<PAGE>
 
     
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1997     
                                                     REGISTRATION NO. 333-20831
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                --------------
                                
                             AMENDMENT NO. 3     
                                      TO
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                                --------------
 
                            AUTO-BY-TEL CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
        DELAWARE                     7375                    33-0711569
     (STATE OR OTHER     (PRIMARY STANDARD INDUSTRIAL     (I.R.S. EMPLOYER
     JURISDICTION OF      CLASSIFICATION CODE NUMBER)  IDENTIFICATION NUMBER)
    INCORPORATION OR
      ORGANIZATION)
 
                                --------------
 
                            AUTO-BY-TEL CORPORATION
                     18872 MACARTHUR BOULEVARD, SUITE 200
                         IRVINE, CALIFORNIA 92612-1400
                                (714) 225-4500
  (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                                --------------
 
                             MARK W. LORIMER, ESQ.
                 VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
                            AUTO-BY-TEL CORPORATION
                     18872 MACARTHUR BOULEVARD, SUITE 200
                         IRVINE, CALIFORNIA 92612-1400
                                (714) 225-4500
     (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
 
                                --------------
 
                                  COPIES TO:
 
         RICHARD J. CHAR, ESQ.                ROD A. GUERRA, JR., ESQ.
         RICHARD J. HART, ESQ.                  SKADDEN, ARPS, SLATE,
        DAVID M. CAMPBELL, ESQ.                  MEAGHER & FLOM LLP
   WILSON SONSINI GOODRICH & ROSATI            300 SOUTH GRAND AVENUE
       PROFESSIONAL CORPORATION             LOS ANGELES, CALIFORNIA 90071
          650 PAGE MILL ROAD                       (213) 687-5000
      PALO ALTO, CALIFORNIA 94304
            (415) 493-9300
 
                                --------------
 
       APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
     As soon as practicable after the effective date of this Registration
                                  Statement.
 
                                --------------
 
  If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.  [_]
 
  If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.  [_]
 
  If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.  [_]
 
  If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [_]
 
                                --------------
                        

                     CALCULATION OF REGISTRATION FEE     
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<TABLE>   
<CAPTION>
                                                                        PROPOSED
                      TITLE OF EACH CLASS OF                        MAXIMUM AGGREGATE      AMOUNT OF
                    SECURITIES TO BE REGISTERED                     OFFERING PRICE(1)  REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>
 Common Stock, par value $0.001 per share..........................    $55,200,000          $16,728
</TABLE>
    
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
   
(1) Estimated solely for the purpose of computing the amount of the
    registration fee. The estimate is made pursuant to Rule 457(o) of the
    Securities Act of 1933, as amended.     
                                --------------
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
 
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>
 
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A     +
+REGISTRATION STATEMENT RELATING TO THE SECURITIES DESCRIBED HEREIN HAS BEEN   +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT   +
+BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION  +
+STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO +
+SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF   +
+THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD +
+BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS  +
+OF ANY SUCH STATE.                                                            +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
                   SUBJECT TO COMPLETION, DATED MARCH 7, 1997
 
                   4,000,000 SHARES
 
                             [LOGO OF AUTO-BY-TEL]
 
                            AUTO-BY-TEL CORPORATION

                                  COMMON STOCK
 
  Of the 4,000,000 shares of Common Stock offered hereby (the "Offering"),
3,600,000 are being sold by Auto-By-Tel Corporation ("Auto-By-Tel" or the
"Company") and 400,000 are being sold by the Selling Stockholder. The Company
will not receive any of the proceeds from the sale of shares by the Selling
Stockholder. See "Principal and Selling Stockholders." Prior to the Offering,
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price will be between $9.50 and $11.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The Company's Common Stock has
been approved for listing on the Nasdaq National Market under the symbol
"ABTL."
 
  THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK OFFERED
HEREBY.
 
                                  -----------
 
THESE  SECURITIES HAVE NOT BEEN APPROVED  OR DISAPPROVED BY THE SECURITIES  AND
 EXCHANGE  COMMISSION   OR  ANY  STATE  SECURITIES  COMMISSION  NOR   HAS  THE
  SECURITIES  AND  EXCHANGE COMMISSION  OR  ANY STATE  SECURITIES  COMMISSION
   PASSED   UPON  THE  ACCURACY   OR  ADEQUACY   OF  THIS   PROSPECTUS.  ANY
              REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                      Price               Proceeds   Proceeds to
                                        to   Underwriting    to        Selling
                                      Public  Discount(1) Company(2) Stockholder
- --------------------------------------------------------------------------------
<S>                                   <C>    <C>          <C>        <C>
Per Share............................  $         $           $           $
Total(3)............................. $         $           $           $
</TABLE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
    Underwriters and other matters.
 
(2) Before deducting expenses payable by the Company estimated at $1,300,000.
 
(3) The Company has granted to the Underwriters a 30-day option to purchase up
    to 600,000 additional shares of Common Stock solely to cover over-
    allotments, if any. If the Underwriters exercise this option in full, the
    Price to Public will total $        , the Underwriting Discount will total
    $         and the Proceeds to Company will total $        . See
    "Underwriting."
 
  The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about           , 1997.
 
                                  -----------
 
MONTGOMERY SECURITIES
                                COWEN & COMPANY
                                                   ROBERTSON, STEPHENS & COMPANY
 
                                        , 1997

<PAGE>
 
 
 
  The top half of this page contains a picture showing the first page of the
Company's Web site.
 
 
  The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent accountants and
copies of quarterly earnings reports for the first three quarters of each
fiscal year containing unaudited financial information.
 
  Auto-By-Tel is a registered service mark of the Company. Auto-By-Tel, ABT
Mobilist and the Company's logo are trademarks of the Company. This Prospectus
also includes trademarks and tradenames of companies other than the Company.
 
  CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

<PAGE>
 
INSIDE FRONT COVER FOLD OUT
 
This page contains a series of six pictures depicting the steps to buying a
vehicle using the Auto-By-Tel program. The page is entitled "How Auto-By-Tel
Works." In the center of the six pictures is the caption: "The easiest, most
hassle-free way ever invented to buy a car."
 
Picture #1 depicts a consumer sitting at a terminal. The caption beneath
picture #1 reads: "At any time of day or night, Internet users can start their
vehicle purchasing process on the AUTO-BY-TEL World Wide Web site. No
salespeople, no crowds, no hassles."
 
Picture #2 depicts the Company's Web site. The caption beneath picture #2
reads: "The AUTO-BY-TEL home page is an easy interface for everyone to use."
 
Picture #3 depicts another page from the Company's Web site featuring
automobile information providers. The caption beneath picture #3 reads: "AUTO-
BY-TEL has arrangements with popular automotive information providers on the
World Wide Web. To date, hundreds of thousands of vehicle buyers have taken
AUTO-BY-TEL for a test drive." Above picture #3 are the logos of three of the
Company's automotive information providers.
 
Picture #4 depicts the form of purchase request from the Company's Web site.
The caption beneath picture #4 reads: "An AUTO-BY-TEL participating dealership
calls the customer (usually within 48 hours of a purchase request) with a low,
no haggle price. All paperwork is prepared before a customer arrives at the
participating dealership to pick up the vehicle."
 
Picture #5 depicts a map of the United States with Auto-By-Tel dealer
locations represented. The caption beneath picture #5 reads: "AUTO-BY-TEL has
hundreds of participating dealerships, including members of some of the
largest auto dealer groups in the U.S., waiting to serve customers."
 
Picture #6 depicts a consumer taking delivery of a vehicle. The caption
beneath picture #6 reads: "Prospective vehicle buyers indicate their desired
vehicle and options by completing an online purchase request. This is
delivered electronically to the AUTO-BY-TEL participating dealership closest
to the buyer."

<PAGE>
 
 

                               PROSPECTUS SUMMARY
 
  The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors" and
the Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus. Except as otherwise noted or the context otherwise requires,
all information in this Prospectus (i) gives effect to a five-for-three split
of the Company's Common Stock approved by the Board of Directors on November
24, 1996, (ii) gives effect to the conversion of all outstanding shares of
Preferred Stock into 3,467,915 shares of Common Stock which will occur
automatically immediately prior to the closing of this Offering, (iii) assumes
no exercise of outstanding options to purchase 2,405,565 shares of the
Company's Common Stock under the Company's 1996 Stock Option Plan and 1996
Stock Incentive Plan, and (iv) assumes no exercise of the Underwriters' over-
allotment option. See "Management--Stock Plans," "Description of Capital Stock"
and "Underwriting."
 

                                  THE COMPANY
 
  Auto-By-Tel is establishing a nationally branded Internet-based marketing
service for new and used vehicle purchasing and related consumer services. The
Company's Web site (www.autobytel.com) enables consumers to gather valuable
information about automobiles and light duty trucks ("vehicles") and shop for
vehicles and related consumer services from the convenience of their home or
office. This convenience, coupled with low, haggle-free pricing and quick and
courteous service, improves consumers' overall buying experiences. The
Company's Internet-based alternative to traditional vehicle retailing
dramatically reduces participating dealerships' selling costs per vehicle and
increases sales volumes by channeling a large number of ready-to-buy, well-
informed consumers to Auto-By-Tel participating dealerships. The Company's
Internet-based services are free to consumers and, to date, the Company has
derived substantially all of its revenues from fees paid by subscribing
dealerships. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Business--Overview."
 
  Consumers wishing to purchase new vehicles through the Company's service
complete a purchase request available on the Company's and its partners' Web
sites which specifies the type of vehicle and accessories desired along with
the consumer's phone number, e-mail address and zip code. The purchase request
is then forwarded to the Auto-By-Tel participating dealership located in the
consumer's geographic area. Typically, consumers are contacted by Auto-By-Tel
dealers within 48 hours with a firm, competitive quote for the vehicle,
eliminating the unwelcome and time consuming task of negotiating with the
dealer and thus facilitating completion of the sale. As of December 31, 1996
the Company's dealership base consisted of (i) 1,206 paying franchises of
dealerships, (ii) 509 non-paying franchises affiliated with paying dealerships
(collectively, "subscribing dealerships") and (iii) approximately 230 "trial
dealers." From the commencement of operations in March 1995 to December 31,
1996, the Company received more than 385,000 new vehicle purchase requests. See
"Business--Overview," "--Products and Services" and "--Dealer Network and
Training."
 
  The emergence of the Internet as a significant communications medium is
driving the development and adoption of Web content and commerce applications
that offer convenience and value to consumers, as well as unique marketing
opportunities and reduced operating costs to businesses. A growing number of
consumers have begun to transact business electronically, including paying
bills, booking airline tickets, trading securities and purchasing consumer
goods, such as personal computers, consumer electronics, compact disks, books
and vehicles. Moreover, online transactions can be faster, less expensive and
more convenient than transactions conducted through a human intermediary. In
addition, Web commerce applications enable businesses to rapidly target and
economically manage a broad customer base and establish and maintain ongoing
direct customer relationships. International Data Corporation ("IDC") estimates
that the dollar value of goods and services purchased over the Web will
increase from approximately $318 million in 1995 to $95 billion in the year
2000. The Auto-By-Tel vehicle marketing service seeks to utilize the unique
marketing capabilities of the Web to address the $660 billion annual U.S. new
and used vehicle market. See "Business--Industry Background."
 
  To create higher levels of consumer satisfaction, the Company focuses on
improving the manner in which dealers interact with consumers. Auto-By-Tel
seeks to establish business relationships with dealerships which share the
Company's commitment to improving customer service in the vehicle retailing
industry. To meet this
 
                                       3

<PAGE>
 
goal, the Company requests that participating dealerships have their
representatives trained in the Auto-By-Tel marketing program, dedicate
electronic and human resources to the Auto-By-Tel system and comply with the
Auto-By-Tel guidelines of rapid consumer response, full disclosure, and
competitive and up-front pricing communicated over telephone. See "Business--
Dealership Network and Training."
   
  An important aspect of the Company's strategy is to strengthen the Auto-By-
Tel brand name, as a means of driving consumer traffic to the Company's Web
site and thereby increasing the volume of vehicle purchase requests. In
addition to marketing its services through relationships with Internet content
providers and advertising on Internet search engines and other online services,
the Company is expanding its marketing efforts through traditional print media
and on network television. The Company intends to capitalize on the increasing
visibility of the Auto-By-Tel brand name as a nationally recognized Internet-
based marketing service for new vehicles by offering additional services such
as online used vehicle purchasing, and vehicle financing, leasing and insurance
services. Auto-By-Tel is currently developing a used vehicle purchasing program
for its network of new vehicle dealerships. The Company has an agreement
whereby certain member companies of American International Group ("AIG"), one
of the largest international insurance organizations, will offer to provide
personal automobile vehicle insurance through the Company's Web site. The
Company also has an agreement with Chase Manhattan Automotive Finance
Corporation ("Chase Manhattan") under which Chase Manhattan, together with its
affiliates, will receive credit applications for new vehicle financing online
via the Company's Web site from Auto-By-Tel's consumers. This arrangement with
Chase Manhattan is intended for prime credit consumers and the Company is
currently negotiating similar relationships with several leading financial
institutions to offer new and used vehicle leasing services and new and used
vehicle financing to sub-prime credit consumers. See "Business--The Auto-By-
Tel--Strategy" and "--Marketing and Sales."     
 
  Auto-By-Tel LLC was formed in January 1995 and began operations in March
1995. In July 1995, it introduced its Web site. Effective as of May 31, 1996,
the interests of the members of Auto-By-Tel LLC and ABT Acceptance Company LLC,
an affiliate, were transferred to the Company in a tax free transaction. The
address of the Company's principal executive offices is 18872 MacArthur
Boulevard, Suite 200, Irvine, California 92612-1400, and the Company's
telephone and fax numbers are (714) 225-4500 and (714) 225-4562, respectively.
The Company's home page is located on the World Wide Web at
http://www.autobytel.com. Information contained on the Company's Web site or
online services does not constitute part of this Prospectus.
 
                                  THE OFFERING
 

<TABLE>
<S>                                   <C>
Common Stock offered by the Company.. 3,600,000 shares
Common Stock offered by the Selling
 Stockholder......................... 400,000 shares
Common Stock to be outstanding after
 the Offering........................ 19,495,136 shares(1)
Use of proceeds...................... For working capital and general corporate
                                      purposes
Proposed Nasdaq National Market
 symbol.............................. ABTL
</TABLE>

 

                                  RISK FACTORS
 
  An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the certain factors
described in "Risk Factors," including those set forth under the headings:
"Limited Operating History and Accumulated Deficit;" "Potential Fluctuations in
Quarterly Results;" "Potential Seasonality and Changes in General Economic
Conditions;" "Fluctuations Resulting From the Introduction of New Services by
the Company or Competitors;" "Regulatory Uncertainties and Government
Regulation;" "Dependence on Automotive Information Providers;" "Requirement to
Strengthen the Auto-By-Tel Brand Name;" "High Cost of Advertising and
Marketing;" "Competition;" "Dependence on Dealership Network; Resistance to
Written Agreements;" "Failure of Participating Dealerships to Adhere to Auto-
By-Tel Sales Practices;" "Rapid Technological Change and System Disruptions;"
"Potential Security Breaches;" "Risks Associated with Introduction of New
Service Offerings;" "Dependence on Third Parties for New Services;" and
"Uncertain Acceptance of Internet-based Marketing Services."
 
                                       4

<PAGE>
 
 
         SUMMARY CONSOLIDATED FINANCIAL AND SUPPLEMENTAL OPERATING DATA
    (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND SUPPLEMENTAL OPERATING DATA)
 

<TABLE>
<CAPTION>
                          JANUARY 31, 1995                  THREE MONTHS ENDED
                         (DATE OF INCEPTION) --------------------------------------------------  YEAR ENDED
                           TO DECEMBER 31,   MARCH 31,    JUNE 30,   SEPTEMBER 30, DECEMBER 31,  DECEMBER 31,
                                1995            1996        1996         1996          1996         1996
                         ------------------- ----------  ----------  ------------- ------------ -------------
<S>                      <C>                 <C>         <C>         <C>           <C>          <C>
STATEMENT OF OPERATIONS
 DATA:
Revenues................     $      274      $      436  $      952   $    1,434    $    2,203   $    5,025
                             ----------      ----------  ----------   ----------    ----------   ----------
Operating expenses:
 Marketing and
  advertising...........            476             475         678        1,247         2,039        4,439
 Selling, training and
  support...............            454             362         563          851         1,417        3,193
 Technology development.             99              67          78          294           954        1,393
 General and
  administrative........            275             134         258          740         1,027        2,159
                             ----------      ----------  ----------   ----------    ----------   ----------
    Total operating
     expenses...........          1,304           1,038       1,577        3,132         5,437       11,184
                             ----------      ----------  ----------   ----------    ----------   ----------
Loss from operations....         (1,030)           (602)       (625)      (1,698)       (3,234)      (6,159)
Other income (expense),
 net....................            --              --           (6)          22           108          124
                             ----------      ----------  ----------   ----------    ----------   ----------
Net loss................         (1,030)           (602)       (631)      (1,676)       (3,126)      (6,035)
                             ==========      ==========  ==========   ==========    ==========   ==========
Net loss per common and
 common equivalent
 share(2)...............     $     (.07)     $     (.04) $     (.04)  $     (.11)   $     (.19)  $     (.38)
                             ==========      ==========  ==========   ==========    ==========   ==========
Weighted average common
 and common equivalent
 shares outstanding(2)..     15,262,262      15,262,262  15,262,262   15,892,576    16,761,962   15,792,293
SUPPLEMENTAL OPERATING
 DATA:
Purchase requests
 received...............         42,600          44,900      73,700      102,700       123,700      345,000
Paying franchises of
 subscribing
 dealerships............            253             546         728          978         1,206        1,206
</TABLE>

 

<TABLE>
<CAPTION>
                                                           DECEMBER 31, 1996
                                                        ------------------------
                                                                    PRO FORMA
                                                        ACTUAL   AS ADJUSTED (3)
                                                        -------  ---------------
<S>                                                     <C>      <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 9,062      $51,129
Working capital........................................   5,960       48,027
Total assets...........................................  12,298       54,365
Total liabilities......................................   4,302        4,302
Accumulated deficit....................................  (7,065)      (7,065)
Stockholders' equity...................................   7,996       50,063
</TABLE>

- --------
(1) Based on 15,895,136 shares of Common Stock outstanding on a pro forma basis
    as of January 31, 1997. Excludes 2,405,565 shares of Common Stock issuable
    upon exercise of outstanding options as of January 31, 1997, at a weighted
    average exercise price of $2.55 per share. Assumes no exercise of the
    Underwriters' over-allotment option.
 
(2) See Note 1.o of Notes to Consolidated Financial Statements for an
    explanation of the determination of shares used in computing net loss per
    share.
 
(3) Adjusted to reflect (i) the sale of 967,915 shares of Series B Preferred
    Stock on January 30, 1997 at a price of $9.35 per share and (ii) the
    conversion of all outstanding shares of Preferred Stock immediately prior
    to the closing of the Offering and (iii) the receipt by the Company of the
    estimated net proceeds of $33.0 million from the sale of 3,600,000 shares
    of Common Stock offered hereby at an assumed initial public offering price
    of $10.25 per share. See "Use of Proceeds."
 
                                       5

<PAGE>
 

                                 RISK FACTORS
 
  An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information in this Prospectus, the following
risk factors should be carefully considered in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains certain forward-looking statements based on current
expectations which involve risks and uncertainties. Actual results and the
timing of certain events may differ materially from those projected in such
forward-looking statements due to a number of factors, including those set
forth below.
 
