autobytel Acquisition I
Corp., A.I.N. Corporation, and shareholders of A.I.N. Corporation
is incorporated herein by reference to Exhibit 2.2 of the Form
8-K filed with the SEC on February 15, 2000

2.3 Amendment No. 2 to Agreement and Plan of Merger dated February
14, 2000, entered into among autobytel.com inc., Autobytel
Acquisition I Corp., A.I.N. Corporation, and shareholders of
A.I.N. Corporation is incorporated herein by reference to Exhibit
2.3 of the Form 8-K filed with the SEC on February 15, 2000

2.4 Agreement and Plan of Merger dated December 17, 1999 among
autobytel.com inc., Autobytel Acquisition II Corp., A.I.N.
Corporation and the shareholders of A.I.N. is incorporated herein
by reference to Exhibit 2.1 of Form 8-K filed with the SEC on
February 25, 2000 (the "February 2000 8-K").

2.5 Amendment to Agreement and Plan of Merger dated January 25, 2000
among autobytel.com inc., Autobytel Acquisition II Corp., A.I.N.
Corporation and the shareholders of A.I.N. is incorporated herein
by reference to Exhibit 2.2 of the February 2000 8-K.

2.6 2nd Amendment to Agreement and Plan of Merger dated February 14,
2000 among autobytel.com inc., Autobytel Acquisition II Corp.,
A.I.N. Corporation and the shareholders of A.I.N. is incorporated
herein in reference to Exhibit 2.3 of the February 2000 8-K.

3.1 Amended and Restated Certificate of Incorporation of
autobytel.com inc. certified by the Secretary of State of
Delaware (filed December 14, 1998 and amended March 1, 1999) is
incorporated herein by reference to Exhibit 3.1 of Amendment No.
2 (filed on March 5, 1999) to autobytel.com inc.'s Registration
Statement on Form S-1 (File No. 333-70621) originally filed with
the SEC on January 15, 1999 and declared effective (as amended)
on March 25, 1999 (the "Registration Statement")

3.2 Second Certificate of Amendment of the Fifth Amended and Restated
Certificate of Incorporation is incorporated herein by reference
to Exhibit 3.1 of Form 10-Q for the Quarter Ended June 30, 1999
filed with the SEC on August 12, 1999

3.3 Amended and Restated Bylaws of autobytel.com inc. is incorporated
herein by reference to Exhibit 3.1 of Form 10-Q for the Quarter
Ended September 30, 2000 filed with the SEC on November 13, 2000
(the "September 2000 10-Q").

4.1 Form of Stock Certificate is incorporated herein by reference to
Exhibit 4.1 of Amendment No. 2 to the Registration Statement
filed with the SEC on March 5, 1999

4.2 Amended and Restated Investors' Rights Agreement dated October
21, 1997 as amended from time to time, between autobytel.com inc.
and the Investors named in Exhibit A thereto is incorporated
herein by reference to Exhibit 4.2 of the Registration Statement
filed with the SEC on January 15, 1999

9.1 Voting Proxy dated January 11, 1999 by Peter R. Ellis is
incorporated herein by reference to Exhibit 9.1 of the
Registration Statement filed with the SEC on January 15, 1999

10.1 Form of Indemnification Agreement between autobytel.com inc. and
its directors and officers is incorporated herein by reference to
Exhibit 10.1 of the Registration Statement filed with the SEC on
January 15, 1999

61

SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------

10.2 Employment Agreement dated July 1, 1998 between autobytel.com
inc. and Mark W. Lorimer is incorporated herein by reference to
Exhibit 10.2 of the Registration Statement filed with the SEC on
January 15, 1999

10.3 First Amendment dated as of July 31, 1998 to Employment Agreement
between Autobytel.com and Mark W. Lorimer is incorporated herein
by reference to Exhibit 10.5 of Form 10-Q for the Quarter Ended
September 30, 1999 filed with the SEC on November 12, 1999

10.4 Letter agreement dated July 28, 2000 between autobytel.com inc.
and Andrew F. Donchak.

10.5 Employment Agreement, dated as of May 3, 2000, between Dennis
Benner and autobytel.com inc. is incorporated herein by reference
to Exhibit 10.5 of the September 2000 10-Q.