LIMITED OPERATING HISTORY AND ACCUMULATED DEFICIT
 
  The Company was formed in January 1995 and introduced its vehicle marketing
program for new vehicle dealerships over Prodigy in March 1995 and over the
Internet in July 1995. The Company first recognized revenues from operations
in March 1995. Accordingly, the Company has only a limited operating history
upon which an evaluation of the Company and its prospects can be based, and
this limited operating history makes the prediction of future operating
results difficult or impossible. In addition, the Company believes that, in
order to achieve its objectives, it will need to significantly increase
revenues from existing services and generate revenues from new services, such
as its used vehicle buying service and its vehicle financing and insurance
policy referral services. There can be no assurance that the Company will
successfully introduce or generate sufficient revenues from such services. The
Company had an accumulated deficit as of December 31, 1996 of $7.1 million. In
addition, the Company expects to incur operating losses in future periods. The
Company's prospects 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 address these risks, the
Company must, among other things, continue to send vehicle purchase requests
to dealers that result in sales in sufficient numbers to support the marketing
fees charged by the Company to its subscribing dealerships, respond to
competitive developments, increase its brand name visibility, successfully
introduce new services, continue to attract, retain and motivate qualified
personnel, and continue to upgrade and enhance its technologies to accommodate
expanded service offerings and increased consumer traffic. There can be no
assurance that the Company will be successful in addressing such risks. In
addition, although the Company has experienced revenue growth in recent
periods, historical growth rates are not sustainable and are not indicative of
future operating results, and there can be no assurance that the Company will
achieve or maintain profitability. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
 
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
 
  As a result of the Company's limited operating history, the Company lacks
sufficient historical financial and operating data on which to adequately base
future operating results. The Company's costs are based, in part, on fees paid
to companies that maintain Web sites which allow consumers to submit purchase
requests. Agreements with such companies generally have fixed terms ranging
from one to five years, although certain of these agreements are terminable on
short notice. Under such agreements, fees may be fixed or may vary depending
on the number of purchase requests submitted through other companies' Web
sites, or may be a combination thereof. Accordingly, increases in the number
of purchase requests received will increase the Company's operating costs,
which may not result in increased revenues to the Company. In addition, the
Company incurs significant expenses to market its services on other Web sites
and online services. Such expenses are generally fixed and are paid pursuant
to marketing agreements which have terms of up to one year. The Company's
expense levels are based in part on its expectations as to future revenues,
which may vary in relation to increases or decreases in the number of
dealerships that subscribe to the Company's marketing programs. Currently,
less than half of subscribing dealerships are subject to written marketing
agreements and these subscribing dealerships may cancel their agreements with
30 days' prior notice. As a result, quarterly revenues and operating results
may vary significantly in response to any significant change in the number of
subscribing dealerships. The Company's inability to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall would have a
material adverse effect on the Company's business, results of operations and
 
                                       6

<PAGE>
 
financial condition. In addition, the Company anticipates significant
increases in expenses as a result of planned increases in its marketing and
advertising programs, development of affiliate programs relating to vehicle
insurance and financing, and the introduction of a used vehicle marketing
service. To the extent that such expenses exceed, precede or are not
subsequently followed by increased revenues, the Company's business, results
of operations and financial condition will be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
 
POTENTIAL SEASONALITY AND CHANGES IN GENERAL ECONOMIC CONDITIONS
 
  Significant fluctuations in future quarterly operating results may also be
caused by traditional seasonality in the automotive and light duty truck
markets and other changes in general economic conditions, which may result in
fluctuations in the level of purchase requests completed by consumers or
adversely affect demand for the Company's existing and planned services. As a
result of the Company's limited operating history and the significant growth
in operations since inception, the Company has not to date experienced
significant seasonality in its business. However, the automotive and light
truck markets historically experience weakest sales in the fourth calendar
quarter. In addition, unit sales of motor vehicles, particularly new vehicles,
historically have been cyclical, fluctuating with general economic cycles.
During economic downturns, the automotive retailing industry tends to
experience similar periods of decline and recession as the general economy.
The Company believes that the automotive and light truck industry is
influenced by general economic conditions and particularly by consumer
confidence, the level of personal discretionary spending, interest rates and
credit availability. There can be no assurance that the automotive and light
truck industry will not experience sustained periods of decline in vehicle
sales in the future. Such a decline could have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 
FLUCTUATIONS RESULTING FROM THE INTRODUCTION OF NEW SERVICES BY THE COMPANY OR
COMPETITORS
 
  The introduction by the Company of new services or the introduction of new
services by the Company's competitors may also result in significant
fluctuations in quarterly operating results. In addition, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain pricing or marketing decisions or establish strategic
relationships that could have a material adverse effect on the Company's
business, results of operations or financial condition. In particular, the
Company may need to revise the marketing fees it charges to subscribing
dealerships. There can be no assurance that subscribing dealerships will
continue to participate in the Company's marketing programs or agree to future
fee increases. In addition, there can be no assurance that marketing fees
derived from subscribing dealerships will be sufficient to cover the Company's
expenses. The foregoing factors make it likely that in some future quarters
the Company's operating results will be below the expectations of the Company,
securities analysts or investors. In such event, the trading price of the
Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
REGULATORY UNCERTAINTIES AND GOVERNMENT REGULATION
 
  The Company believes that its dealer marketing service does not qualify as a
brokerage activity and, therefore, that the Company does not need to comply
with state broker licensing requirements. In Texas, however, the Company was
required to modify its marketing program to include a pricing model under
which subscribing dealerships are charged uniform fees based on the population
density of their particular geographic area and to make its program open to
all dealerships who wish to apply. In the event that individual state
regulatory requirements change or additional requirements are imposed on the
Company, the Company may be required to modify its marketing programs in such
states in a manner which may undermine the program's attractiveness to
consumers or dealers. In addition, in the event that a state deems that the
Company is acting as a broker, the Company may be required to comply with
burdensome licensing requirements of such state or terminate operations in
such state. In each case, the Company's business, results of operations or
financial condition could be materially and adversely affected.
 
                                       7

<PAGE>
 
  The Company's marketing service may result in changes in the way new and
used vehicles are sold which may be deemed to be threatening by new and used
vehicle dealerships which do not subscribe to the Auto-By-Tel program. Such
businesses are often represented by influential lobbying organizations, and
such organizations may seek to introduce legislation which may impact the
evolving marketing and distribution model which the Company's service
promotes. Should legislative or legal challenges be brought successfully by
such organizations, the Company's business, results of operations or financial
condition could be materially and adversely affected.
 
  As the Company introduces new services, the Company may need to comply with
additional licensing regulations and regulatory requirements. For example, the
Company recently obtained an insurance brokerage license in California and has
begun procuring insurance brokerage licenses in other states to ensure
compliance with applicable insurance regulations, if any, of such states. In
addition, the Company is currently in the process of applying for financial
brokers' licenses in those states in which the Company believes such licenses
are required. Becoming licensed may be an expensive and time-consuming process
which could divert the efforts of management. In the event that the Company
does not successfully become licensed under applicable state insurance or
lending rules or otherwise comply with regulations necessitated by changes in
current regulations or the introduction of new services, the Company's
business, results of operations or financial condition could be materially and
adversely affected.
 
  Additionally, there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is likely that a number of
laws and regulations may be adopted at the local, state, national or
international levels with respect to commerce over the Internet, potentially
covering issues such as pricing of services and products, advertising, user
privacy and expression, intellectual property, information security, anti-
competitive practices or the convergence of traditional distribution channels
with Internet commerce. In addition, 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 the Company to
additional state sales and income taxes. The adoption of any such laws or
regulations may decrease the growth of Internet usage or the acceptance of
Internet commerce which could, in turn, decrease the demand for the Company's
services and increase the Company's costs or otherwise have a material adverse
effect on the Company's business, results of operations or financial
condition. See "Business--Government Regulation."
 
DEPENDENCE ON AUTOMOTIVE INFORMATION PROVIDERS
 
  The Company receives a significant number of purchase requests from certain
automotive information providers, including Edmund's, Microsoft CarPoint and
AutoSite. The Company's agreements with automotive information providers
typically have terms ranging from one to three years, but some are cancellable
with 30 days notice. Under the agreements, Auto-By-Tel typically pays the
automotive information provider a monthly fee based on the number of users who
submit Auto-By-Tel purchase requests. In 1996, the Company incurred expenses
to automotive information providers of approximately $630,000. The termination
of any of these relationships, or any significant reduction in traffic to the
Web sites on which the Company's services are advertised or offered, could
have a material adverse effect on the Company's business, results of
operations or financial condition.
 
  The Company has established a relationship with Edmund's, a leading source
of online automobile and light truck price and model information. Consumers
are sometimes referred to Auto-By-Tel from Edmund's. At other times, consumers
will begin at the Auto-By-Tel Web site and will be hyperlinked to the Edmund's
Web site to obtain price and model information, before returning to Auto-By-
Tel to submit a purchase request. The Company pays Edmund's a fee based on the
aggregate number of referred and returning consumers submitting a purchase
request. In 1996, approximately 170,000 consumers who eventually submitted
purchase requests with Auto-By-Tel either were referred to the Company's Web
site from Edmund's, or went to the Edmund's site and then returned to Auto-By-
Tel. While the Company expects the number of referrals and returning consumers
from the Edmund's Web site to remain significant, the percentage of consumers
entering from or visiting Edmund's during an Auto-By-Tel session has decreased
in the past several months due to (i) the availability of other automobile
 
                                       8

<PAGE>
 
information Web sites, (ii) Auto-By-Tel's new practice of referring consumers
to an alternate automobile information provider, and (iii) the Company's
marketing efforts to encourage consumers to begin their automobile purchasing
sessions at the Company's Web site. Nevertheless, given the current level of
consumers accessing the Company from Edmund's, a change or termination in the
Edmund's arrangement could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Strategy" and "--Marketing and Sales."
 
REQUIREMENT TO STRENGTHEN THE AUTO-BY-TEL BRAND NAME
 
  The Company believes that enhancing its national brand name recognition is
critical to its efforts to maintain and increase the number of purchase
requests and subscribing dealerships. The growing number of Web sites which
offer competing services and the relatively low barriers to entry in providing
Internet services increase the importance of establishing and maintaining
brand name recognition. In order to achieve this objective, the Company will
need to continue to maintain high quality services and incur considerable
costs to enhance and expand brand name recognition and improve its competitive
position. Much of the Company's advertising is placed on Web sites maintained
by (i) online service providers (like America Online's Digital Cities,
CompuServe and Prodigy which offer proprietary online content to their
subscribers, as well as Internet access) and (ii) search engine companies
(like Excite, Magellan and Webcrawler which allow Internet users to navigate
the Internet by searching for key words or topics of interest). Advertising
agreements with these online service providers and search engine companies are
generally short-term contracts or are otherwise cancelable on short notice.
Payments under none of these agreements have been material to date. While no
single online or search engine company has individually accounted for material
leads to the Company, these companies as a group are a material source of
Internet referrals to the Auto-By-Tel Web site and the Company believes an
inability to continue advertising on online service provider or search engine
web sites would adversely affect the Company. There can be no assurance that
such online service providers or search engine companies will not cancel such
contracts, or that competitors will not be able to displace Auto-By-Tel from
its preferred advertising arrangements with such companies. See "Business--
Strategy" and "--Marketing and Sales." In addition, the Company receives a
significant number of Internet referrals from automotive information
providers, such as Edmund's and Microsoft CarPoint. See "Dependence on
Automotive Information Providers."
 
HIGH COST OF ADVERTISING AND MARKETING
 
  The intense competition in the sale of Internet advertising with online
service providers and search engine companies, including competition from
other vehicle marketing services, has resulted in a wide range of rates quoted
by different vendors for a variety of advertising services. This makes it very
difficult to project future levels of Internet advertising costs and
availability of prime advertising space. The Company has also entered into
agreements with automotive information services, such as Edmund's and
Microsoft CarPoint, to display the Company's services on their Web sites.
These agreements require the Company to pay such entities a fee for each user
who completes an Auto-By-Tel purchase request. Accordingly, any increase in
the volume of purchase requests received from these sites will result in
increased advertising costs with no assurance of a corresponding increase in
revenues to the Company. The Company is also incurring significant expenses to
increase awareness of its nationally branded Internet-based marketing services
in print and television media. The Company expects these expenses to increase
significantly, particularly in the first half of 1997. There can be no
assurance that the Company's efforts to brand the Auto-By-Tel name will be
successful or that advertising on the Internet, on television or in other
media will attract consumers to the Company's Web site, or that existing
marketing or advertising sources will continue to be available on commercially
reasonable terms, or at all. See "Dependence on Automotive Information
Providers" and "Requirement to Strengthen the Auto-By-Tel Brand Name,"
"Business--Strategy" and "--Sales and Marketing."
 
COMPETITION
 
  The Company's vehicle buying services compete against a variety of Internet
and traditional vehicle buying services and automobile brokers. In the
Internet-based market, the Company competes for attention with other
 
                                       9

<PAGE>
 
entities which maintain similar commercial Web sites. The Company also
competes indirectly against automobile brokerage firms and affinity programs
offered by several companies, including Price Costco and Wal-Mart. Like the
Company's services, the services offered by competing Web sites, vehicle
brokerage firms and affinity programs seek to increase consumer satisfaction
and reduce vehicle purchasing costs.
 
  Although the Company does not currently compete directly with vehicle
dealers and manufacturers, such competition would arise in the future if
dealers and manufacturers introduced competing Web sites or developed
cooperative relationships among themselves or with online vehicle information
providers. Moreover, the Company's ability to achieve its objectives would be
adversely affected if dealers and manufacturers adopted a low cost, firm price
sales model similar to that facilitated by the Auto-By-Tel program.
 
  The market for Internet-based commercial services is new and competition
among commercial Web sites is expected to increase significantly in the
future. The Internet is characterized by minimal barriers to entry, and
current and new competitors can launch new Web sites at relatively low cost.
Potential competitors could include, but are not limited to, automotive
information service providers, manufacturers and new and used vehicle dealers.
In order to compete successfully as an Internet commercial entity, the Company
must significantly increase awareness of the Company and its brand name,
effectively market its services and successfully differentiate its Web site.
Many of the Company's current and potential competitors have longer operating
histories, greater name recognition and significantly greater financial and
marketing resources than the Company. Such competitors could undertake more
aggressive and costly marketing campaigns than the Company which may adversely
affect the Company's marketing strategies which could have a material adverse
effect on the Company's business, results of operations or financial
condition.
 
  In addition, as the Company introduces new services, it will compete
directly with a greater number of companies, including vehicle insurers and
lenders as well as used vehicle superstores, such as CarMax and Auto Nation.
Such companies may already maintain or may introduce Web sites which compete
with that of the Company. There can be no assurance that the Company can
continue to compete successfully against current or future competitors nor can
there be any assurance that competitive pressures faced by the Company will
not result in increased marketing costs, decreased Internet traffic or loss of
market share or otherwise will not materially adversely affect its business,
results of operations and financial condition. See "Business--Strategy" and
"--Competition."
 
DEPENDENCE ON DEALERSHIP NETWORK; RESISTANCE TO WRITTEN AGREEMENTS
   
  To date, substantially all of the Company's revenues have been derived from
fees paid by subscribing dealerships. Currently, less than half of subscribing
dealerships have entered into written marketing agreements with the Company,
and such agreements are cancelable at the option of either party with 30 days'
notice. Accordingly, subscribing dealers may terminate their affiliation with
the Company for any reason, including an unwillingness to accept the Company's
subscription terms or to join other marketing programs. Some of the Company's
dealers have resisted signing written agreements. As of March 11, 1997,
approximately 48% and 26% of all subscribing dealerships had signed a revised
marketing agreement and a financing agreement, respectively. Among the reasons
cited by dealerships in resisting entering into written agreements are: (i)
the exclusivity provision of the revised form of marketing agreement which
requires that dealerships not participate in any other Internet-based or
online program with attributes similar to those of the Auto-By-Tel program,
(ii) the indemnification provisions which require dealerships to indemnify
Auto-By-Tel under certain circumstances, (iii) concerns by dealerships that by
signing a written agreement they will surrender control of the rates they will
be charged by Auto-By-Tel, and (iv) concerns over the California choice of law
and venue provisions in the agreement.     
 
                                      10

<PAGE>
 
  There can be no assurance that the Company will be able to convince all of
its subscribing dealerships to enter into written agreements with the Company
or revise existing agreements or that the Company's efforts to cause
subscribing dealerships to revise their agreements will not result in
subscribing dealerships terminating their relationship with Auto-By-Tel. In
addition, should the volume of purchase requests increase, the Company
anticipates that it will need to reduce the size of the exclusive territories
currently allocated to dealerships in order to serve consumers more
effectively. Dealerships may be unwilling to accept reductions in the size of
their territories and may, therefore, terminate their Auto-By-Tel
relationship, refuse to execute formal agreements with the Company or decide
not to join the Company's marketing programs. A material decrease in the
number of subscribing dealerships, or slower than expected growth in the
number of subscribing dealerships, could have a material adverse effect on the
Company's business, results of operations or financial condition. The Company
may also become unable to refer an adequate number of consumers to
participating dealerships. There can be no assurance that the Company will be
able to continue to attract additional dealerships and retain existing
dealerships. See "Business--Strategy" and "--Dealership Network and Training."
 
FAILURE OF PARTICIPATING DEALERSHIPS TO ADHERE TO AUTO-BY-TEL SALES PRACTICES
 
  The success of the Company's business strategy depends on its participating
dealerships' adherence to the Company's consumer oriented sales practices. The
Company devotes significant efforts to train participating dealerships in such
practices which are intended to increase consumer satisfaction. The Company's
inability to train dealerships effectively, or the failure by participating
dealerships to adopt such practices, respond rapidly and professionally to
vehicle purchase requests, or sell vehicles in accordance with the Company's
marketing strategies, could result in low consumer satisfaction, damage the
Company's brand name and materially adversely affect the Company's business,
results of operations or financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation" and "Business--
Strategy" and "--Dealership Network and Training."
 
RAPID TECHNOLOGICAL CHANGE AND SYSTEM DISRUPTIONS
 
  The Internet is characterized by rapidly changing technology. The Company
believes that its future success is significantly dependent on its ability to
continuously improve the speed and reliability of its Web site, enhance
communications functionality with its consumers and dealers and maintain the
highest-level of information privacy and ensure transactional security. The
Company recently migrated its Web site platform to a more robust enterprise
network (a large communications and data exchange system created by physically
connecting telephone lines or other communication media to link computers
separated by thousands of miles), internalized all Web server hosting
functions and, to accelerate connectivity, has installed higher bandwidth
telecommunications lines, consisting of two 1.54 Mbps (millions of bits per
second) T-1 lines for outbound traffic and a 6 Mbps fractional DS/3 line (a
very high bandwidth telephone trunk line capable of transferring 44.21 Mbps)
for inbound traffic. The Company has also recently upgraded its routers (for
faster data transmission routing through its computer network) and has
installed firewall technology (security software and hardware placed between
the Company's private network and the Internet to prevent corruption of the
private network). System enhancements entail the implementation of
sophisticated new technology and system processes and there can be no
assurance that such continuous enhancements may not result in unanticipated
system disruptions. For example, since April 1, 1996, the Company has
experienced three periods of system downtime (with an average downtime of
approximately three hours) due to power loss and telecommunications failures,
and there can be no assurance that future interruptions will not recur.
Although the Company maintains redundant local offsite backup servers, all of
the Company's primary servers are located at its corporate headquarters and
are vulnerable to interruption by damage from fire, earthquake, power loss,
telecommunications failure and other events beyond the Company's control. The
Company is in the process of developing comprehensive out-of-state disaster
recovery plans to safeguard dealer and consumer information. The Company's
business interruption insurance may not be sufficient to compensate the
Company for all losses that may occur. In the event that the Company
experiences significant system disruptions, the Company's business, results of
operations or financial condition could be materially and adversely affected.
See "Business--Operations and Technology; Facilities."
 
                                      11

<PAGE>
 
   
  In addition, the Company is currently in the process of completing a
conversion to a redundant client/server (a network of multiple computers
consisting of end user or "client" computers connected to controlling or
"server" computers) SQL database (an organized collection of data) platform
which involves the integration of several different internal databases used to
handle the Company's consumer and dealer information and transmission
requirements, as well as the Company's financial, accounting and record-
keeping requirements. No assurance can be given that the implementation of
this new platform will not result in disruptions to the Company's business,
such as the loss of data, errors in purchase request transmissions, delays in
the Company's ability to effect periodic closings of its accounting records
and other similar problems. Any such disruptions or any failure to
successfully implement this new information system in a timely manner could
have a material adverse effect on the Company's business, results of
operations or financial condition. See "Business--Operations and Technology;
Facilities."     
 
POTENTIAL SECURITY BREACHES
 
  The Company's services may be vulnerable to break-ins and similar disruptive
problems caused by Internet users. Further, weaknesses in the Internet may
compromise the security of confidential electronic information exchanged
across the Internet. This includes, but is not limited to, the security of the
physical network and the security of the physical machines used for the
information transfer. Any such flaws in the Internet, the end-user
environment, or weaknesses or vulnerabilities in the Company's services or the
licensed technology incorporated in such services could jeopardize the
confidential nature of information transmitted over the Internet and could
require the Company to expend significant financial and human resources to
protect against future breaches, if any, and alleviate or mitigate problems
caused by such security breaches. Concerns over the security of Internet
transactions and the privacy of users may also inhibit the growth of the
Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company, or third party
contractors, involve the storage and transmission of proprietary information
(such as personal financial information or credit card numbers), security
breaches could expose the Company to a risk of financial loss, litigation and
other liabilities. The Company does not currently maintain insurance to
protect against such losses. Any such occurrence could reduce consumer
satisfaction in the Company's services and could have a material adverse
effect on the Company's business, results of operations or financial
condition. See "Business--Operations and Technology; Facilities."
 
RISKS ASSOCIATED WITH INTRODUCTION OF NEW SERVICE OFFERINGS
   
  In order to generate additional revenues, to attract more consumers to its
Web site and dealerships to its programs and remain competitive, the Company
must successfully develop, market and introduce new services. The Company
believes that to achieve its objectives it will need to generate a substantial
portion of its future revenues from new services. The Company recently
introduced an Internet-based insurance service with certain member companies
of American International Group ("AIG"), one of the largest international
insurance organizations. Consumers can currently link to the specific Web site
for such AIG member companies to submit requests for quotes and, when the
service is fully implemented, will be able to receive real-time, online
quotes. The Company also recently entered into an agreement with Chase
Manhattan Automotive Finance Corporation ("Chase Manhattan") under which Chase
Manhattan, together with its affiliates, will receive credit applications for
new vehicle financing who access Auto-By-Tel's Web Site. The agreement with
Chase Manhattan has a term of three years but may be terminated sooner by
Chase Manhattan with six months' notice or in the event Auto-By-Tel fails to
refer to Chase Manhattan a prescribed percentage of loan application requests
submitted through the Auto-By-Tel Web site, or the referred loan applications
do not result in a prescribed percentage of loans generated by Chase
Manhattan, or Auto-By-Tel otherwise breaches the agreement.     
 
  In addition, the Company is developing client/server database applications
and user interfaces which will enable the Company to provide consumers access
to vehicles currently listed by dealerships who participate in the Company's
used vehicle program. None of these new services has been fully developed and,
in some cases, their introduction has recently been delayed due to
difficulties encountered by the Company's partners in developing their
software systems. There can be no assurance that the Company will successfully
develop or introduce these new services, that such services will achieve
market acceptance or that subscribing dealerships will not view such new
services as competitive to services already offered by such dealerships. For
example, consumers may be reticent to purchase vehicle insurance or procure
vehicle financing online. Also, it may be
 
                                      12

<PAGE>
 
more difficult to educate consumers as to the value of locating used vehicles
for purchase through the Internet since used vehicle purchases are generally
thought to require a greater level of hands-on involvement. The Company
expects to incur additional expenses to develop and successfully market such
services. To the extent that revenues generated by such additional services
are insufficient to cover increased expenses, the Company's operating results
would be adversely affected. Should the Company fail to develop and
successfully market these services, or should competitors successfully
introduce competing services, the Company's business, results of operations
and financial condition may be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Business--Products and Services."
 
DEPENDENCE ON THIRD PARTIES FOR NEW SERVICES
 
  As a part of its overall strategy, the Company plans to develop new services
by entering into alliances with other companies engaged in complementary
businesses, such as vehicle financing and leasing, and insurance providers.
For example, the Company recently entered into agreements with Chase Manhattan
to provide vehicle financing and AIG to provide vehicle insurance services to
its consumers. Strategic relationships involve numerous risks, including
difficulties in the introduction and marketing of new services, diversion of
management's attention from other business requirements, and the risks of
entering markets in which the Company has no or limited direct prior
experience and where competitors in such markets have stronger market
positions. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with
such strategic alliances or that such transactions will not adversely affect
the Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" and "Business--Strategy" and "--Products and Services."
 
UNCERTAIN ACCEPTANCE OF INTERNET-BASED MARKETING SERVICES
 
  The market for the Company's Internet-based marketing service has only
recently begun to develop and is rapidly evolving. 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 exist few proven services and products. Moreover,
since the market for the Company's services is new and evolving, it is
difficult to predict the future growth rate, if any, and size of this market.
 
  The success of the Company's service will depend upon the adoption of the
Internet by consumers and dealers as a mainstream medium for commerce. There
can be no assurance that widespread acceptance of Internet commerce in
general, or of the Company's services in particular, will occur. Consumers and
dealers who have historically relied upon traditional means of commerce to
purchase vehicles and vehicle insurance, or to procure vehicle financing, must
accept novel ways 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 systems and technologies. Moreover, critical
issues concerning the commercial use of the Internet (including ease of
access, security, reliability, cost, and quality of service) remain unresolved
and may impact the growth of Internet use or the attractiveness of conducting
commerce online. There can be no assurance that consumers will use the
Internet for commerce or that the market for the Company's services will
develop successfully or achieve widespread market acceptance. If the market
for Internet-based vehicle marketing services fails to develop, develops more
slowly than expected or becomes saturated with competitors, or if the
Company's services do not achieve market acceptance, the Company's business,
results of operations and financial condition will be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and "Business--Strategy."
 
INABILITY TO MANAGE GROWTH
 
  The rapid execution necessary for the Company to establish itself as a
leader in the evolving market for Internet-based vehicle marketing services
requires an effective planning and management process. The Company's rapid
growth has placed, and is expected to continue to place, a significant strain
on the Company's managerial, technical, sales and marketing and administrative
personnel and financial resources. As of
 
                                      13

<PAGE>
 
December 31, 1996, the Company had 73 employees (including two employees
located in Canada), compared to 17 employees as of December 31, 1995. The
Company is also in the process of testing, introducing or developing new
services. The Company anticipates that to effectively develop, introduce and
maintain such new services, it will need to hire a significant number of
qualified managerial, technical and sales and marketing personnel in the
future. Competition for such qualified individuals is intense and there can be
no assurance that the Company will be able to recruit and retain such
employees.
 
  To manage its growth, the Company must continue to implement and improve its
operational and financial systems, and expand, train and manage its employee
base and subscribing dealerships. There can be no assurance that the Company
will be able to successfully implement these changes on a timely basis.
Further, the Company is required and will continue to be required to manage
multiple relationships with consumers, dealers, strategic partners and other
third parties. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's current or
future operations or that Company management will be able to achieve the rapid
execution necessary to establish itself as a leader in the evolving market for
Internet-based vehicle marketing services. For example, to date the Company
has been able to enter into written marketing agreements with less than half
of its subscribing dealership base. The Company's future operating results
will also depend on its ability to expand its sales and marketing
organizations, implement and manage new services to penetrate broader markets
and further develop and expand its organization and technology infrastructure,
to support an increased number of services. If the Company is unable to manage
growth effectively, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Business--
Employees."
 
  The Company's growth strategy is predicated in part on its ability to
successfully identify, acquire and integrate companies that complement or
expand the Company's service offerings. While the Company is not currently
negotiating any acquisitions and does not have any commitments or agreements
with respect to any acquisitions, the Company anticipates that potential
acquisition opportunities may arise. The Company intends to actively pursue
any attractive acquisition opportunities. In the event that the Company were
to issue Common Stock to consummate such potential acquisitions, such
additional issuance could dilute the holdings of investors purchasing the
Common Stock offered hereby. Additionally, the Company may utilize cash to
consummate such acquisitions. There can be no assurance that the Company will
have adequate resources to consummate any acquisition, that any acquisition
will or will not occur, that any target company can be successfully integrated
into the Company, and that, if any acquisition does occur, it will not be
dilutive to the Company's earnings per share or otherwise have a material
adverse affect on the Company's business, results of operations and financial
condition.
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's performance is substantially dependent on the performance of
its executive officers and key employees, all of whom are employed on an at-
will basis and many of whom have worked together for only a short period of
time. Given the Company's early stage of development, the Company is dependent
on its ability to retain and motivate highly qualified personnel, especially
its management, technical and business development teams. The Company
maintains "key person" life insurance in the amount of $7.5 million on the
life of Peter R. Ellis, the Company's President and Chief Executive Officer.
However, the loss of the services of Mr. Ellis, or one or more of the
Company's other executive officers or key employees would likely have a
material adverse effect on the business, results of operations or financial
condition of the Company. Certain Company officers have been involved in legal
matters prior to the formation of Auto-By-Tel. While management believes that
these matters have been resolved, future proceedings, if any, could interfere
to some extent with the officers' services for the Company. See "Management."
 
  The Company's future success also depends on its ability to identify, hire,
train and retain other highly qualified sales and marketing, managerial and
technical personnel. In addition, the Company anticipates the need to hire a
significant number of personnel as it introduces new services. Competition for
such personnel is intense, and there can be no assurance that the Company will
be able to attract, assimilate or retain such personnel in the
 
                                      14

<PAGE>
 
future. The inability to attract and retain the necessary managerial,
technical and sales and marketing personnel could have a material adverse
effect upon the Company's business, results of operations or financial
condition. See "Business--Employees."
 
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
 
  The Company intends to expand its new vehicle marketing service to foreign
jurisdictions by establishing relationships with vehicle dealers and strategic
partners located in foreign jurisdictions in which similar challenges and
inefficiencies in the market for new vehicles exist. In addition, there are
certain risks inherent in doing business in international markets, such as
changes in regulatory requirements, tariffs and other trade barriers,
fluctuations in currency exchange rates, potentially adverse tax consequences,
difficulties in managing or overseeing foreign operations, and educating
consumers and dealers who may be unfamiliar with the benefits of online
marketing and commerce. There can be no assurance that one or more of such
factors will not have a material adverse effect on the Company's current or
future international operations and, consequently, on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Results of
Operations--Revenues."
 
DEPENDENCE ON THE INTERNET; CAPACITY CONSTRAINTS
   
  The Company's ability to efficiently process purchase requests for vehicles
received through the Company's Internet-based marketing service will depend,
in large part, upon a robust communications industry and infrastructure for
providing Internet access and carrying Internet traffic. The Internet may not
prove to be a viable commercial marketplace because of inadequate development
of the necessary infrastructure (e.g., reliable network backbone), timely
development of complementary products (e.g., high speed modems (devices that
enable computers to send and receive information via telephone lines)), delays
in the development or adoption of new standards and protocols required to
handle increased levels of Internet activity or increased government
regulation. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and the level of use,
there can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by such potential growth. Because
global commerce and exchange of information on the Internet is new and
evolving, it is difficult to predict with any assurance whether the Internet
will prove to be a viable commercial marketplace. If the necessary
infrastructure or complementary products are not developed, or if the Internet
does not become a viable commercial marketplace, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business--Operations and Technology; Facilities."     
 
DEPENDENCE ON PROPRIETARY SYSTEMS AND TECHNOLOGY
 
  The Company's success and ability to compete is dependent in part upon its
proprietary systems and technology. While the Company relies on trademark,
trade secret and copyright law to protect its proprietary rights, the Company
believes that the technical and creative skills of its personnel, continued
development of its proprietary systems and technology, brand name recognition
and reliable Web site maintenance are more essential in establishing and
maintaining a leadership position and strengthening its brand. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's services or to obtain and use
information that the Company regards as proprietary. Policing unauthorized use
of the Company's proprietary rights is difficult. In addition, litigation may
be necessary in the future to enforce or protect the Company's intellectual
property rights or to defend against claims of infringement or invalidity.
Misappropriation of the Company's intellectual property or potential
litigation could have a material adverse effect on the Company's business,
results of operations or financial condition. See "Business--Operations and
Technology; Facilities."
 
SUBSTANTIAL CONTROL BY OFFICERS AND DIRECTORS AND THEIR AFFILIATES
 
  Following the Offering, the Company's officers and directors and their
affiliates will beneficially own or control approximately 72.5% of the
outstanding shares of Common Stock (after giving effect to the conversion of
all outstanding Preferred Stock and the exercise of all outstanding options
and assuming no exercise of the
 
                                      15

<PAGE>
 
Underwriter's over-allotment option). The Company's officers, directors and
their affiliates will have the ability to control the election of the
Company's Board of Directors and the outcome of corporate actions requiring
stockholder approval. See "Principal and Selling Stockholders."
 
ANTI-TAKEOVER PROVISIONS
 
  Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Bylaws could make it difficult for a third party to acquire,
and could discourage a third party from attempting to acquire, control of the
Company. Certain of these provisions allow the Company to issue Preferred
Stock with rights senior to those of the Common Stock without any further vote
or action by the stockholders and impose various procedural and other
requirements which could make it more difficult for stockholders to effect
certain corporate actions. Such charter provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock or Preferred Stock and may have the effect of delaying
or preventing a change in control of the Company. The issuance of Preferred
Stock also could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common
Stock. See "Description of Capital Stock--Common Stock" and "--Preferred
Stock."
 
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
 
  There has been no public market for the Company's Common Stock prior to this
offering. Although application will be made to the Nasdaq National Market for
listing of the Common Stock, there can be no assurance that an active trading
market will develop or be sustained or that the market price of the Common
Stock will not decline below the initial public offering price. The initial
public offering price will be determined through negotiations between the
Company and the Underwriters and may not be indicative of the market price for
the Common Stock following the Offering. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. Even if an active trading market does develop, the market price of the
Common Stock following this offering may be highly volatile. Factors such as
variations in the Company's revenue, earnings and cash flow, announcements of
new service offerings, technological innovations or price reductions by the
Company, its competitors or providers of alternative services, changes in
financial estimates by securities analysts or other events or factors could
cause the market price of the Common Stock to fluctuate substantially. In
addition, the stock markets recently have experienced significant price and
volume fluctuations that have particularly affected companies in the
technology sector and that have been unrelated to the operating performance of
those companies. Such broad market fluctuations or any failure of the
Company's operating results in a particular quarter to meet market
expectations may adversely affect the market price of the Common Stock
following this offering.
 
DILUTION
 
  Investors participating in the Offering will incur immediate, substantial
dilution. To the extent that outstanding options to purchase the Company's
Common Stock are exercised, there will be further dilution. See "Dilution."
 
ABSENCE OF DIVIDENDS
 
  The Company intends to retain all future earnings for use in the development
of its business and does not currently anticipate paying any cash dividends in
the foreseeable future. See "Dividend Policy."
 
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
 
  Sale of substantial numbers of shares of Common Stock in the public market
could adversely affect the market price of the Common Stock and make it more
difficult for the Company to raise funds through equity offerings in the
future. A substantial number of outstanding shares of Common Stock and other
shares of
 
                                      16

<PAGE>
 
Common Stock issuable upon exercise of outstanding stock options will become
available for resale in the public market at prescribed times. Of the
19,495,136 shares to be outstanding after the Offering, the 4,000,000 shares
offered hereby will be eligible for immediate sale in the public market
without restriction. All other outstanding shares of Common Stock are subject
to 180-day lock-up agreements with the Underwriters. Upon the expiration of
the 180-day lock-up agreements, such shares of Common Stock will become
eligible for sale in the public market, subject to the provisions of Rules
144(k), 144 and 701 under the Act and any contractual restrictions on their
transfer. Montgomery Securities may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to lock-
up agreements. Upon completion of the Offering, the holders of approximately
15,322,248 shares of Common Stock will be entitled to certain registration
rights with respect to such shares. In addition, the Company intends to
register the shares of Common Stock reserved for issuance under the Company's
1996 Stock Option Plan, 1996 Stock Incentive Plan and 1996 Employee Stock
Purchase Plan following the date of this Prospectus. See "Shares Eligible for
Future Sale" and "Description of Capital Stock--Registration Rights."
 

                                USE OF PROCEEDS
 
  The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at an assumed initial public offering price of $10.25 per
share, after deducting estimated underwriting discounts and estimated offering
expenses, are estimated to be approximately $33.0 million (approximately $38.7
million if the Underwriters' over-allotment is exercised in full). The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholder. See "Principal and Selling Stockholders."
 
  The principal purposes of the Offering are to increase the Company's equity
capital, create a public market for the Common Stock and to facilitate future
access to public equity markets. The Company intends to use approximately $12
million of the net proceeds from the Offering to fund online and traditional
advertising programs designed to strengthen the Auto-By-Tel brand name and
$6 million to fund information technology investments required to support the
transition to a real-time online communications platform and to develop new
products and services. The Company intends to use the remainder of the net
proceeds from the Offering for other working capital and general corporate
purposes. In addition, a portion of the proceeds from the Offering also may be
used for possible acquisitions of or investments in businesses, products or
technologies that expand, complement or are otherwise related to the Company's
current or planned services, although no specific acquisitions are currently
in negotiation. Pending such uses, the proceeds will be invested in short-
term, investment grade, interest-bearing securities. The Company may require
additional financing in the future to finance continuing growth. No assurance
can be given that such financing will be available on favorable terms or at
all.
 

                                DIVIDEND POLICY
 
  The Company has never declared or paid cash dividends on its capital stock.
The Company currently intends to retain all of its future earnings, if any,
for use in its business and does not anticipate paying any cash dividends in
the foreseeable future.
 
                                      17

<PAGE>
 

                                CAPITALIZATION
 
  The following table sets forth (i) the actual capitalization of the Company
derived from its financial statements as of December 31, 1996, (ii) pro forma
capitalization of the Company, giving effect to (a) the authorization of
967,915 shares of Series B Preferred Stock and the sale and issuance on
January 30, 1997 of 967,915 shares of Series B Preferred Stock at a price of
$9.35 per share and (b) the restatement of the Company's Amended and Restated
Certificate of Incorporation to provide for authorized capital stock of
50,000,000 shares of Common Stock and 5,000,000 shares of undesignated
Preferred Stock, and (c) the conversion of all outstanding shares of Preferred
Stock into 3,467,915 shares of Common Stock immediately prior to the closing
of the Offering, and (iii) the pro forma as adjusted capitalization of the
Company to reflect the sale by the Company of 3,600,000 shares of Common Stock
pursuant to the Offering at an assumed public offering price of $10.25 and the
receipt by the Company of the estimated net proceeds therefrom, after
deducting estimated underwriting discounts and estimated offering expenses.
The capitalization information set forth in the table below is qualified by
the more detailed Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus and should be read in conjunction with such
Consolidated Financial Statements and Notes.
 

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 1996
                                                -------------------------------
                                                                    PRO FORMA
                                                ACTUAL   PRO FORMA AS ADJUSTED
                                                -------  --------- ------------
                                                        (IN THOUSANDS)
<S>                                             <C>      <C>       <C>
Cash and cash equivalents...................... $ 9,062   $18,112    $51,129
                                                =======   =======    =======
Stockholders' equity (1):
 Convertible preferred stock, $0.001 par value;
  1,500,000 shares authorized, 1,500,000 shares
  issued and outstanding, actual; 5,000,000
  shares authorized, no shares issued and
  outstanding, pro forma and pro forma as
  adjusted.....................................       2       --         --
 Common stock, $0.001 par value; 16,666,666
  shares authorized, 12,427,221 shares issued
  and outstanding, actual; 50,000,000 shares
  authorized, 15,895,136 shares outstanding,
  pro forma; 50,000,000 shares authorized,
  19,495,136 shares issued and outstanding, pro
  forma as adjusted............................      12        16         19
 Additional paid-in capital....................  15,073    24,121     57,135
 Deferred compensation.........................     (26)      (26)       (26)
 Accumulated deficit...........................  (7,065)   (7,065)    (7,065)
                                                -------   -------    -------
  Total stockholders' equity...................   7,996    17,046     50,063
                                                -------   -------    -------
    Total capitalization....................... $ 7,996   $17,046    $50,063
                                                =======   =======    =======
</TABLE>

- --------
(1) Gives effect to a five-for-three stock split approved by the Board of
    Directors on November 24, 1996 and effected January 30, 1997. Excludes as
    of December 31, 1996: (i) 2,280,815 shares of Common Stock reserved for
    issuance pursuant to options outstanding under the Company's 1996 Stock
    Option Plan and 1996 Stock Incentive Plan at a weighted exercise price of
    $2.21 per share. On October 23, 1996, the Company terminated the 1996
    Stock Option Plan and adopted the 1996 Stock Incentive Plan and, on
    November 24, 1996, amended the 1996 Stock Incentive Plan and adopted the
    1996 Employee Stock Purchase Plan and reserved 1,250,000 and 666,666
    shares of Common Stock, respectively, for issuance thereunder. Subsequent
    to December 31, 1996, the Board of Directors granted options to purchase
    an additional 124,750 shares of Common Stock with an exercise price of
    $8.80 per share under the Company's 1996 Stock Incentive Plan. See
    "Capitalization," "Management--Stock Plans" and Notes 1, 7 and 8 of Notes
    to Consolidated Financial Statements.
 
                                      18

<PAGE>
 
                                   DILUTION
 
  The pro forma net tangible book value of the Company as of December 31, 1996
was $16.6 million or $1.04 per share of Common Stock. Pro forma net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities, divided by the number of shares of Common Stock outstanding
on a pro forma basis after giving effect to (i) the sale and issuance on
January 30, 1997 of 967,915 shares of Series B Preferred Stock at a price of
$9.35 per share and (ii) the conversion of all outstanding shares of Preferred
Stock into 3,467,915 shares of Common Stock immediately prior to the closing
of the Offering. After giving effect to the sale of 3,600,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $10.25 and
the receipt by the Company of the estimated net proceeds therefrom, after
deducting estimated underwriting discounts and estimated offering expenses,
the pro forma net tangible book value of the Company at December 31, 1996
would have been $49.6 million, or $2.54 per share. This represents an
immediate increase in pro forma net tangible book value of $1.50 per share to
existing stockholders and an immediate dilution of $7.71 per share to new
investors. The following table illustrates this per share dilution:
 

<TABLE>
<S>                                                                  <C>   <C>
Assumed initial public offering price per share.....................       $10.25
 Pro forma net tangible book value per share before the Offering.... $1.04
 Increase per share attributable to new investors...................  1.50
                                                                     -----
Pro forma net tangible book value per share after the Offering......         2.54
                                                                           ------
Dilution per share to new investors.................................       $ 7.71
                                                                           ======
</TABLE>

 
  The following table summarizes, on a pro forma basis as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
by existing stockholders and by the investors purchasing shares of Common
Stock in this offering (before deducting estimated underwriting discounts and
estimated offering expenses):
 

<TABLE>
<CAPTION>
                                                                         AVERAGE
                                   SHARES PURCHASED  TOTAL CONSIDERATION  PRICE
                                  ------------------ -------------------   PER
                                    NUMBER   PERCENT   AMOUNT    PERCENT  SHARE
                                  ---------- ------- ----------- ------- -------
<S>                               <C>        <C>     <C>         <C>     <C>
Existing stockholders(1)......... 15,895,136   81.5% $24,137,000   39.5% $ 1.52
New investors(1).................  3,600,000   18.5%  36,900,000   60.5%  10.25
                                  ----------  -----  -----------  -----
  Total.......................... 19,495,136  100.0% $61,037,000  100.0%
                                  ==========  =====  ===========  =====
</TABLE>

- --------
(1) The sale of shares by the Selling Stockholder in the Offering will cause
    the number of shares held by the existing stockholders to be reduced to
    15,495,136, or approximately 79.5% of the total number of shares, and will
    increase the number of shares to be purchased by new stockholders to
    4,000,000, or 20.5% of the total number of shares. Assuming full exercise
    of the Underwriters' over-allotment option, the number of shares held by
    new stockholders would be increased to 4,600,000 shares or 22.9% of the
    total number of shares outstanding.
 