10.6 Employment Agreement, dated as of April 3, 2000 between Ariel
Amir and autobytel.com inc.

10.7 Contract of Employment, dated September 1, 2000, between Max Rens
and Autobytel.Europe Holdings, B.V. is incorporated herein by
reference to Exhibit 10.4 of the September 2000 10-Q.

10.8 Employment Agreement dated as of February 14, 2000 among A.I.N.
Corporation, autobytel.com inc. and Michael Gorun is incorporated
herein by reference to Exhibit 10.8 of Annual Report on Form 10-K
for the Year Ended December 31, 1999 filed with the SEC on March
23, 2000 (the "1999 10-K").

10.9 1996 Employee Stock Purchase Plan is incorporated herein by
reference to Exhibit 10.7 of Amendment No. 1 to the Registration
Statement filed with the SEC on February 9, 1999

10.10 1998 Stock Option Plan is incorporated herein by reference to
Exhibit 10.8 of Amendment No. 1 to the Registration Statement
filed with the SEC on February 9, 1999

10.11 1999 Stock Option Plan is incorporated herein by reference to
Exhibit 10.30 of Amendment No. 1 to the Registration Statement
filed with the SEC on February 9, 1999

10.12 1999 Employee and Acquisition Related Stock Option Plan is
incorporated herein by reference to Exhibit 10.1 of the
Registration Statement filed on Form S-8 (file no. 333-90045)
with the SEC on November 1, 1999

10.13 Amendment No. 1 to the autobytel.com inc. 1998 Stock Option Plan
dated September 22, 1999 is incorporated herein by reference to
Exhibit 10.2 of Form 10-Q for the Quarter Ended September 30,
1999 filed with the SEC on November 12, 1999

10.14 Amendment No. 1 to the autobytel.com inc. 1999 Stock Option Plan,
dated September 22, 1999 is incorporated herein by reference to
Exhibit 10.1 of Form 10-Q for the Quarter Ended September 30,
1999 filed with the SEC on November 12, 1999

10.15 Form of Dealership Agreements are incorporated herein by
reference to Exhibit 10.12 of the Registration Statement filed
with the SEC on January 15, 1999

10.16+ Data License and Web Site Agreement dated April 1, 1997 between
IntelliChoice, Inc. and Auto-By-Tel Marketing Corporation and
autobytel.com inc. is incorporated herein by reference to Exhibit
10.16 of the Registration Statement filed with the SEC on January
15, 1999

10.17+ Kelley Blue Book/Auto-By-Tel Agreement dated November 19, 1997,
as amended July 1, 1998, between Kelley Blue Book and Auto-By-Tel
Corp. is incorporated herein by reference to Exhibit 10.17 of the
Registration Statement filed with the SEC on January 15, 1999

10.18+ License and Services Agreement dated November 23, 1998 between
autobytel.com inc. and Auto-by-Tel UK Limited is incorporated
herein by reference to Exhibit 10.24 of the Registration
Statement filed with the SEC on January 15, 1999

62

SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------

10.19+ Share Purchase Agreement dated November 23, 1998 between
autobytel.com inc. and Inchcape Automotive Limited is
incorporated herein by reference to Exhibit 10.25 of the
Registration Statement filed with the SEC on January 15, 1999

10.20 Advisory Agreement dated August 20, 1998 between autobytel.com
inc. and Peter R. Ellis is incorporated herein by reference to
Exhibit 10.29 of the Registration Statement filed with the SEC on
January 15, 1999