  The foregoing tables exclude 2,405,565 shares that are issuable upon
exercise of options outstanding as of January 31, 1997 with a weighted average
exercise price of $2.55 per share. See "Management--Stock Plans." To the
extent that outstanding options are exercised in the future, there will be
further dilution to new investors.
 
                                      19

<PAGE>


                     SELECTED CONSOLIDATED FINANCIAL DATA
 
  The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Prospectus. The statement
of operations data for the period from January 31, 1995 (date of inception) to
December 31, 1995, and the year ended December 31, 1996 and the balance sheet
data as of December 31, 1995 and December 31, 1996 are derived from the
Consolidated Financial Statements of the Company which have been audited by
Arthur Andersen LLP, independent auditors, and are included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 

<TABLE>
<CAPTION>
                                                             THREE MONTHS ENDED
                           JANUARY 31, 1995   --------------------------------------------------  YEAR ENDED
                         (DATE OF INCEPTION)  MARCH 31,    JUNE 30,   SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
                         TO DECEMBER 31, 1995    1996        1996         1996          1996         1996
                         -------------------- ----------  ----------  ------------- ------------ ------------
                              (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND SUPPLEMENTAL OPERATING DATA)
<S>                      <C>                  <C>         <C>         <C>           <C>          <C>
STATEMENT OF OPERATIONS
 DATA:
Revenues................      $      274      $      436  $      952   $    1,434    $    2,203   $    5,025
                              ----------      ----------  ----------   ----------    ----------   ----------
Operating expenses:
 Marketing and
  advertising...........             476             475         678        1,247         2,039        4,439
 Selling, training and
  support...............             454             362         563          851         1,417        3,193
 Technology development.              99              67          78          294           954        1,393
 General and
 administrative.........             275             134         258          740         1,027        2,159
                              ----------      ----------  ----------   ----------    ----------   ----------
  Total operating
   expenses.............           1,304           1,038       1,577        3,132         5,437       11,184
                              ----------      ----------  ----------   ----------    ----------   ----------
Loss from operations....          (1,030)           (602)       (625)      (1,698)       (3,234)      (6,159)
Other income (expense),
 net....................             --              --           (6)          22           108          124
                              ----------      ----------  ----------   ----------    ----------   ----------
Net loss................      $   (1,030)     $     (602) $     (631)  $   (1,676)   $   (3,126)  $   (6,035)
                              ==========      ==========  ==========   ==========    ==========   ==========
Net loss per common and
 common equivalent
 shares (1).............      $     (.07)     $     (.04) $     (.04)  $     (.11)   $     (.19)  $     (.38)
                              ==========      ==========  ==========   ==========    ==========   ==========
Weighted average common
 and common equivalent
 shares outstanding (1).      15,262,262      15,262,262  15,262,262   15,892,576    16,761,962   15,792,293
SUPPLEMENTAL OPERATING
 DATA:
Purchase requests
 received...............          42,600          44,900      73,700      102,700       123,700      345,000
Paying franchises of
 subscribing
 dealerships............             253             546         728          978         1,206        1,206
</TABLE>

 

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                               ----------------
                                                                1995     1996
                                                               -------  -------
                                                               (IN THOUSANDS)
<S>                                                            <C>      <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $    48  $ 9,062
Working capital (deficit).....................................  (1,099)   5,960
Total assets..................................................     285   12,298
Total liabilities.............................................   1,275    4,302
Accumulated deficit...........................................  (1,030)  (7,065)
Stockholders' equity (deficit)................................    (990)   7,996
</TABLE>

- -------
(1) See Note 1.o of Notes to Consolidated Financial Statements for an
    explanation of the determination of shares used in computing net loss per
    share.
 
                                      20

<PAGE>
 

               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS
 
  The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements based on
current expectations which 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
set forth in the section entitled "Risk Factors" and elsewhere in this
Prospectus.
 
OVERVIEW
   
  Auto-By-Tel is establishing a nationally branded Internet-based marketing
service for new and used vehicle purchasing and related consumer services. The
Company's Web site (www.autobytel.com) enables consumers to gather valuable
automotive information and shop for vehicles and related consumer services
from the convenience of their home or office. Monthly vehicle purchase
requests increased from 10,700 in January 1996 to 40,000 in December 1996.
During the same period, the number of paying franchises of subscribing
dealerships increased from 253 franchises as of December 31, 1995 to 1,206
franchises as of December 31, 1996. The Company believes that the growth rates
experienced by the Company since inception are not indicative of future growth
rates and that growth will be slower in the future. Auto-By-Tel LLC was formed
in January 1995 and began operations in March 1995. In July 1995, it
introduced its Web site. Effective as of May 31, 1996, the interests of the
members of Auto-By-Tel LLC and ABT Acceptance Company LLC, an affiliate, were
transferred to the Company in a tax-free transaction.     
          
  To date, substantially all of the Company's revenues have been derived from
new vehicle marketing fees paid by franchises of subscribing new vehicle
dealerships. As of December 31, 1996 the Company's participating dealership
base consisted of (i) 1,206 paying franchises of dealerships, (ii) 509 non-
paying franchises affiliated with paying dealerships (collectively,
"subscribing dealerships") and (iii) approximately 230 "trial dealers." A
subscribing dealership is comprised of one or more franchises with typically
high volume vehicle sales (such as Ford or Toyota). A subscribing dealership
may sell vehicles from multiple manufacturers and therefore have multiple
subscribing dealer franchises. Dealerships pay initial, annual and monthly
fees per franchise to subscribe to the Company's nationally branded Internet-
based marketing program. Non-paying franchises are associated with lower
volume vehicle manufacturers (such as Audi, Saab or Suzuki) and receive
purchase request referrals without paying fees to Auto-By-Tel. The Company's
230 trial dealerships have not entered into agreements with the Company. Such
dealerships maintain an informal relationship with the Company, whereby the
Company directs at its discretion, purchase requests to such potential
dealership participants on a trial basis in order to assist the Company and
the dealership in evaluating the effectiveness of the Auto-By-Tel program at
such dealership. The Company does not collect fees from trial dealerships.
Neither the Company nor any trial dealership is obligated to continue this
relationships nor is any trial dealership obligated to respond to purchase
requests which it receives.     
 
  In order to generate additional revenues, attract more consumers to its Web
site and dealerships to its program and remain competitive, the Company must
successfully develop, market and introduce new services. The Company believes
that to achieve its objectives it will need to generate a majority of its
future revenues from new services. These new services will leverage the
Company's existing network of dealerships. The Company's used vehicle
marketing program is expected to commence in the first quarter of 1997. The
Company will charge each new vehicle dealership which participates in the
Company's used vehicle program separate signup and annual fees. See
"Business--Products and Services--Used Vehicle Marketing Service." In
addition, the Company intends to charge daily listing fees for each used
vehicle marketed through the used vehicle program. In October 1996, the
Company entered into an agreement with Chase Manhattan pursuant to which Chase
Manhattan will offer vehicle loans to consumers referred by the Company and
pay the Company and the related subscribing dealership an origination fee on
each loan. The Company's financing program with Chase Manhattan is expected to
become available to purchasers of new vehicles in the first quarter of 1997
and is
 
                                      21

<PAGE>
 
   
intended for consumers with prime (higher quality) credit ratings.
Additionally, the Company expects to begin offering financing to purchasers
with sub-prime (lower quality) credit ratings in the second quarter of 1997.
Finance program revenues will be recognized in the month the loan is
originated. The Company also plans to offer leasing through a major financial
institution in the second quarter of 1997. In August 1996, the Company began
offering an insurance service to its consumers through certain member
companies of AIG, one of the largest international insurance organizations,
and, as part of such service, recently began offering a direct hyperlink (text
on a Web site that, when selected, links a user to another Web site) to the
specific Web site of such AIG member companies. In October 1996, the Company
received an insurance brokerage license from the State of California.
Subsequent to receipt of this license, the Company became eligible to receive
referral fees from AIG member companies. Fees due the Company under the
insurance program are calculated as a percentage of the net premiums collected
by AIG member companies and revenues are recognized by the Company as premiums
on the underlying policies are earned by AIG member companies.     
   
  The Company first recognized revenues from operations in March 1995.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. In addition, the
Company believes that, in order to achieve its objectives, it will need to
significantly increase revenues from existing services and generate revenues
from new services, such as the planned used vehicle buying service and the
planned vehicle financing, leasing and insurance policy referral services. See
"Risk Factors--Limited Operating History and Accumulated Deficit" and "--Risks
Associated with Introduction of New Service Offerings."     
   
  As a result of the Company's limited operating history, the Company lacks
sufficient historical financial and operating data on which to base operating
results. The Company's expense levels are based in part on its expectations as
to future revenues, which may vary in relation to increases or decreases in
the number of dealerships which subscribe to the Company's marketing program.
The Company's inability to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall would have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, the Company anticipates significant increases in costs and expenses
as a result of planned increases in its marketing and advertising efforts,
dealership training and support, development of affiliate programs relating to
vehicle insurance and financing, and the introduction of a used vehicle buying
program. The Company also anticipates significant additions to its managerial,
technical, sales and marketing, and administrative personnel in order to
support the Company's growth and business objectives. To the extent that such
expenses exceed, precede or are not subsequently followed by increased
revenues, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Risk Factors--Potential
Fluctuations in Quarterly Results."     
 
  Significant fluctuations in future quarterly operating results may also be
caused by general economic conditions or traditional seasonality in the
automobile and light duty truck markets, which may result in fluctuations in
the level of purchase requests completed by consumers or adversely affect
demand for the Company's existing and planned services. The foregoing factors
make it likely that, in some future quarters, the Company's operating results
will be below the expectations of the Company, securities analysts or
investors. In such event, the trading price of the Common Stock would likely
be materially and adversely affected.
 
 
                                      22

<PAGE>
 
RESULTS OF OPERATIONS
 
  The following tables set forth certain unaudited quarterly financial
information for the eight quarters ended December 31, 1996. In the opinion of
management, this information has been prepared substantially on the same basis
as the financial statements appearing elsewhere in this Prospectus, and all
necessary adjustments (consisting only of normal recurring adjustments and
certain non-recurring adjustments) have been included in the amounts stated
below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of the Company
and related notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
 

<TABLE>
<CAPTION>
                                                       QUARTER ENDED
                         -------------------------------------------------------------------------
                         MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
                         1995(1)    1995     1995      1995     1996     1996     1996      1996
                         -------- -------- --------- -------- -------- -------- --------- --------
                                                      (IN THOUSANDS)
<S>                      <C>      <C>      <C>       <C>      <C>      <C>      <C>       <C>
Revenues................   $  3    $  18     $  77    $ 176    $  436   $  952   $ 1,434  $ 2,203
                           ----    -----     -----    -----    ------   ------   -------  -------
Operating expenses:
 Marketing and
  advertising...........      6       38       130      302       475      678     1,247    2,039
 Selling, training and
  support...............     13       98       136      207       362      563       851    1,417
 Technology development.      6       28        44       21        67       78       294      954
 General and
  administrative........     14       73        83      105       134      258       740    1,027
                           ----    -----     -----    -----    ------   ------   -------  -------
    Total operating
     expenses...........     39      237       393      635     1,038    1,577     3,132    5,437
                           ----    -----     -----    -----    ------   ------   -------  -------
Loss from operations....    (36)    (219)     (316)    (459)     (602)    (625)   (1,698)  (3,234)
Other income (expense),
 net....................    --       --        --       --        --        (6)       22      108
                           ----    -----     -----    -----    ------   ------   -------  -------
Net loss................   $(36)   $(219)    $(316)   $(459)   $ (602)  $ (631)  $(1,676) $(3,126)
                           ====    =====     =====    =====    ======   ======   =======  =======
</TABLE>

- --------
(1)Period from the Company's inception on January 31, 1995.
 
 REVENUES
 
  Revenues were $274,000 in 1995 and $5.0 million in 1996. Revenues increased
each successive quarter, from $3,000 in the first quarter of 1995 to $176,000
in the fourth quarter of 1995 to $436,000 in the first quarter of 1996 to $2.2
million in the fourth quarter of 1996. The growth in revenues was primarily due
to an increase in the number of paying subscribing dealerships in the Company's
new vehicle marketing programs from 253 as of December 31, 1995 to 1,206 as of
December 31, 1996, and, to a lesser extent, increases in average dealership
fees.
 
  Since its inception in January 1995, the Company has derived substantially
all of its revenues from fees paid by its paying subscribing new vehicle
dealerships. Currently, these fees typically consist of (i) initial
subscription fees ranging from $2,500 to $4,500, (ii) annual fees of $2,500 and
(iii) monthly fees ranging from $250 to $1,500. These dealership fees are
fixed. However, under the Company's marketing agreements, which less than half
of subscribing dealerships have signed, the Company may typically increase or
decrease dealership fees with 30 or 60 days' prior notice. For example, the
average initial and monthly fee paid by the Company's subscribing dealerships
increased from approximately $2,300 and $250, respectively, in December 1995 to
approximately $3,300 and $400 in December 1996. Average annual fees increased
from $2,300 in May 1996 to $2,400 in December 1996. The Company intends to
continuously review its pricing structure and adjust dealership fees in a
manner commensurate with its ability to reduce a dealership's selling costs but
there can be no assurance that dealership fees will continue to increase in the
future.
 
  In April 1996, the Company introduced its new vehicle marketing service in
Canada and, as of December 31, 1996, the Company had 72 paying franchises of
subscribing dealerships located in Canada. In 1996, the Company derived
approximately 98% of its revenues from dealership fees paid by subscribing
 
                                       23

<PAGE>
 
dealerships located in the United States and 2% of its revenues from dealership
fees paid by subscribing dealerships in Canada. Fees from Canadian dealerships
are denominated in U.S. dollars. To date, the Company has had limited
experience in providing its Internet-based marketing service abroad and there
can be no assurance that the Company will be successful in introducing or
marketing its service abroad or will not encounter foreign regulation of its
operations.
   
  New vehicle marketing revenues derived under subscription agreements are
recognized as follows: initial fees are recognized ratably over the first
twelve months following receipt, annual fees are recognized ratably over the
twelve months commencing when due, and monthly fees are recognized when due. In
certain instances, the Company will waive a newly subscribing dealership's
monthly fees for several months. Initial fees are typically paid prior to the
commencement of services. The Company typically bills its subscribing
dealerships prior to the due date of any monthly fees and annual fees. On
average, the Company collects outstanding receivables for monthly and annual
fees within two to three weeks of the due date. The Company's new vehicle
dealer fees are not calculated on a per vehicle basis. See "--Revenues,"
"Business--Dealership Network and Training," and Note 1.e of Notes to
Consolidated Financial Statements.     
   
  The introduction of new services by the Company's competitors, market
acceptance of Internet-related services in general and, in particular, demand
for the Company's services, and the introduction by the Company of new services
and market acceptance of such services may also result in significant
fluctuations in quarterly operating results. In addition, as a strategic
response to changes in the competitive environment, the Company may from time
to time make certain pricing or marketing decisions or establish strategic
relationships that could have a material adverse effect on the Company's
business, results of operations or financial condition. In particular, the
Company may need to revise the marketing fees it charges to subscribing
dealers. There can be no assurance that subscribing dealerships will continue
to participate in the Company's marketing program or agree to future fee
increases. Currently, less than half of subscribing dealerships have entered
into written marketing agreements with the Company and these subscribing
dealerships may cancel subscriptions on 30 days' prior notice. As a result,
quarterly sales and operating results may vary significantly in response to any
significant change in the number of subscribing dealerships. In December 1996,
the Company commenced an effort to have all subscribing dealerships execute
revised marketing agreements with the Company, which have been revised to
provide, among other things, that such dealerships will not participate in any
other Internet-based or online program with attributes similar to those of the
Auto-By-Tel program. At the same time, the Company commenced a program to have
all subscribing dealerships enter into written agreements relating to the Auto-
By-Tel financing program. As of March 11, 1997, approximately 48% and 26% of
all subscribing dealerships had signed the revised marketing agreement and the
financing agreement, respectively. Some of the Company's dealers have resisted
signing written agreements and there can be no assurance that the Company will
be able to convince its subscribing dealers to enter into written agreements
with the Company or revise existing agreements or that the Company's efforts to
cause subscribing dealers to sign these agreements will not result in the
subscribing dealers terminating their relationship with Auto-By-Tel. See
"Business--Dealership Network and Training."     
 
 MARKETING AND ADVERTISING
 
  Marketing and advertising expenses have historically consisted primarily of
referral fees paid to online automotive information providers, online service
providers and online search engine companies which recommend and refer
consumers to the Auto-By-Tel Web site or allow consumers to complete Auto-By-
Tel vehicle purchase requests on their Web sites. Other marketing and
advertising expenses include print advertising, public relations expenses,
salaries and associated expenses related to the Company's marketing personnel.
Marketing and advertising expenses were $476,000 in 1995 and $4.4 million in
1996. Marketing and advertising expenses increased each successive quarter,
from $6,000 in the first quarter of 1995 to $302,000 in the fourth quarter of
1995 to $475,000 in the first quarter of 1996 to $2.0 million in the fourth
quarter of 1996. Marketing and advertising expenses increased due to increased
referral fees paid as a result of increased vehicle purchase requests,
increased print advertising, and the addition of marketing and advertising
employees as well as national
 
                                       24

<PAGE>
 
print and television branding efforts. The marketing and advertising staff grew
from two employees as of December 31, 1995 to five employees as of December 31,
1996. The Company anticipates that the overall level of marketing and
advertising expenditures will increase significantly in the future,
particularly in the first half of 1997 in connection with the Company's efforts
to further increase awareness of the Auto-By-Tel brand name. The Company
commenced cable television advertising in the fourth quarter of 1996 and
launched network television advertising in the first quarter of 1997. Due to
seasonal variations in the timing of marketing and advertising expenditures,
the Company anticipates that marketing and advertising expenses will vary
significantly from quarter to quarter.
 
 SELLING, TRAINING AND SUPPORT
 
  Selling, training and support expenses consist primarily of dealer training
and support, salaries and related costs for customer service personnel and
travel and entertainment. Selling, training and support expenses were $454,000
in 1995 and $3.2 million in 1996. Selling, training and support expenses
increased each successive quarter, from $13,000 in the first quarter of 1995 to
$207,000 in the fourth quarter of 1995 to $362,000 in the first quarter of 1996
to $1.4 million in the fourth quarter of 1996. Selling, training and support
expenses increased primarily as the result of the addition of selling,
training, and support staff and the associated overhead and employment costs.
Selling, training and support staff grew from 11 employees as of December 31,
1995 to 39 employees (including two in Canada) as of December 31, 1996.
   
  Much of the Company's advertising is placed on Web sites maintained by online
service providers and online search engine companies. The Company's advertising
agreements with online service providers and search engine companies are
generally short-term contracts or are otherwise cancelable on short notice.
There can be no assurance that these advertisers will not cancel such
contracts, or that competitors will not be able to displace Auto-By-Tel from
its preferred advertising arrangements with such companies. The intense
competition in the sale of Internet advertising, including competition from
other vehicle marketing services, has resulted in a wide range of rates quoted
by different vendors for a variety of advertising services. This makes it very
difficult to project future levels of Internet advertising costs and
availability of prime advertising space. The Company has also entered into
agreements with automotive information services, such as Edmunds and Microsoft
CarPoint, to display the Company's services on their Web sites. These
agreements require the Company to pay such entities a fee for each user who
submits a vehicle purchase request to Auto-By-Tel from their sites.
Accordingly, any increase in the volume of purchase requests will result in
increased advertising costs, but revenue from dealers will not necessarily
increase thereafter. The Company is also incurring significant expenses to
increase awareness of its Internet-based marketing service in print and
television media. The Company expects these expenses to increase significantly,
particularly in the first half of 1997. In the fourth quarter of 1996, the
Company began to advertise on cable television. In the first quarter of 1997,
the Company commenced advertising on network television, including a 30 second
commercial which aired during the Super Bowl. See "Business--Marketing and
Sales."     
 
 TECHNOLOGY DEVELOPMENT
 
  Technology development expenditures are charged to expense as incurred and
consist primarily of personnel and related compensation costs and contract
labor to support software development and configuration and implementation of
the Company's Internet, telecommunications and support system infrastructure.
Technology development expenses have increased significantly since the
Company's inception, from $6,000 in the first quarter of 1995 to $67,000 in the
first quarter of 1996 to $954,000 in the fourth quarter of 1996. Technology
 
                                       25

<PAGE>
 
development expenses increased primarily as a result of increased third party
software development costs and increased costs associated with the increase in
technical headcount from one employee as of April 25, 1996 to 12 employees as
of December 31, 1996 and, to a lesser extent, additional indirect costs
associated with the Company's expanded technology development efforts. These
increased expenditures were necessary to support the Company's development of
its Dealer Realtime System, the used vehicle program software and systems, and
the rollout of the financing and lease programs.
 
 GENERAL AND ADMINISTRATIVE
 
  General and administrative expenses consist primarily of salaries of
financial and administrative personnel, a portion of salaries of other
managerial personnel and related travel expenses, as well as legal and
accounting expenses. General and administrative expenses increased each
successive quarter, from $14,000 in the first quarter of 1995 to $105,000 in
the fourth quarter of 1995 to $134,000 in the first quarter of 1996 to $1.0
million in the fourth quarter of 1996. General and administrative expenses
increased primarily as a result of increased accounting and legal expenses,
and the addition of administrative and financial staff. The general and
administrative staff grew from three employees as of December 31, 1995 to 17
employees as of December 31, 1996. The Company intends to increase the
absolute dollar level of general and administrative expenses in future
periods. The Company anticipates significant additions to its managerial,
technical, sales and marketing and administrative personnel in order to
support the Company's growth and business objectives. To the extent that such
expenses exceed, precede or are not subsequently followed by increased
revenues, the Company's business, results of operations and financial
condition will be materially adversely affected.
 
 OTHER INCOME (EXPENSE), NET
 
  Other expense in the second and third quarters of 1996 consisted of interest
expense on amounts borrowed from the Company's Chairman, John Bedrosian, and
Michael Fuchs, who subsequently became a director of the Company. These
amounts were loaned to the Company to allow the Company to meet its liquidity
requirements. Following the Company's $15.0 million financing in August 1996,
the Company repaid the amounts borrowed from Mr. Bedrosian, together with
$20,000 of accrued interest expense, and converted the amounts borrowed from
Mr. Fuchs, together with accrued interest, into Series A Preferred Stock. The
Company realized $40,000 and $108,000 of interest income in the third and
fourth quarters, respectively, as a result of increased cash balances derived
from the issuance of Series A Preferred Stock. See Notes 3 and 5.a of Notes to
Consolidated Financial Statements.
 
 INCOME TAXES
 
  No provision for federal and state income taxes has been recorded as the
Company incurred operating losses through December 31, 1996. As of December
31, 1996, the Company had approximately $4.7 million of net operating loss
carryforwards which are available to offset future federal and state taxable
income; such carryforwards expire in various years through 2011. Under the Tax
Reform Act of 1986, the amounts of and the benefits from net operating loss
carryforwards may be impaired in certain circumstances. Events which may cause
such limitations in the amount of available net operating losses which the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. As of
December 31, 1996, the effect of such limitation, if imposed, has not been
determined. The Company has provided a full valuation allowance on the
deferred tax asset because of the uncertainty regarding its realization. See
Note 4 of Notes to Consolidated Financial Statements.
 
 LIQUIDITY AND CAPITAL RESOURCES
 
  As of December 31, 1996, the Company had approximately $9.1 million in cash
and short-term investments. Since its inception, the Company has financed its
operations primarily through loans from John Bedrosian, the Company's Chairman
and co-founder, loans from Mr. Michael Fuchs, who subsequently became a
director of the Company, and the issuance of Preferred Stock in August 1996
and January 1997. See "Certain
 
                                      26

<PAGE>
 
Transactions." For fiscal 1995 and 1996, cash used in operating activities was
primarily attributable to the net losses from operations and increases in
accounts receivable, prepaid expenses and other assets, offset to some extent
by increases in deferred income and other current liabilities. For the year
ended December 31, 1996, cash used in investing activities was attributable to
purchases of property and equipment consisting primarily of computer hardware,
telecommunications equipment, furniture and leasehold improvements.
 
  The Company has no material commitments other than those under the operating
lease for its principal executive offices and certain marketing and
advertising agreements and arrangements (considered in the aggregate) for the
next twelve months. However, the Company anticipates a substantial increase in
its capital expenditures and operating lease expenses in 1997. The Company
believes that the net proceeds from this offering, along with current cash and
cash equivalents, will be sufficient to fund its working capital and capital
expenditure requirements for at least the next twelve months. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
liquidity requirements, the Company may seek to issue additional equity or
debt securities or establish a credit facility. The issuance of additional
equity or convertible debt securities could result in additional dilution to
the Company's shareholders. There can be no assurance that financing will be
available to the Company in amounts or on terms acceptable to the Company. See
"Use of Proceeds" and Notes 2, 3, 5, 6, 7 and 8 of Notes to Consolidated
Financial Statements.
 
                                      27

<PAGE>
 

 
                                  BUSINESS
 
OVERVIEW
 
  Auto-By-Tel is establishing a nationally branded Internet-based marketing
service for new and used vehicle purchasing and related consumer services. The
Company's Web site (www.autobytel.com) enables consumers to gather valuable
information about automobiles and light duty trucks ("vehicles") and shop for
vehicles and related consumer services from the convenience of their home or
office. This convenience, coupled with low, haggle-free pricing and quick and
courteous service, improves consumers' overall buying experiences. The
Company's Internet-based alternative to traditional vehicle retailing
dramatically reduces participating dealerships' selling costs per vehicle and
increases sales volumes by channeling a large number of ready-to-buy, well-
informed consumers to Auto-By-Tel dealerships. The Company's Internet-based
services are free to consumers and, to date, the Company has derived
substantially all of its revenues from fees paid by subscribing dealerships.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Revenues."
 
  Consumers wishing to purchase new vehicles through the Company's services
complete a request available on the Company's and its partners' Web sites
which specifies the type of vehicle and accessories desired, along with the
consumer's phone number, e-mail address and zip code. The purchase request is
then forwarded to the Auto-By-Tel participating dealership located in the
consumer's geographic area. Typically, consumers are contacted by dealers
within 48 hours with a firm, competitive quote for the vehicle, eliminating
the unwelcome and time-consuming task of negotiating with the dealer and thus
facilitating completion of the sale. As of December 31, 1996 the Company's
Internet-based dealership base consisted of (i) 1,206 paying franchises of
dealerships, (ii) 509 non-paying franchises affiliated with paying dealerships
(collectively, "subscribing dealerships"), and (iii) approximately 230 "trial
dealers." Non-paying franchises are typically franchises of lower-volume
manufacturers affiliated with paying franchises participating in the Auto-By-
Tel program. The Company enters into agreements with non-paying franchises to
ensure that it is able to serve the broadest base of customers and increase
its geographic coverage for the make of vehicle represented by the non-paying
franchise. Accommodating non-paying franchises allows Auto-By-Tel to offer
additional benefit to its dealership network and represents a potential source
of additional financing and insurance revenue. In addition, the Company may
begin charging marketing fees to a non-paying franchise which begins to
receive a sufficient number purchase requests. From the commencement of
operations in March 1995 to December 31, 1996, the Company received more than
385,000 new vehicle purchase requests. See "Dealership Network and Training."
 
INDUSTRY BACKGROUND
 
 Information and Commerce on the Internet
 
  The Internet is a network of computers which enables users to access and
share information and conduct business transactions. Much of the recent growth
in the use of the Internet by businesses and individuals has been driven by
the emergence of the World Wide Web (the "Web") which enables non-technical
users to exploit the resources of the Internet. International Data Corporation
("IDC") estimates that the number of Web users increased from 16.1 million at
the end of 1995 to 34.6 million at the end of 1996 and that this number will
increase to 163 million by the end of the year 2000.
 
  The emergence of the Internet as a significant communications medium is
driving the development and adoption of Web content and commerce applications
that offer convenience and value to consumers, as well as unique marketing
opportunities and reduced operating costs to businesses. By hosting
information about products and services on the Web, a company can enable
potential customers in any geographical area to gather relevant, in-depth
information about products and services at their convenience and according to
their preferences. A growing number of consumers have begun to transact
business electronically, such as paying bills, booking airline tickets,
trading securities and purchasing consumer goods, including personal
computers, consumer electronics, compact disks, books and vehicles. Moreover,
online transactions can be faster, less expensive and more convenient than
transactions conducted through a human intermediary. In addition, Web commerce
 
                                      28

<PAGE>
 
applications enable businesses to rapidly target and economically manage a
broad customer base and establish and maintain ongoing direct customer
relationships. IDC estimates that the dollar value of goods and services
purchased over the Web will increase from approximately $318 million in 1995
to $95 billion in the year 2000.
 
  The increasing use of the Internet has encouraged information providers to
post their automotive information on the Internet. For example, Kelley Blue
Book (www.kbb.com), Edmund Publications (www.edmund.com), AutoSite
(www.autosite.com), IntelliChoice (www.intellichoice.com) and Microsoft's
CarPoint (carpoint.msn.com) all maintain Web sites that allow consumers to
conduct comprehensive automotive research online. The marketing capabilities
of the Web, combined with the easy availability of automotive information,
have enabled the establishment of Web-based vehicle marketing services. Many
of these services may be characterized as either online services sponsored by
technology providers with little understanding of the automobile and light
duty truck markets, or Web sites published by traditional vehicle dealers or
manufacturers which do not effectively utilize the capabilities of the
Internet to provide an effective buying solution.
 
 New Vehicle Retailing
 
  Buying a new vehicle is the second largest purchase an average consumer
makes. According to the National Automobile Dealers Association ("NADA"), the
industry's largest dealer organization, $293 billion was spent by consumers in
the United States in 1995 on new vehicles, representing 14.8 million new
units. Although it attracts significant consumer dollars, the vehicle sales
process has not changed significantly in the last 25 years. In the United
States, new vehicles are sold almost exclusively by approximately 22,000
dealerships franchised by manufacturers.
 
  The excitement of purchasing a new vehicle is often muted by the fear of
being misled, intimidated or pressured into making a purchase decision.
Dealerships typically retain multiple levels of sales personnel trained in
sales, deal closing, finance and insurance. As a result, a consumer is often
faced with the prospect of negotiating with numerous individuals, all of whom
receive compensation based on a percentage of the profits on each sale. This
makes it difficult for a consumer to receive clear information or a fair price
without protracted and unpleasant negotiation. These dynamics often result in
low consumer satisfaction as consumers view sales tactics utilized by some
dealers as self serving, unfair, intimidating or overbearing.
 
  Notwithstanding the magnitude of the new vehicle market, the automotive
dealer infrastructure is under pressure and consolidating. The new vehicle
retailing business is fiercely competitive due to an overabundance of dealers.
A significant number of dealers not only compete against dealers franchised by
other manufacturers, but against dealers located in the same geographical area
who are affiliated with the same manufacturer. In addition, the typical
business model of a new vehicle dealership is capital intensive, requiring
significant investments in inventory, and is characterized by an expensive
sales cost structure and significant pressure to increase per unit gross
profit. These factors have fostered industry consolidation resulting in a 27%
decrease in the number of dealerships in the last 25 years. According to J.D.
Power and Associates, a recognized automobile industry market research firm,
this consolidation trend is likely to continue in the future.
 
  The historic abundance of dealerships and the resulting intense competition
have led to the development of high-pressure sales methods designed not only
to complete the sale of new vehicles, but also to increase per unit gross
profit from additional product sales to the same consumer, such as vehicle
accessories, financing, insurance and extended service contracts. These high-
pressure sales methods have resulted in low consumer satisfaction and low
sales productivity. The Company believes that the productivity of a typical
retail salesperson has essentially remained unchanged over the past 10 years.
In order to overcome this low productivity, a dealership must generate more
sales leads by spending significant amounts to market its franchise, maintain
a large selection of vehicles and improve the physical premises to attract
consumers. These efforts are often accompanied by high priced print and
television advertising. These factors, combined with the high cost of
attracting and retaining the numerous sales personnel required to effect
vehicle sales utilizing current sales methods, have significantly increased
the average cost per new vehicle sold. According to NADA, average labor and
overhead costs (exclusive of floor plan and prorated rent expenses) incurred
per vehicle sold in 1995 totaled approximately
 
                                      29

<PAGE>
 
$1,120 and average marketing and advertising cost per vehicle sold in 1995
totaled $219. Increased costs contributed to an average loss to dealers of $22
per new vehicle sold in 1995.
 
  Low consumer satisfaction and the inefficient nature of traditional vehicle
retailing have left both consumers and retailers seeking an alternative means
of buying and selling automobiles and light duty trucks.
 
THE AUTO-BY-TEL SOLUTION
 
  Auto-By-Tel is establishing a nationally branded Internet-based marketing
service for new and used vehicle purchasing and related consumer services.
Using the Internet, consumers in the United States and Canada submit purchase
requests on the Company's and its partners' Web site. Each purchase request is
then forwarded to the Auto-By-Tel dealership located in the consumer's
geographic area. The dealership then telephones the consumer with a firm,
competitive price. By providing an Internet-based alternative to traditional
vehicle retailing, Auto-By-Tel provides the following benefits:
 
  Benefits to Consumers. Using Auto-By-Tel's Internet-based marketing program,
consumers benefit from the convenience and privacy of shopping from their home
or office; online access to a wide range of up-to-date information about
vehicle models, options and dealer costs; receipt of a competitive price
without the need to haggle; and quick and courteous delivery of the vehicle.
 
  Benefits to Dealers. One of the goals of the Auto-By-Tel program is to
significantly reduce dealers' labor and marketing costs attributable to a
vehicle sale. The Company provides participating dealers a high-volume of
quality purchase requests at a low cost. These requests are submitted by
consumers who have indicated their level of purchase commitment and who, in
most cases, have already conducted research on their desired vehicle. As a
result, dealers can complete the sales process more quickly and efficiently
under the Auto-By-Tel program than via traditional sales methods, thereby
reducing a dealer's labor costs. In addition, participating dealers can reduce
their average per vehicle marketing costs by gaining access to a large number
of serious purchasers without incurring the expense of incremental
advertising.
 
STRATEGY
 
  The Company is committed to being the premier nationally branded, Internet-
based marketing service for new and used vehicles and related consumer
services. Key elements of the Company's strategy include:
 
  Enhancing the Strength of Auto-By-Tel Brand Name. The Company believes that
enhancing the strength of the Auto-By-Tel brand name and positioning itself as
the industry standard for Internet-based, consumer friendly, low cost vehicle
purchasing and related consumer services is critical in its efforts to attract
vehicle buyers and to increase the size of its subscribing dealership base.
The Company further believes that the early stage of Internet commerce and the
Company's leadership in the development of the Internet-based vehicle
purchasing market provide it with an opportunity to establish a level of
branding not typically available to newer companies. A key element of the
Company's strategy is to devote significant management and financial resources
to brand name-building activities, including advertising in online and
traditional print and television media, public relations initiatives and
participation in industry conferences and trade shows. The Company
aggressively promotes awareness of its brand name primarily through (i)
strategic marketing relationships with Internet-based automotive information
providers including AutoSite, Edmund's and Microsoft CarPoint, (ii) Internet
advertising (sometimes on an exclusive or preferred basis) on online search
engines, such as Excite, Magellan, and WebCrawler, (iii) online service
providers, such as America Online's Digital Cities, CompuServe and Prodigy and
(iv) in popular automotive and Internet related magazines. Recently, the
Company began to place advertisements in a number of additional leading
magazines and on television in order to reach a wider audience, strengthen the
awareness of the Auto-By-Tel brand name and drive consumer traffic to the
Company's Web site.
 
  Maintaining, Strengthening and Expanding Online and Internet
Relationships. Contractual agreements with online services, Internet search
engine companies, and other service providers which recommend and refer
 
                                      30

<PAGE>
 
consumers to the Company or allow consumers to complete purchase requests on
their Web sites are critical to increasing the Company's visibility on the
Internet, enhancing the strength of its brand name and generating a high
volume of purchase requests. For example, the Company has exclusive or
preferred position on Web sites maintained by AutoSite, Edmund's and Microsoft
CarPoint. The Company intends to strengthen its relationships with existing
Internet referral sources and continue to seek exclusive or preferred
arrangement with such sources. In addition, the Company continues to seek
opportunities to promote its services on other Web sites or to enter into
strategic alliances with or acquisitions of complementary service providers.
See "Marketing and Sales."
 
  Continuing to Expand and Upgrade Technology Infrastructure. The Company
believes that its future success is significantly dependent on its ability to
continuously improve the speed and reliability of its Web site, accommodate
increasing traffic and enhance communication functionality with its consumers
and dealers. The Company has recently added the capability to communicate with
dealers online and upload information, including photographs, on a weekly
basis, about their used vehicle inventory to the Company's used vehicle
database. The Company plans to continue to expand its technological
infrastructure, enhance the security and reliability of the Company's Web site
and develop additional sophisticated software applications and user interfaces
to accommodate planned services.
 
  Expanding Dealership Base and Improving Dealer Service. The Company believes
that the size and quality of its participating dealership base is critical to
the success of its business. The Company intends to capitalize on its
marketing and advertising programs to further the expansion of its dealership
base. This expansion would provide the Company with the ability to increase
its geographic penetration and improve its ability to service the purchase
requests of a greater number of consumers. In addition, the Company believes
that increased consumer satisfaction with the vehicle purchasing experience is
essential to the success and differentiation of its services. Accordingly, the
Company maintains an extensive training program for its participating
dealerships which includes the initial and ongoing training of dealership
representatives and emphasizes rapid response times, a firm competitive price
quote and fair and honest treatment of its consumers. The Company regularly
solicits consumer feedback and monitors dealership compliance with the Auto-
By-Tel program.
 
  Leveraging Existing Auto-By-Tel Brand Name and Marketing Model with
Additional Services. The Company continually evaluates opportunities to
leverage the Auto-By-Tel brand name and its Internet-based vehicle purchasing
model by introducing new and complementary services. For example, the Company
has an alliance with AIG to offer the Company's consumers high-quality and
price competitive vehicle insurance and an agreement with Chase Manhattan to
provide competitive new and used vehicle financing to consumers with prime
credit ratings. The Company is negotiating similar relationships with several
leading financial institutions to provide new and used vehicle leasing
services and vehicle loans to sub-prime credit consumers. The Company also
plans to introduce used vehicle marketing services and an affinity program to
further penetrate its potential consumer base. The Company currently expects
these new service offerings to be launched in the first half of 1997.
 
  Pursuing International Growth Opportunities. The Internet and online service
providers enable the Company to market its services internationally. The
Company believes that its vehicle purchasing model can be adapted for use in
countries in which the vehicle retailing industry faces structural
inefficiencies and consumer dissatisfaction similar to that experienced in the
United States. The Company recently introduced its service in Canada and as of
December 31, 1996, had a subscribing dealership base of 72 Canadian franchises
and, in the fourth quarter of 1996, processed over 3,000 purchase requests
from Canadian consumers.
 
  Leveraging Proprietary Consumer Information. The Company's growing database
may, in the future, have the potential to provide dealers and manufacturers
with improved information regarding consumer preferences which they may
utilize to streamline purchasing and production decisions.
 