10.21 Form of Gold Term Subscription Agreement is incorporated herein
by reference to Exhibit 10.31 of Amendment No. 1 to the
Registration Statement filed with the SEC on February 9, 1999

10.22 Form of Platinum Term Continuation Rider is incorporated herein
by reference to Exhibit 10.32 of Amendment No. 1 to the
Registration Statement filed with the SEC on February 9, 1999

10.23 Amended and Restated Operating Agreement dated as of January 6,
2000 among Autobytel.Europe LLC, autobytel.com inc., GE Capital
Equity Holdings, Inc., Inchcape Overseas Investments B.V. and Pon
Holdings B.V. is incorporated herein by reference to Exhibit
10.31 of the 1999 10-K

10.24 1996 Stock Option Plan and related agreements are incorporated
herein by reference to Exhibit 10.5 of Amendment No. 1 to the
Registration Statement filed with the SEC on February 9, 1999.

10.25 1996 Stock Incentive Plan and related agreements are incorporated
herein by reference to Exhibit 10.6 of Amendment No. 1 to the
Registration Statement filed with the SEC on February 9, 1999.

10.26+ Intercompany Software License Agreement dated as of January 6,
2000 between autobytel.com inc. and Autobytel.Europe LLC is
incorporated herein by reference to Exhibit 10.34 of the 1999
10-K.

10.27 Form of autobytel.com Gold Term Services Agreement is
incorporated herein by reference to Exhibit 10.35 of the 1999
10-K.

10.28 Form of CarSmart.com Internet Marketing Agreement is incorporated
herein by reference to Exhibit 10.36 of the 1999 10-K.

10.29 autobytel.com inc. Retirement Savings Plan is incorporated herein
by reference to Exhibit 99.1 of the Registration Statement filed
on Form S-8 (file no. 333-33038) with the SEC on June 15, 2000.

10.30 Letter agreement, dated July 14, 2000, between ABN AMRO Bank N.V.
and Autobytel.Europe Holdings B.V. regarding foreign currency
forward transaction is incorporated herein by reference to
Exhibit 10.1 of the September 2000 10-Q.

10.31 Letter agreement, dated July 19, 2000 between ABN AMRO Bank N.V.
and Autobytel. Europe Holdings B.V. regarding foreign currency
forward transaction is incorporated herein by reference to
Exhibit 10.2 of the September 2000 10-Q.

10.32 Letter agreement, dated July 24, 2000 between ABN AMRO Bank N.V.
and Autobytel. Europe Holdings B.V. regarding foreign currency
forward transaction is incorporated herein by reference to
Exhibit 10.3 of the September 2000 10-Q.

10.33 First Amendment to Amended and Restated Operating Agreement,
dated as of January 27, 2000 among autobytel.com inc, GE Capital
Holdings, Inc., Inchcape Overseas Investments B.V. and Pon
Holdings B.V. is incorporated herein by reference to Exhibit 10.1
of Form 10-Q for the Quarter Ended March 31, 2000 filed with the
SEC on May 15, 2000.

63

SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION PAGE
- ------ ----------- ------------

10.34 Second Amendment to Amended and Restated Operating Agreement,
dated as of April 6, 2000 among autobytel.com inc., GE Capital
Holdings, Inc., Inchcape Overseas Investments B.V., Pon Holdings
B.V. and e-LaSer S.A.

10.35 autobytel.com inc. 2000 Stock Option Plan is incorporated herein
by reference to Exhibit 99.1 of the Registration Statement filed
on Form S-8 (file no. 333-39396) with the SEC on June 15, 2000.

10.36 Employment Agreement dated November 7, 2000 between autobytel.com
inc. and Howard Layson.

10.37 Employment Agreement dated August 30, 1999 between autobytel.com
inc. and Amit Kothari.

21.1 Subsidiaries of autobytel.com inc.

23.1 Consent of Arthur Andersen LLP, Independent Public Accountants

23.2 Consent of Manheim Auctions

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

- ----------

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