                                      31

<PAGE>
 
PRODUCTS AND SERVICES
 
  The Company's existing and currently planned Internet-based services
include:
 

<TABLE>   
<CAPTION>
     EXISTING
     SERVICES                    LAUNCH DATE                      DESCRIPTION
     --------                    ------------ ---------------------------------------------------
 <S>                             <C>          <C>
 New vehicle                     March 1995   This service offers a cost-effective new vehicle
  marketing                                   purchasing method which allows consumers to submit
  service                                     purchase requests to local dealers who promptly
                                              contact the consumer with a firm, competitive price
                                              over the telephone.
 Insurance                       August 1996  The Company entered into a marketing agreement with
  marketing                                   AIG in August 1996, to provide a vehicle insurance
  service                                     service through the Company's Web site. This
                                              service allows users to submit insurance requests
                                              for quotes online in order to more rapidly arrange
                                              for their personal automobile insurance at
                                              competitive rates.
<CAPTION>
                                 ANTICIPATED
 PLANNED SERVICES                LAUNCH DATE                      DESCRIPTION
 ----------------                ------------ ---------------------------------------------------
 <S>                             <C>          <C>
 Used vehicle                    Q2 1997      This service will allow consumers to purchase high-
  marketing                                   quality used vehicles available at local area
  service                                     dealerships by searching an extensive database of
                                              used vehicles which have been certified to meet
                                              certain Auto-By-Tel standards.
 Financing and leasing services               In October 1996, the Company entered into an
  New vehicles                                agreement with Chase Manhattan, pursuant to which
 . Prime credit                  Q1-Q2 1997   Chase Manhattan will receive online credit
 . Sub-prime credit              Q2 1997      applications from consumers referred by the
 . Leasing                       Q2 1997      Company. In addition, the Company is negotiating
  Used vehicles                               with several leading financial institutions to
 . Prime credit                  Q2 1997      offer financing to new and used vehicle consumers
 . Sub-prime credit              Q2 1997      with sub-prime credit ratings, as well as new and
 . Leasing                       Q2 1997      used vehicle leasing services.
 Credit union                    Q2 1997      The Company intends to launch a customized
  program                                     marketing service to credit unions to assist their
                                              members in purchasing new and used vehicles through
                                              Auto-By-Tel participating dealerships.
 Affinity program                Q3 1997      Consumers may join the Company's affinity program,
  (ABT Mobilist)                              which will provide discounted services, including
                                              roadside assistance programs, discounted travel
                                              products and special credit card programs.
</TABLE>
    
 
  New vehicle marketing service. Consumers who purchase new vehicles through
the Company's Web site complete a purchase request over the Internet which
specifies the type of vehicle and accessories the consumer desires, along with
the consumer's phone number, e-mail address and zip code. The purchase request
is then forwarded to the Auto-By-Tel participating dealership located in the
consumer's geographic area and the Company promptly returns an e-mail message
to the consumer informing the consumer of the dealership's name and phone
number and the name of the Auto-By-Tel manager at the dealership. Typically,
the consumer is contacted by the dealership by telephone within 48 hours with
a firm, competitive quote for the vehicle, eliminating the unwelcome and time
consuming task of negotiating with the dealer and thus facilitating completion
of the sale. Consumers usually complete their purchase and take delivery of
their vehicles at the dealership showroom. Generally, within 10 days of the
submission of the consumer's purchase request, the Company contacts the
consumer by e-mail requesting completion of a quality assurance survey on the
Company's Web site that is used by the Company and its dealers to improve the
quality of dealer service and allows the Company to evaluate the sales process
at participating dealerships.
 
                                      32

<PAGE>
 
  The Auto-By-Tel network of subscribing dealerships has grown from 367
franchises as of December 31, 1995 to 1,715 franchises as of December 31,
1996. 230 dealers were participating in the Auto-By-Tel program on a non-
paying trial basis as of December 31, 1996. Subscribing dealerships are
charged initial fees, annual fees and monthly fees to participate in the Auto-
By-Tel marketing program. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Revenues."
   
  Insurance marketing services. According to Best Executive Data Service, the
United States' market for total written personal auto insurance premiums
totalled $104 billion in 1995. In August 1996, the Company began offering
vehicle insurance to its consumers through an online program with certain
member companies of AIG. The Company's Web site currently offers a direct
hyperlink to the specific Web site for such AIG member companies which enables
consumers to submit requests for quotes and, when the service is fully
implemented, be approved for insurance online. The Company's agreement with
AIG provides for fees to the Company to be calculated as a percentage of the
net premiums earned and collected by AIG on policies issued to Auto-By-Tel
consumers.     
 
  Used vehicle marketing service. The market for used vehicles in the United
States was estimated by NADA to be $370 billion in 1995, of which $182 billion
represented sales of used vehicles by new vehicle franchised dealers. This
market has been growing rapidly, due primarily to increasing prices for new
vehicles and the large supply of high-quality, late model used vehicles
created by the recent trend toward short-term leasing. Used vehicle
departments at many dealers are more profitable than new vehicle departments.
 
  The Company intends to leverage its brand name and new vehicle dealership
network by launching similar marketing services for used vehicles during the
first half of 1997. Unlike existing Internet services which act as unwieldy
electronic classified ads, the Auto-By-Tel used vehicle program will display
to consumers a wide selection of vehicles available in the consumer's specific
locale, tailored to their individualized search parameters. This display will
eventually provide warranty and price information on the used vehicle,
including updated retail and wholesale prices and the Auto-By-Tel dealership
price, and, when available, a digital photograph of the used vehicle.
Consumers could then place a purchase request for the used vehicle and would
be contacted by the dealer to conclude the sale.
 
  To ensure that the used vehicles being sold through the service are of the
highest quality, dealers are required to certify that their used vehicles meet
Auto-By-Tel certification standards and to provide a nationwide, limited 90
day warranty. Consumers also receive a 72-hour, money-back guarantee on their
purchases which any dealership in the Auto-By-Tel used vehicle program will be
required to honor. Only dealers participating in the new vehicle program will
be eligible to participate in the used vehicle program.
 
  The Company will charge each new vehicle subscribing dealership that wishes
to participate in the Company's used vehicle program a separate and additional
signup and annual fee per franchise. The Company anticipates that these fees
would initially be lower than those charged in the new vehicle program and is
currently considering charging additional sign-up fees ranging from $1,500 to
$2,500, annual fees ranging from $1,500 to $2,500. In addition, the Company
intends to charge daily listing fees (typically ranging from $1.25 to $2.00)
for each used vehicle marketed on the service which will be priced according
to the number of used vehicles a dealer lists with the Auto-By-Tel program.
 
  Finance and leasing services. The Company intends to make financing
available to consumers purchasing new and used vehicles through the Auto-By-
Tel programs. The Auto-By-Tel financing program will be economical, convenient
and private. Vehicle buyers will be able to apply for a loan online at the
time they submit their purchase request for either a new or used vehicle. The
Company believes that the loans and leases offered through its service will be
competitive with those currently available through major financial
institutions.
 
  The Auto-By-Tel financing program will benefit lenders, lessors, consumers,
and dealers. Finance companies and dealers will benefit from reduced paperwork
and processing costs. Consumers will be able to arrive at the dealership with
their loan pre-approved, their credit verification documents in hand, and the
loan paperwork waiting for them. This will enable immediate delivery and allow
the dealer to be more rapidly paid by the lender, thereby accelerating the
dealer's cash flow. The Company believes that the convenience of attractive
financing, combined with a firm, competitive price, will increase the closing
rates on sales attributable to Auto-By-Tel purchase request referrals.
 
                                      33

<PAGE>
 
  In October 1996, the Company entered into an agreement with Chase Manhattan
to receive credit application for new vehicle financing from consumers who
submit purchase requests. This arrangement is intended for consumers with
prime credit ratings. The agreement has a term of three years but may be
terminated sooner by Chase Manhattan with six months' notice or in the event
that Auto-By-Tel fails to refer to Chase Manhattan a prescribed percentage of
loan application requests received by Auto-By-Tel, or the referred loan
applications do not result in a prescribed percentage of loans generated by
Chase Manhattan, or Auto-By-Tel otherwise breaches the agreement. The Company
anticipates that, when the service is implemented, consumers will be able to
access Chase Manhattan's credit applications through the Company's Web site,
submit their loan applications online and, depending on the creditworthiness
of the consumer, have their loan requests approved electronically while they
wait. All responses will be routed simultaneously to the subscribing
dealership. The Auto-By-Tel financing program will enable consumers to receive
up front, competitive loans from the privacy of their home or office,
eliminating the need to negotiate a loan with the traditional car dealership's
F&I (finance and insurance) department or visit their local bank or credit
union. Chase Manhattan will pay the Company an origination fee for most loans
and the dealership will be compensated for each loan made to an Auto-By-Tel
consumer. The Company anticipates that this service will be implemented during
the first half of 1997.
 
  The Company is negotiating with several financial institutions to offer new
and used vehicle leasing programs and financing programs for new and used
vehicle purchasers with sub-prime credit ratings. The Company believes that
origination fees will vary depending on the credit qualifications of
applicants. The Company currently expects to launch a financing program for
consumers with sub-prime credit ratings in the second quarter of 1997. The
Company expects to begin offering leasing for new and used vehicles by the end
of the second quarter of 1997.
 
  Credit Union Program. Auto-By-Tel believes that credit unions, which assist
their members in acquiring and financing new and used vehicles, represent an
attractive market for its marketing services. There are presently about 11,800
credit unions in the U.S. with about 70 million members according to Callahan
and Associates, a recognized authority on the credit union industry. Credit
unions account for $80 billion in vehicle loans outstanding as of June 30,
1996. The Company intends to launch a customized program for credit unions to
assist their members in purchasing new and used vehicles through Auto-By-Tel
participating dealers.
 
  The Company's program is designed to ensure that credit union members
receive the same competitive price and courteous service as the Company's
direct Internet customers, through access to Auto-By-Tel's participating
dealers, while allowing credit unions to provide for the financing needs of
their members. The Company's program will offer several Internet-based
solutions targeted toward credit union members.
 
  Affinity program (ABT Mobilist). In order to offer Auto-By-Tel consumers
additional services and encourage them to regularly revisit the Auto-By-Tel
Web site after purchasing their vehicles, the Company intends to begin
offering an Internet-based affinity program during the third quarter of 1997.
This program, which has been developed in conjunction with an affinity
consulting organization, may include various services, including an affinity
credit card, discount travel products, concierge services, discount cellular
phone service, entertainment services and special promotional offerings on
items such as auto parts. Members will accumulate credits to be applied
towards the purchase of automobiles or trucks through an Auto-By-Tel
subscribing dealer. The Company currently expects that consumers will pay an
annual fee for such programs as well as a small commission each time certain
services are utilized. The Company currently anticipates that the annual fee
to subscribers will range from approximately $39 to $59 depending upon the
level of membership.
   
  In order to generate additional revenues, attract more consumers to its Web
site and dealerships to its program and remain competitive, the Company must
successfully develop, market and introduce new services. The Company believes
that to achieve its objectives it will need to generate a substantial portion
of its future revenues from new services. None of these new services has been
fully developed and, in some cases, their introduction has been delayed due to
difficulties in software development encountered by the Company's Internet
partners. For example, the development of an Internet-based system to receive
and respond to loan applications was delayed due to difficulties in installing
desired encryption (a method by which information is coded and decoded during
transmission to prevent misappropriation) hardware and difficulties
experienced when testing the financing program with older Internet browser
software and the older Windows version 3.11 operating environment. There can
be no assurance that the Company will successfully develop or introduce these
new     
 
                                      34

<PAGE>
 
services, that such services will achieve market acceptance or that
subscribing dealerships will not view such new services as competitive to
services already offered by such dealerships. For example, consumers may be
reticent to purchase insurance or procure vehicle financing online. Also, it
may be more difficult to educate consumers as to the value of locating used
vehicles for purchase through the Internet since used vehicle purchases are
generally thought to require a greater level of hands-on involvement in the
inspection and purchase of a used vehicle. The Company intends to incur
additional expenses to develop and successfully market such services. To the
extent that revenues generated by such additional services are insufficient to
cover such expenses, the Company's operating results would be adversely
affected. Should the Company fail to develop and successfully market these
services, or should competitors successfully introduce competing services, the
Company's business, results of operations, and financial condition may be
materially and adversely affected.
 
MARKETING AND SALES
 
  The Company believes that enhancing its national brand name recognition and
position as a leading Internet-based marketing service is critical to its
efforts to increase the number of purchase requests and subscribing
dealerships. The growing number of Web sites which offer competing services
and the relatively low barriers to entry in providing Internet services
increase the importance of establishing and maintaining brand name
recognition.
 
  In order to enhance brand name awareness, the Company aggressively markets
its services to vehicle consumers and Internet users by advertising on the
Internet, in print media and on television. The Company has established
marketing programs with many of the leading automotive information providers
on the Internet, including AutoSite, Edmund's and Microsoft CarPoint. The
Company's agreements with automotive information providers typically have
terms ranging from one to three years, but some are cancellable with 30 days
notice. Under the agreements, Auto-By-Tel typically pays the automotive
information provider a monthly fee based on the number of users who submit
Auto-By-Tel purchase requests. In 1996, the Company incurred expenses related
to automotive information providers of approximately $630,000. The Company has
established a relationship with Edmund's, a leading source of online
automobile and light truck price and model information. Consumers are
sometimes referred to Auto-By-Tel from Edmund's. At other times, consumers
will begin at the Auto-By-Tel Web site and will be hyperlinked to the Edmund's
Web site to obtain price and model information, before returning to Auto-By-
Tel to submit a purchase request. The Company pays Edmund's a fee based on the
aggregate number of referred and returning consumers submitting a purchase
request. In 1996, approximately 170,000 consumers who eventually submitted
purchase requests with Auto-By-Tel either were referred to the Company from
Edmund's, or went to the Edmund's site and then returned to Auto-By-Tel. While
the Company expects the number of referrals and returning consumers from the
Edmund's Web site to remain significant, the percentage of consumers entering
from or visiting Edmund's during an Auto-By-Tel session has decreased in the
past several months due to (i) the availability of other automobile
information web sites, (ii) Auto-By-Tel's new practice of referring consumers
to an alternate automobile information provider, and (iii) the Company's
marketing efforts to encourage consumers beginning their automobile purchasing
sessions at the Company's Web site. Nevertheless, given the current level of
consumers accessing the Company from Edmund's, a change or termination in the
Edmund's arrangement could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Strategy."
 
  Auto-By-Tel continues to position itself as the leading vehicle and related
consumer services marketing program with major online services, such as
America Online's Digital Cities, CompuServe and Prodigy, and major Internet
search engine companies such as Excite, Magellan, and Web Crawler. The Company
believes that its comprehensive coverage of these Internet sites helps to
increase purchase request volume and will remain a critical element of the
Company's future business. Advertising agreements with these online service
providers and search engine companies are generally short-term contracts or
are otherwise cancelable on short notice. Payments under these agreements have
not been material to date. While no single online or search engine company has
individually accounted for material leads to the Company, these companies as a
group are a
 
                                      35

<PAGE>
 
material source of Internet referrals's to the Auto-By-Tel web site and the
Company believes an inability to continue advertising on online service
provider or search engine websites would adversely affect the Company.
 
  The Company supplements its coverage of Internet referral sources with
traditional print advertising. The Company has historically focused on
computer user and hobbyist publications and major automotive magazines. The
Company advertises in publications such as Car & Driver, Motor Trend, Road &
Track, and their respective buyers guides, as well as magazines such as
Internet World, OnLine Access and CompuServe to direct traffic to its Web
site. The Company has begun to expand this marketing with a campaign to
accelerate awareness of the Auto-By-Tel brand name and drive traffic to its
Web site through television ads featured on the CNN and MSNBC networks and
C/NET television programs. In the fourth quarter of 1996, the Company
commenced advertising on cable television and, in the first quarter of 1997,
launched national network television advertising (including a 30 second
commercial during the broadcast of the Super Bowl).
 
  The revolutionary nature of the Company's program compared to traditional
vehicle sales methods has also resulted in a significant amount of unpaid
media coverage. To date, the Company has been the subject of over 500
newspaper, magazine, radio and television stories. Articles about the
Company's new vehicle program have appeared in BusinessWeek, Fortune, Time,
and the Wall Street Journal. Television stories featuring the Company have
been aired on the NBC Nightly News and CNN. The Company believes that the
initial media coverage has been an important element in creating consumer
awareness of the Auto-By-Tel program and contributed to early dealership
subscriptions to the program.
 
  In addition to its consumer-oriented marketing activities, which help to
attract participating dealerships, the Company also markets its programs
directly to dealerships by soliciting targeted dealerships, participating in
trade shows, advertising in trade publications, and encouraging subscribing
dealerships to recommend the Auto-By-Tel program to other dealerships.
 
                                      36

<PAGE>
 
DEALERSHIP NETWORK AND TRAINING

                             [CHART APPEARS HERE]

Paying Franchises           0   38   111   253   546     728     978   1,206
Non-Paying Franchises       0   15    43   114   308     380     474     509
                          ---  ---   ---   ---   ---   -----   -----   -----
*Total Subscribing          0   53   154   367   854   1,108   1,452   1,715
                          ===  ===   ===   ===   ===   =====   =====   =====
- --------
* Does not include dealers who were participating on a trial basis. As of
  December 31, 1996, the Company had approximately 230 non-paying, trial
  dealers.
 
  As of December 31, 1996 the Company's participating dealership base
consisted of (i) 1,206 paying franchises of subscribing dealerships, (ii) 509
non-paying franchises affiliated with paying subscribing dealerships and (iii)
approximately 230 "trial dealers." A subscribing dealership is comprised of
one or more franchises with typically high volume vehicle sales (such as Ford
or Toyota). A subscribing dealership may sell vehicles from multiple
manufacturers and therefore have multiple subscribing dealer franchises.
Dealerships pay initial, annual and monthly fees per franchise to subscribe to
the Company's online marketing program. Non-paying franchises are typically
associated with lower-volume vehicle manufacturers (such as Audi, Saab or
Suzuki) and receive purchase request referrals without paying fees to Auto-By-
Tel. The non-paying franchise is typically affiliated with a paying franchise
participating in the Auto-By-Tel program. (For example, a paying Ford
dealership may also have a Volvo franchise at the same premises and this Volvo
franchise would be enrolled as a non-paying franchise and receive Auto-By-Tel
referrals without paying an additional fee.) The Company enters into
agreements with non-paying franchises to ensure that it is able to serve the
broadest base of customers and its geographic for the make of vehicle
represented by the non-paying franchise. Accommodating non-paying franchises
also allows Auto-By-Tel to offer additional benefit to its dealership network
and represents a potential source of additional financing and insurance
revenue. In addition, the Company may begin charging marketing fees to a non-
paying franchise which begins to receive a sufficient
 
                                      37

<PAGE>
 
number of purchase requests. The Company enters into informal arrangements
with potential dealership participants on a trial basis in order to assist the
Company and the dealership in evaluating the effectiveness of the Auto-By-Tel
program at such dealerships. The Company refers consumers to trial dealerships
but does not collect fees. As of December 31, 1996, approximately 230
dealerships were participating on a trial basis. In order to better serve
consumers, the Company intends to significantly increase the number of
participating North American dealership franchises by the end of fiscal 1998,
but there can be no assurance that it will be able to do so.
 
  Although the number of the Company's subscribing dealerships has increased
in every quarter since the Company's inception, the Company periodically
terminates agreements or relationships with subscribing dealerships when the
Company receives repeated complaints from consumers regarding dealer sales
practices that conflict with the Auto-By-Tel marketing program. Currently,
less than half of subscribing dealerships have entered into written agreements
with the Company. Dealership marketing agreements have a five year term but
are cancelable by either party with 30 days notice. From inception through
February 28, 1997, the loss of paying dealerships due to terminations by the
Company and cancellations by dealerships totaled 85 and 145 franchises
respectively. This represented a termination attrition rate of 6.8% from
inception through February 28, 1997 (85 terminated paying dealerships divided
by a high of 1,256 paying dealerships during the period) and a cancellation
attrition rate of 11.5% from inception through February 28, 1997 (145
cancelling paying dealerships divided by a high of 1,256 paying dealerships
during the period). These losses were more than offset by new subscribing
dealerships during the same period.
 
  In December 1996, the Company commenced an effort to have all subscribing
dealerships execute written marketing agreements with the Company which have
been revised to provide, among other things, that such dealerships will not
participate with any other program with attributes similar to those of the
Auto-By-Tel program. At the same time, the Company has begun a program to have
all subscribing dealerships enter into written marketing agreements relating
to the Auto-By-Tel financing program. As of March 11, 1997, approximately 48%
and 26% of all subscribing dealerships had signed the revised marketing
agreement and the financing agreement, respectively. Some of the Company's
dealers have resisted signing written agreements. Among the reasons cited by
dealerships in resisting entering into written agreements are: (i) the
exclusivity provision of the revised form of agreement which requires that
dealerships not participate in any other Internet-based or online program with
attributes similar to those of the Auto-By-Tel program, (ii) the
indemnification provisions which require dealerships to indemnify Auto-By-Tel
under certain circumstances, (iii) concerns by dealerships that by signing a
written agreement they will surrender control of the rates they will be
charged by Auto-By-Tel, and (iv) concerns over the California choice of law
and venue provisions in the agreement. There can be no assurance that the
Company will be able to convince subscribing dealerships to enter into written
agreements with the Company or revise their existing agreements or that the
Company's efforts to cause subscribing dealerships to revise their agreements
will not result in subscribing dealerships terminating their relationship with
Auto-By-Tel.
 
  In addition, should the volume of purchase requests increase, the Company
anticipates that it will need to reduce the size of the exclusive territories
currently allocated to dealerships in order to serve consumers more
effectively. Dealers may be unwilling to accept reductions in the size of
their territories and may, therefore, terminate their relationship, refuse to
execute formal agreements with the Company or decide not to join the Company's
marketing program. A material decrease in the number of subscribing
dealerships, or slower than expected growth in the number of subscribing
dealerships, could have a material adverse effect on the Company's business,
results of operations or financial condition. The Company may also become
unable to refer an adequate number of consumers to participating dealerships.
There can be no assurance that the Company will be able to continue to attract
additional dealerships and retain existing dealerships.
 
  Auto-By-Tel dealerships are located in every major metropolitan area in the
United States and Canada. In December 1996, the Company's computer systems
were able to match and electronically route 92% of total purchase requests to
participating dealerships. The remaining 8% of purchase requests were received
from consumers in unassigned territories and were manually assigned and
subsequently electronically routed to dealers. Auto-By-Tel dealerships are
often leaders in their respective markets. Of the ten largest dealership
holding companies (according to the Automotive News 1996 Data Book), eight
participate in the Company's
 
                                      38

<PAGE>
 
new vehicle marketing program at some level. Size is not always a sufficient
criterion, however, in the selection of Auto-By-Tel participating dealers.
Auto-By-Tel is only interested in establishing relationships with dealers
which share the Company's commitment to improving consumer service in the
vehicle retailing industry. To meet this goal, the Company requests that
participating dealerships have their representatives trained in the Auto-By-
Tel marketing program, dedicate electronic and human resources to the Auto-By-
Tel system and comply with the Auto-By-Tel guidelines of rapid consumer
response, full disclosure, competitive and up-front pricing communicated by
telephone and the selection of an employee to be the dedicated Auto-By-Tel
manager. To further increase consumer satisfaction and reduce dealership
costs, the Company discourages dealerships from using commissioned
salespersons and the accompanying layers of personnel to interface with Auto-
By-Tel consumers.
 
  The Company trains Auto-By-Tel dealers over the telephone, via satellite
seminars, at the Company's headquarters in Irvine, California, at regional
training centers and at dealerships' premises. The Company's staff strives to
shift dealer salespersons away from traditional vehicle selling techniques and
to the Auto-By-Tel approach. Special emphasis is placed upon telephone skills
and addressing consumer questions and concerns. Generally, within ten days of
the submission of a vehicle purchase request, the Company contacts the
consumer by e-mail requesting completion of a quality assurance survey on the
Company's Web site that is used by the Company and dealers to improve the
quality of dealer service and allows the Company to evaluate the sales process
at participating dealers. Dealerships that fail to abide by the Auto-By-Tel
program or who receive repeated consumer complaints are terminated from the
Auto-By-Tel program.
 
  Auto-By-Tel participating dealerships are assigned exclusive territories
based upon specific zip codes. Auto-By-Tel assigned regions tend to be larger
than the traditional dealership region assigned by automobile manufacturers,
in order to allow the Company to generate sufficiently high volume to the
subscribing dealership to make participation in the Auto-By-Tel program
attractive. Pursuant to an agreement with the Texas Department of
Transportation, Auto-By-Tel cannot effectively guarantee exclusive territories
to dealerships located in Texas, and dealership sign-up and annual fees in
Texas are required to be uniform while monthly fees are based solely on
population density in a given zip code.
 
COMPETITION
 
  The Company's vehicle purchasing services compete against a variety of
Internet and traditional vehicle buying services and automotive brokers. In
the Internet-based market, the Company competes for attention with other
entities which maintain similar commercial Web sites. The Company also
competes indirectly against vehicle brokerage firms and affinity programs
offered by several companies, including Price Costco and Wal-Mart. Like the
Company's services, the services offered by competing Web sites, automotive
brokerage firms and affinity programs seek to increase consumer satisfaction
and reduce vehicle purchasing costs.
 
  Although the Company does not currently compete directly with vehicle
dealers and manufacturers, such competition would arise in the future if
dealers and manufacturers introduced competing Web sites or developed
cooperative relationships among themselves or with online automotive
information providers. Moreover, the Company's ability to achieve its
objectives would be adversely affected if dealers and manufacturers adopted a
low cost, firm price sales model similar to that facilitated by the Auto-By-
Tel program.
 
  The market for Internet-based commercial services is new and competition
among commercial Web sites is expected to increase significantly in the
future. The Internet is characterized by minimal barriers to entry, and
current and new competitors can launch new Web sites at relatively low cost.
Potential competitors could include, but are not limited to, automotive
information service providers, vehicle manufacturers and new and used vehicle
dealers. In order to compete successfully as an Internet commerce entity, the
Company must significantly increase awareness of the Company and its brand
name, effectively market its services and successfully differentiate its Web
site. Many of the Company's current and potential competitors have longer
operating histories, greater name recognition and significantly greater
financial and marketing resources than the Company. Such competitors could
undertake more aggressive and costly marketing campaigns than the Company
which may adversely affect the Company's marketing strategies which could have
a material adverse effect on the Company's business, results of operations or
financial condition.
 
                                      39

<PAGE>
 
  In addition, as the Company introduces new services, it will compete
directly with a greater number of companies, including vehicle insurers,
lenders and lessors as well as used vehicle superstores, such as CarMax and
Auto Nation. Such companies may already maintain or may introduce Web sites
which compete with that of the Company. There can be no assurance that the
Company can continue to compete successfully against current or future
competitors nor can there be any assurance that competitive pressures faced by
the Company will not result in increased marketing costs, decreased Internet
traffic or loss of market share or otherwise will not materially adversely
affect its business, results of operations and financial condition.
 
  The Company believes that the principal competitive factors affecting the
market for Internet-based vehicle marketing services are the speed and quality
of service execution, the size and effectiveness of the participating
dealership base, competitive dealer pricing, successful marketing and
establishment of national brand name recognition, positioning itself as a
leading Internet-based marketing service, the volume and quality of traffic to
and purchase requests from a Web site and the ability to introduce new
services in a timely and cost-effective manner. Although the Company believes
that it currently competes favorably with respect to such factors, there can
be no assurance that the Company will be able to compete successfully against
current or future competitors with respect to any of these factors.
 
OPERATIONS AND TECHNOLOGY; FACILITIES
 
  The Company believes that its future success is significantly dependent on
its ability to continuously improve the speed and reliability of its Web site,
enhance communications functionality with its consumers and dealers and
maintain the highest-level of information privacy and transactional security.
The Company maintains all of its own Web server hosting functions and, to
accelerate connectivity, has installed two 1.54 Mbps T-1 lines for outbound
traffic and a 6 Mbps fractional DS/3 line for inbound traffic. The Company has
also recently upgraded its routers and has installed firewall technology to
protect its private network. Continuous system enhancements are primarily
intended to accommodate increased traffic across the Company's Web site,
improve the speed with which purchase requests are processed and heighten Web
site security which will be increasingly important as the Company offers new
services such as vehicle insurance and financing. System enhancements entail
the implementation of sophisticated new technology and system processes and
there can be no assurance that such continuous enhancements may not result in
unanticipated system disruptions. For example, since April 1, 1996, the
Company has experienced three periods of system downtime with an average
downtime of approximately three hours due to power loss and telecommunications
failures, and there can be no assurance that interruptions will not recur.
Although the Company maintains redundant local offsite backup servers, all of
the Company's primary servers are located at its corporate headquarters and
are vulnerable to interruption by damage from fire, earthquake, power loss,
telecommunications failure and other events beyond the Company's control. The
Company is in the process of developing comprehensive out-of-state disaster
recovery plans to safeguard dealer and consumer information. The Company
maintains business interruption insurance which pays up to $1,000,000
($333,333 monthly limit) 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 the Company's offices. However, in the event of a
prolonged interruption, it is probable that this business interruption
insurance will not be sufficient to fully compensate the Company. In the event
that the Company experiences significant system disruptions, the Company's
business, results of operations or financial condition could be materially and
adversely affected.
   
  The Company recently implemented its proprietary Dealer Realtime System, a
personal computer-based network which allows participating dealers to receive
consumer purchase requests online shortly after submission by consumers.
Historically, all purchase requests were transmitted through the Company's fax
server to dealers. By complementing the fax server (a computer which transmits
and routes facsimile transmissions) process, the Dealer Realtime System, is
designed to shorten dealer response time to consumers. The successful
implementation of the Dealer Realtime System requires the active support of
the Company's dealership base. To receive consumer purchase requests online,
dealers must purchase or lease the Dealer Realtime System and train, under the
Company's guidance, their personnel. There can be no assurance that all or
most dealerships will acquire the Dealer Realtime System or adopt the skills
necessary to effectively use this system.     
 
                                      40

<PAGE>
 
  In addition, the Company has developed and intends to further develop its
proprietary client/server database applications which allow consumers to
search and display used vehicle information. Such database applications allow
Auto-By-Tel dealerships to upload their inventory, including digitized
photographs of vehicles, to the Company's used vehicle database. Dealerships
participating in the Company's Dealer Realtime System will already have
acquired the equipment necessary to participate in the used vehicle marketing
program. As of January 30, 1997, 118 subscribing dealerships have acquired the
Dealer Realtime System. There can be no assurance that Auto-By-Tel dealerships
will agree to invest in the Dealer Realtime System, or pay the associated
monthly maintenance charges on a timely basis, or at all.
 
  The Company has developed and intends to further enhance systems which allow
consumers to complete and securely transmit online loan applications which
will be forwarded by the Company to the appropriate lender. The Company
anticipates launching these services during the first quarter of 1997.
 
  In addition, the Company is currently in the process of completing a
conversion to a redundant client/server SQL database platform which involves
the integration of several different internal databases used to handle the
Company's consumer and dealer information and transmission requirements as
well as the Company's financial, accounting and record-keeping requirements.
In addition to increasing the overall efficiency of the Company's operations,
the Company anticipates that these new integrated systems could enable Auto-
By-Tel to develop and market new and strategically targeted database services.
No assurance can be given that the implementation of this new platform will
not result in disruptions to the Company's business, such as the loss of data,
errors in purchase request transmissions, delays in the Company's ability to
effect periodic closings of its accounting records and other similar problems.
Any such disruptions or any failure to successfully implement this new
information system in a timely manner could have a material adverse effect on
the Company's business, results of operations or financial condition.
 
  The Company's services may be vulnerable to break-ins and similar disruptive
problems caused by Internet users. Further, weaknesses in the Internet may
compromise the security of confidential electronic information exchanged
across the Internet. This includes, but is not limited to, the security of the
physical network and security of the physical machines used for the
information transfer. Any such flaws in the Internet or the end-user
environment, or weaknesses or vulnerabilities in the Company's services or the
licensed technology incorporated in such service, would jeopardize the
confidential nature of information transmitted over the Internet and could
require the Company to expend significant financial and human resources to
protect against future breaches, if any, in order to alleviate or mitigate
problems caused by such security breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company, or third party
contractors, involve the storage and transmission of proprietary information
(such as personal financial information or credit card numbers), security
breaches could expose the Company to a risk of financial loss or litigation or
other liabilities. Any such occurrence could reduce consumer satisfaction in
the Company's services and could have a material adverse effect on the
Company's business, results of operations or financial condition.
 
  The Company's success and ability to compete is dependent in part upon its
proprietary systems and technology. While the Company relies on trademark,
trade secret and copyright laws to protect its proprietary rights, the Company
believes that the technical and creative skills of its personnel, continued
development of its proprietary systems and technology, brand name recognition
and reliable Web site maintenance are more essential in establishing and
maintaining a leadership position. Despite the Company's efforts to protect
its proprietary rights, unauthorized parties may attempt to copy aspects of
the Company's services or to obtain and use information that the Company
regards as proprietary. Policing unauthorized use of the Company's proprietary
rights is difficult. In addition, litigation may be necessary in the future to
enforce or protect the Company's intellectual property rights or to defend
against claims of infringement or invalidity. Misappropriation of the
Company's intellectual property or potential litigation could have a material
adverse effect on the Company's business, results of operations or financial
condition.
 
                                      41

<PAGE>
 
  All of the Company's operations are centrally located in approximately
13,700 square feet of office space in Irvine, California. Approximately 12,300
square feet is leased through August 1, 2001, and the Company has the option
to renew this lease for an additional five-year period. Approximately 1,400
square feet is separately leased under a sublease through April 30, 1997.
 
GOVERNMENT REGULATION
 
  The Company believes that its dealer marketing service does not qualify as a
brokerage activity and, therefore, that the Company does not need to comply
with state broker licensing requirements. In Texas, however, the Company was
required to modify its marketing program to include a pricing model under
which subscribing dealerships are charged uniform fees based on the population
density of their particular geographic area and to make its program open to
all dealerships who wish to apply. In the event that individual state
regulatory requirements change or additional requirements are imposed on the
Company, the Company may be required to modify its marketing programs in such
states in a manner which may undermine the program's attractiveness to
consumers or dealers. In addition, in the event that a state deems that the
Company is acting as a broker, the Company may be required to comply with
burdensome licensing requirements of such state or terminate operations in
such state. In each case, the Company's business, results of operations or
financial condition could be materially and adversely affected.
 
  The Company's marketing service may result in changes in the way new and
used vehicles are sold which may be deemed to be threatening by new and used
vehicle dealers who do not subscribe to the Auto-By-Tel program. Such
businesses are often represented by influential lobbying organizations, and
such organizations may seek to introduce legislation which may impact the
evolving marketing and distribution model which the Company's service
promotes. Should legislative or legal challenges be brought successfully by
such organizations, the Company's business, results of operations or financial
condition could be materially and adversely affected.
 
  As the Company introduces new services, the Company may need to comply with
additional licensing regulations and regulatory requirements. For example, the
Company recently obtained an insurance brokerage license in California and has
begun procuring insurance brokerage licenses in other states to ensure
compliance with applicable insurance regulations, if any, of such states. In
addition, the Company is currently in the process of applying for financial
brokers' licenses in those states in which the Company believes such licenses
are required. Becoming licensed may be an expensive and time-consuming process
which could divert the efforts of management. In the event that the Company
does not successfully become licensed under applicable state insurance or
lending rules or otherwise comply with regulations necessitated by changes in
current regulations or the introduction of new services, the Company's
business, results of operations or financial condition could be materially and
adversely affected.
 
  Additionally, there are currently few laws or regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is likely that a number of
laws and regulations may be adopted at the local, state, national or
international levels with respect to commerce over the Internet, potentially
covering issues such as pricing of services and products, advertising, user
privacy and expression, intellectual property, information security, anti-
competitive practices or the convergence of traditional distribution channels
with Internet commerce. In addition, 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 the Company to
additional state sales and income taxes. The adoption of any such laws or
regulations may decrease the growth of Internet usage or the acceptance of
Internet commerce which could, in turn, decrease the demand for the Company's
services and increase the Company's costs or otherwise have a material adverse
effect on the Company's business, results of operations or financial
condition.
 
                                      42

<PAGE>
 
EMPLOYEES
 
  The Company experienced significant growth in employment during 1996, and as
of December 31, 1996, the Company had a total of 73 employees (including two
in Canada), compared to 17 employees as of December 31, 1995. Employees as of
December 31, 1996 included nine in management, 41 in marketing, selling,
training and support, 11 engaged in technical activities and 12 administrative
employees. The Company also employs independent contractors for software and
hardware development, which totaled 17 people as of December 31, 1996. None of
the Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.
 
  The Company's rapid growth has placed, and is expected to continue to place,
a significant strain on the Company's managerial and technical resources. The
Company's future success depends in significant part upon the continued
service of its key technical and senior management personnel and its
continuing ability to attract and retain qualified sales, marketing, technical
and managerial personnel. As the Company introduces new services, it will need
to hire a significant number of additional managerial, sales, marketing and
technical personnel. Competition for qualified personnel is intense and there
can be no assurance that the Company will be able to retain its key employees
or that it will be able to attract and retain additional highly qualified
personnel in the future.
 
  The Company's performance is substantially dependent on the performance of
its executive officers and key employees, all of whom are employed on an at-
will basis and many of whom have worked together for only a short period of
time. The Company maintains "key person" life insurance in the amount of $7.5
million on the life of Peter R. Ellis, the Company's President and Chief
Executive Officer. However, the loss of the services of Mr. Ellis or one or
more of the Company's other executive officers or key employees would likely
have a material adverse effect on the business, results of operations and
financial condition of the Company. See "Management."
 
                                      43

<PAGE>
 

                                  MANAGEMENT
 
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
 
  The following table sets forth certain information with respect to the
executive officers, directors and other key employees of the Company.
 

<TABLE>   
<CAPTION>
 EXECUTIVE OFFICERS AND
       DIRECTORS          AGE                             POSITION
 ----------------------   ---                             --------
<S>                       <C> <C>
Peter R. Ellis..........   50 President, Chief Executive Officer and Director
John C. Bedrosian.......   62 Chairman of the Board
W. Randolph Ellspermann.   50 Senior Vice President of the Company and Chief Operating Officer
                               of Auto-By-Tel Acceptance Corporation
Robert S. Grimes........   53 Executive Vice President and Director
Mark W. Lorimer.........   37 Vice President, General Counsel and Secretary
Michael J. Lowell.......   38 Senior Vice President of the Company and Chief Operating Officer
                               of Auto-By-Tel Marketing Corporation
Brian B. MacDonald......   39 Vice President Finance and Treasurer
John M. Markovich.......   40 Senior Vice President Finance and Chief Financial Officer
Jeffrey H. Coats (1)(2).   39 Director
Michael Fuchs(1)(2).....   51 Director
<CAPTION>
  OTHER KEY EMPLOYEES
  -------------------
<S>                       <C> <C>
Thomas J. Ciresa........   55 Director of Used Vehicle Development and Canada Operations
Jacqueline A. Dufort....   35 Chief Technology Officer
John P. Honiotes........   49 National Sales Director
</TABLE>
    
 
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
 
  Peter R. Ellis co-founded the Company and has been President and Chief
Executive Officer since its inception. Mr. Ellis has extensive experience in
the automobile retailing industry. From June 1993 to December 1993, Mr. Ellis
served as Chairman of PEAC Corporation, a retail used vehicle business. From
August 1973 to May 1991, Mr. Ellis was a controlling stockholder and served as
President of P.R. Ellis Corp. (formerly known as CAJ Corporation), a holding
corporation for several companies which owned and operated automobile
dealerships and related businesses in Northern and Southern California and
Arizona. Mr. Ellis' corporations guaranteed in the ordinary course of business
loans made to vehicle purchasers, and, in 1985, the principal amount
outstanding under such guaranteed loans reached an aggregate of approximately
$80 million. As a result of higher than industry standard defaults by vehicle
purchasers in subsequent years, Mr. Ellis' corporations, which then owned
three dealerships, were required to expend significant cash to satisfy these
guarantees. In the early 1990's, vehicle sales decreased significantly as a
result of the then ongoing recession in California. The effects of the
recession, when combined with poor working capital, had a severe impact on Mr.
Ellis' dealership operations. During this period, Mr. Ellis personally
guaranteed additional capital and inventory loans with an aggregate principal
amount in excess of $40 million on behalf of three dealerships. In 1991, Mr.
Ellis closed the three remaining dealerships due to ongoing financial
difficulties. As a result, certain company loans were defaulted. Subsequently,
in response to a creditor's proceedings, Mr. Ellis declared personal
bankruptcy under Chapter 7 of the United States Bankruptcy Code in January
1994. All outstanding debts were discharged in August 1994 by order of the
Bankruptcy Court.
 
  John C. Bedrosian co-founded the Company and has been Chairman of the Board
since its inception. Since September 1993, Mr. Bedrosian has been engaged in
personal investing activities. From August 1985 to September 1993, Mr.
Bedrosian was Senior Executive Vice President of National Medical Enterprises
("NME"), a hospital management company. Mr. Bedrosian holds a B.S. from the
University of California, Los Angeles and an LL.B. from the University of
Southern California. Mr. Bedrosian also served on the Board of
 
                                      44

<PAGE>
 
NME from 1976 to September 1994. In 1992, the U.S. Attorney's office commenced
an investigation of a subsidiary of NME for alleged Medicare and Medicaid
billing improprieties. In June 1994, NME reached an out of court settlement
with the U.S. Department of Justice paying fines and penalties of $379
million. Mr. Bedrosian was not involved in these proceedings. In addition, in
1995, the Securities and Exchange Commission (the "SEC") commenced an
examination into potential improper disclosures made by NME in its periodic
reports filed in 1991. Mr. Bedrosian and eight former employees appeared
before the SEC to give testimony relating to the exercise of employee stock
options and disposition of the underlying shares during this period. To date,
the SEC has taken no further action.
 
  W. Randolph Ellspermann joined the Company in July 1996 as Chief Operating
Officer of Auto-By-Tel Acceptance Corporation and, in January 1997, was
appointed a Senior Vice President of the Company. Mr. Ellspermann also serves
as Chief Operating Officer of Auto-By-Tel Insurance Services, Inc. From
November 1993 to June 1996, Mr. Ellspermann was employed by Mark III
Industries, a van conversion company, where he last served as Chief Operating
and Financial Officer. From June 1986 to June 1993, Mr. Ellspermann served at
subsidiaries of Security Pacific Corporation, including five years as Chief
Executive Officer of Security Pacific Information Services and two years as
Chief Financial Officer of Security Pacific Auto Finance. Mr. Ellspermann's
background also includes 13 years with Ford Motor Company and Ford Motor
Credit Company in a variety of finance and management positions.
Mr. Ellspermann holds a B.S. in Industrial Management from Purdue University
and a Masters of Business Administration from the University of Michigan.
 
  Robert S. Grimes has been a director of the Company since inception and has
served as Executive Vice President since July 1996. Since September 1987, Mr.
Grimes has been President of R.S. Grimes & Co., Inc., an investment company.
From April 1981 to March 1987, Mr. Grimes was a partner with the investment
firm of Cowen & Company. Mr. Grimes holds a B.S. from the Wharton School of
Commerce and Finance at the University of Pennsylvania and an LL.B. from the
University of Pennsylvania Law School.
 
  Mark W. Lorimer joined the Company in December 1996 as Vice President,
General Counsel and Secretary. From January 1996 to November 1996, Mr. Lorimer
was a partner and, from March 1989 to January 1996, was an associate with the
law firm of Dewey Ballantine. Mr. Lorimer holds a B.S. in Speech from
Northwestern University and a J.D. from the Fordham University School of Law.
 
  Michael J. Lowell joined the Company in October 1996 as Chief Operating
Officer of Auto-By-Tel Marketing Corporation and, in January 1997, was also
appointed a Senior Vice President of the Company. From March 1995 to November
1996, Mr. Lowell served as Vice President and Chief Financial Officer of Alpha
Microsystems, a publicly-held computer hardware and software developer. From
February 1990 to March 1995, Mr. Lowell held various financial and management
positions, most recently as Vice President and Chief Financial Officer, with
Wahlco Environmental Systems, Inc. ("Wahlco"), a publicly-held manufacturer of
environment control equipment. From February 1987 to February 1990, Mr. Lowell
served in various management and financial positions, most recently as Vice
President and Treasurer, with Pacific Diversified Capital Company, a
diversified holding company, the investments of which included a controlling
interest in Wahlco. Prior to working with Wahlco, Mr. Lowell held various
positions with Ducommun, Inc., a publicly-held manufacturer and distributor of
electronic components. Mr. Lowell holds a B.S. in Finance from California
State University at Long Beach and a Masters of Business Administration from
the University of San Diego.
 
  Brian B. MacDonald joined the Company in October 1995 as Chief Financial
Officer and Manager, was appointed Vice President in May 1996 and was
appointed Vice President Finance and Treasurer in January 1997. From April
1990 to October 1994, Mr. MacDonald served as Controller for all of the
subsidiaries of Long Beach Bank, F.S.B. and from December 1992 to October 1994
also managed the operations of the bank's insurance subsidiary. From September
1983 to January 1990, Mr. MacDonald worked at Price Waterhouse L.L.P. in a
variety of divisions, including their audit and high-technology divisions. Mr.
MacDonald holds a B.S. in Business from the University of Southern California.
 
  John M. Markovich joined the Company in January 1997 as Senior Vice
President Finance and Chief Financial Officer. From April 1995 to January
1997, Mr. Markovich served as Vice President Finance and Chief
 
                                      45

<PAGE>
 
Financial Officer of Optical Coating Laboratory, Inc., a publicly-held
manufacturer of thin film coated optical products. From May 1993 to February
1995, Mr. Markovich served as Vice President Finance and Chief Financial
Officer of Electrosci, Inc., an early stage environmental technology company,
and from July 1992 to May 1993, he was Vice President and Chief Financial
Officer of the Norden Fruit Company. From August 1987 to February 1992, Mr.
Markovich served as Vice President and Treasurer of Western Digital
Corporation, a publicly-held multinational electronics manufacturer.
Previously, Mr. Markovich worked for Citibank, N.A. as a corporate banking
officer in the bank's high technology group. Mr. Markovich holds a B.S. in
General Business from Miami University and a Masters of Business
Administration from Michigan State University.
 
  Jeffrey H. Coats was elected a director of the Company on August 27, 1996.
Mr. Coats has served as Managing Director of GE Equity Capital Group, Inc., a
wholly-owned subsidiary of General Electric Capital Corporation, a significant
shareholder in the Company, since April 1996. He was also a Managing Director
of GE Capital Corporate Finance Group, Inc., a wholly-owned subsidiary of
General Electric Capital Corporation, from June 1987 to April 1993. From March
1994 to April 1996, Mr. Coats served as President of Maverick Capital Equity
Partners, LLC, and from April 1993 to January 1994, Mr. Coats was a partner
with Veritas Capital, Inc., both of which are investment firms. Mr. Coats
holds a B.B.A. in Finance from the University of Georgia and a Masters in
Industrial Management in Finance from the American Graduate School of
International Management. Mr. Coats is a director and Chairman of the Board of
The Hastings Group, Inc., a privately held clothing retailer, which on October
23, 1995, filed a voluntary petition under Chapter 11 of the Bankruptcy Code
and is currently in the process of formulating a plan of reorganization. Mr.
Coats is a member of the board of directors of Krause's Furniture, Inc., a
publicly-held company.
 
  Michael Fuchs was elected as a director of the Company on September 25,
1996. Mr. Fuchs was Chairman and Chief Executive Officer of Home Box Office
("HBO"), the world's largest pay-television company, from October 1984 until
November 1995, and Chairman and Chief Executive Officer of Warner Music Group
from May 1995 to November 1995. Mr. Fuchs holds a B.A. from Union College and
a J.D. from the New York University School of Law. Mr. Fuchs is a member of
the Board of Directors of Marvel Entertainment Group, an entertainment and
publishing company, and IMAX Corp., an entertainment film and technology
company. On December 27, 1996, Marvel Entertainment Group filed a voluntary
petition under Chapter 11 of the Bankruptcy Code and is currently in the
process of formulating its plan of reorganization.
 
  Thomas J. Ciresa joined the Company in May 1995 as a regional director and
subsequently launched the customer service and training departments. Since
March 1996 Mr. Ciresa has served as Director of Used Vehicle Development and
Canada Operations. From March 1993 to June 1994, Mr. Ciresa served as Western
Regional Operations Manager for Kia Motors America. From November 1991 to
March 1993, Mr. Ciresa worked as National Sales Manager of Agency Rent-A-Car
and from September 1988 to November 1991 owned and operated a Toyota
franchised vehicle dealership in Eugene, Oregon. From June 1965 to September
1988, Mr. Ciresa served in senior management positions with a variety of
vehicle manufacturers, including Hyundai Auto Canada, Porsche Cars, N.A. and
Toyota Motor Sales, U.S.A., Inc. Mr. Ciresa holds a B.E. from the University
of Miami, Florida.
 
  Jaqueline A. Dufort joined the Company in April 1996 as Director of
Information Technology. Since October 1996, Ms. Dufort has served as Chief
Technology Officer of the Company. From September 1990 to April 1996, Ms.
Dufort served as Director of Information Technology Strategic Planning for
Long Beach Mortgage Company, formerly known as Long Beach Bank, F.S.B. From
November 1986 to August 1990, Ms. Dufort served as Senior Project Manager for
Salomon Brothers Inc. Ms. Dufort holds a B.S. in Computer Science from Embry-
Riddle Aeronautical University and a Masters of Business Administration from
New York University.
 
  John P. Honiotes joined the Company in May 1995 as National Sales Director.
From October 1993 to October 1994, Mr. Honiotes served as regional director of
ABAC, a sub-par lender and from October 1994 to April 1995 as an independent
consultant, in each case developing sub-par programs and systems for use by
automobile dealerships to determine more efficiently the eligibility of sub-
prime credit consumers under the rules
 
                                      46

<PAGE>
 
of a large number of financing institutions. From June 1991 to October 1993,
Mr. Honiotes served as Director of Sales at Cush Automotive Group, Escondido,
California, an automotive dealership group, and, from June 1990 to June 1991,
as Chief Executive Officer and President of Presidential/AMS. From August 1988
to May 1990, Mr. Honiotes served as President of After-Market Profit Plus,
Inc., prior to which he served as Senior Vice President, National Sales
Director of AutoMax, an automotive affinity card program. Mr. Honiotes holds a
B.S. in Marketing from Northern Illinois University.
 
  The Board of Directors has currently authorized five members. Members of the
Board of Directors are elected each year at the Company's annual meeting of
stockholders, and serve until the following annual meeting of stockholders or
until their respective successors have been elected and qualified. In
connection with the Series A Preferred Stock financing, Mr. Coats was elected
to the Board of Directors pursuant to the Company's Amended and Restated
Certificate of Incorporation. The provision providing for the Series A
Preferred Stock nominee to the Board of Directors will terminate upon the
closing of the Offering.
 
 Director Compensation
 
  The Company's non-employee directors do not currently receive any cash
compensation for service on the Company's Board of Directors or any committee
thereof, but directors may be reimbursed for certain expenses incurred in
connection with attendance at Board and committee meetings. The Company's 1996
Stock Incentive Plan provides for automatic grants of stock options to non-
employee directors commencing upon the closing of this offering. See "Stock
Plans--1996 Stock Incentive Plan."
 
  Officers of the Company are appointed by the Board of Directors and serve at
its discretion. The Company has entered into indemnification agreements with
each member of the Board of Directors and certain of its officers providing
for the indemnification of such person to the fullest extent authorized,
permitted or allowed by law.
 

EXECUTIVE COMPENSATION
 
  Summary Compensation. The following table sets forth in summary form the
compensation paid by the Company during the year ended December 31, 1996 to
the Company's Chief Executive Officer and the four most highly paid executive
officers (the "Named Officers").
 
                          SUMMARY COMPENSATION TABLE
 

<TABLE>
<CAPTION>
                                                         LONG-TERM
                                                        COMPENSATION
                                                        ------------
                                                           AWARDS
                                                        ------------
                                 ANNUAL COMPENSATION     SECURITIES
   NAME AND PRINCIPAL          ------------------------  UNDERLYING       ALL OTHER
        POSITION          YEAR SALARY ($) (1) BONUS ($)  OPTIONS(#)  COMPENSATION ($) (2)
   ------------------     ---- -------------- --------- ------------ --------------------
<S>                       <C>  <C>            <C>       <C>          <C>
Peter R. Ellis..........  1996    $122,502    $321,167        --           $11,301
W. Randolph Ellspermann.  1996      50,000         --     125,000              --
Robert S. Grimes........  1996      90,000         --     250,000              --
Michael J. Lowell.......  1996      15,000         --     166,666              --
Brian B. MacDonald......  1996      85,000      50,000    125,000            1,776
</TABLE>

- --------
(1) Salary data reflect amounts paid for the year ended December 31, 1996 for
    the Chief Executive Officer and the Named Officers. Mr. Grimes began
    receiving cash compensation on August 1, 1996. The current annualized base
    salaries of the Chief Executive Officer and the Named Officers are as
    follows: Mr. Ellis--$275,000; Mr. Ellspermann--$120,000; Mr. Grimes--
    $180,000; Mr. Lowell--$120,000; and Mr. MacDonald--$120,000.
 
(2) Includes the following amounts: Mr. Ellis--$3,150 in health benefits, $369
    in life insurance payments and $7,782 in automobile expenses; and Mr.
    MacDonald--$1,776 in health benefits.
 
                                      47

<PAGE>
 
OPTION GRANTS DURING FISCAL 1996
 
  The following table sets forth for the Chief Executive Officer and the Named
Officers and certain information concerning stock options granted during
fiscal 1996. The Company did not grant SARs during fiscal 1996.

<TABLE>
<CAPTION>
                                                                               
                                                                               
                                                                               
                                                                               
                                           INDIVIDUAL GRANTS                   
                          ---------------------------------------------------- POTENTIAL REALIZABLE  
                                          PERCENT OF                             VALUE AT ASSUMED    
                            NUMBER OF       TOTAL                              ANNUAL RATES OF STOCK 
                           SECURITIES      OPTIONS                              PRICE APPRECIATION   
                           UNDERLYING     GRANTED TO     EXERCISE               FOR OPTION TERM(5)   
                             OPTIONS     EMPLOYEES IN     PRICE     EXPIRATION ---------------------- 
          NAME            GRANTED(1)(#) FISCAL 1996(2) ($/SHARE)(3)  DATE(4)     5%($)      10%($)
          ----            ------------- -------------- ------------ ---------- ---------- -----------
<S>                       <C>           <C>            <C>          <C>        <C>        <C>
Peter R. Ellis..........          --          --             --           --          --         --
W. Randolph Ellspermann.     125,000          5.3%        $ 0.60      7/03/06  $   47,167 $  119,531
Robert S. Grimes........     250,000         10.7           0.60      7/03/06      94,334    239,062
Michael J. Lowell.......     166,666          7.1           3.00     10/23/06     314,446    796,868
Brian B. MacDonald .....     125,000          5.3           0.60      7/03/06      47,167    119,531
</TABLE>

- -------
(1) Represent options granted under the Company's 1996 Stock Option Plan and
    the 1996 Stock Incentive Plan. On October 23, 1996, the Board of Directors
    terminated the 1996 Stock Option Plan, and no further options may be
    granted thereunder.
 
(2) Based on an aggregate 2,352,066 shares subject to options granted to
    employees during fiscal 1996.
 
(3) Options were granted at an exercise price equal to the estimated fair
    market value of the Company's Common Stock at the date of grant. In
    determining the fair market value of the Company's Common Stock, the Board
    of Directors considered various factors, including the Company's financial
    condition and business prospects, its operating results, the absence of a
    market for its Common Stock and the risks normally associated with
    investments in companies engaged in similar businesses. For accounting
    purposes only, the Company recorded deferred compensation expense in
    connection with the grant of the options to Mr. Grimes. See Note 7 of
    Notes to Consolidated Financial Statements.
 
(4) The term of each option granted under the 1996 Stock Option Plan is
    generally ten years from the date of grant. Options may terminate before
    their expiration dates, however, if the optionee's status as an employee
    or a consultant is terminated or upon the optionee's death or disability.
    Options granted under the Company's 1996 Stock Option Plan and 1996 Stock
    Incentive Plan must generally be exercised within 30 days of the
    termination of the optionee's status as an employee or consultant of the
    Company, or within twelve months after such optionee's death or
    disability.
 
(5) The 5% and 10% assumed annual rates of compounded stock price appreciation
    are mandated by rules of the Securities and Exchange Commission and do not
    represent the Company's estimate or projection of the Company's future
    Common Stock prices.
 
                                      48

<PAGE>
 
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND FISCAL YEAR-END OPTION/SAR VALUES
 
  The following table sets forth for each of the Named Officers certain
information concerning options exercised during fiscal 1996 and the number of
shares subject to both exercisable and unexercisable stock options as of
December 31, 1996. Also reported are values for "in-the-money" options that
represent the positive spread between the respective exercise prices of
outstanding options and the fair market value of the Company's Common Stock as
of December 31, 1996. The Company has never issued stock appreciation rights
("SARs").
 

<TABLE>
<CAPTION>
                                                          NUMBER OF SECURITIES               VALUE OF UNEXERCISED
                           NUMBER OF                 UNDERLYING UNEXERCISED OPTIONS/       IN-THE-MONEY OPTIONS/SARS
                            SHARES                    SARS AT DECEMBER 31, 1996(#)        AT DECEMBER 31, 1996 ($)(2)
                          ACQUIRED ON     VALUE      ----------------------------------   ------------------------------
          NAME            EXERCISE(#) REALIZED($)(1)  EXERCISABLE       UNEXERCISABLE     EXERCISABLE     UNEXERCISABLE
          ----            ----------- -------------- ---------------   ----------------   -------------   --------------
<S>                       <C>         <C>            <C>               <C>                <C>             <C>
Peter R. Ellis..........       --             --                   --                 --             --               --
W. Randolph Ellspermann.    41,666       $308,328                    0             83,333  $           0         $616,656
Robert S. Grimes........       --             --               125,000            125,000        925,000          925,000
Michael J. Lowell.......       --             --                     0            166,666              0          833,330
Brian B. MacDonald .....       --             --                41,666             83,333        308,328          616,656
</TABLE>

- --------
(1) The amount set forth represents the difference between the fair market
    value of the shares at the time of exercise, as determined by the Board of
    Directors, and the exercise price of the option, multiplied by the
    applicable number of options.
 
(2) Calculated by determining the difference between the fair market value of
    the securities underlying the option as of December 31, 1996 ($8.00 per
    share as determined by the Board of Directors) and the exercise price of
    the Named Officer's options. In determining the fair market value of the
    Company's Common Stock, the Board of Directors considered various factors,
    including the Company's financial condition and business prospects, its
    operating results, the absence of a market for its Common Stock and the
    risks normally associated with technology companies.
 
STOCK PLANS
 
  1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the "Option
Plan") was approved by the Board of Directors and the stockholders on May 18,
1996. The Option Plan provides 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 grant to employees, consultants
and directors of nonstatutory stock options. Under the Option Plan, the
exercise price of all incentive stock options granted under the Option Plan
cannot be lower than the fair market value of the Common Stock 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 the
Company, 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
1996 Option Plan may be up to 10 years. The Option Plan may be administered by
the Board of Directors or a committee of the Board (the "Administrator"). Any
options granted under the Option Plan are exercisable at such times as
determined by the Administrator, but in no case at a rate of less than 20% per
year over five years from the grant date. A majority of the outstanding
options vest and become exercisable as to one-third of the grant on October
31, 1996, and as to an additional one third of the grant at each successive
October 31. Options granted under the Option Plan must be exercised within 30
days following termination of the optionee's status as an employee or
consultant of the Company, or within 12 months following such optionee's
termination by death or disability. The Board of Directors may at anytime
amend, suspend or discontinue the Option Plan, but no amendment, suspension or
discontinuation shall be made which would impair the rights of any optionee,
without his or her consent. If so requested by the Company or any
representative of the underwriters, the optionee shall not sell or transfer
any shares of the Company during the 180-day period following the effective
date of the registration statement relating to an initial public offering of
securities filed pursuant to the Securities Act of 1933 (the "Securities
Act"). On October 23, 1996, the Board of Directors terminated the Option Plan
and no further options may be granted thereunder. On October 23, 1996, options
to purchase an aggregate of 1,305,833 shares of Common Stock at an exercise
price of $0.60 per share were outstanding under the Option Plan.
 
                                      49

<PAGE>
 
  1996 Stock Incentive Plan. The Company's 1996 Stock Incentive Plan (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 ("SPRs"). The Incentive Plan was approved by the Board of
Directors on October 23, 1996, amended by the Board of Directors on November
24, 1996 and approved by the stockholders on January 16, 1997. A total of
2,268,333 shares of Common Stock are currently reserved for issuance under the
Incentive Plan. Shares available for future grant under the Incentive Plan
will be increased as of the first day of each new fiscal year during the term
of the Incentive Plan by the number of shares issuable upon exercise of
options granted thereunder in the previous fiscal year, net of returns. This
increase may not exceed 1,250,000 in any fiscal year. No option holder may be
granted options to purchase more than 500,000 shares in any fiscal year;
provided, however, that an option holder may be granted an additional 500,000
shares in connection with his or her initial service with the Company.
 
  The Incentive Plan may be administered by the Board of Directors or a
committee of the Board (the "Committee"), which Committee will, in the case of
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The Committee has
the power to determine the terms of the options or SPRs granted, including the
exercise price, the number of shares subject to each option or SPR, the
exercisability thereof, and the form of consideration payable upon such
exercise. In addition, the Committee has the authority to amend, suspend or
terminate the Incentive Plan, provided that no such action may affect any
share of Common Stock previously issued and sold or any option previously
granted under the Incentive Plan.
 
  Options and SPRs granted under the Incentive Plan are not generally
transferable by the optionee, and each option and SPR is exercisable during
the lifetime of the optionee only by such optionee. Options granted under the
Incentive Plan must generally be exercised within three months of the end of
optionee's status as an employee or consultant of the Company, or within
twelve months after such optionee's termination by death or disability, but in
no event later than the expiration of the option's ten year term. In the case
of SPRs, unless the Committee determines otherwise, the Restricted Stock
Purchase Agreement will grant the Company a repurchase option exercisable upon
the voluntary or involuntary termination of the purchaser's employment with
the Company for any reason (including death or disability). The purchase price
for Shares repurchased pursuant to the Restricted Stock Purchase Agreement
will be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the Committee. The
exercise price of all incentive stock options granted under the Incentive Plan
must be at least equal to the fair market value of the Common Stock on the
date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the Incentive Plan is determined by the Committee, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code, the
exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive stock option
granted must equal at least 110% of the fair market value on the grant date
and the term of such incentive stock option must not exceed five years. The
term of all other options granted under the Incentive Plan may not exceed ten
years.
 
  The Incentive Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option will be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the Committee shall provide for the Optionee to have the
right to exercise the option or SPR as to all of the optioned stock, including
shares as to which it would not otherwise be exercisable. If the Administrator
makes an option or SPR exercisable in full in the event of a merger or sale of
assets, the Administrator will notify the optionee that the option or SPR will
be fully exercisable for a period of 15 days from the date of such notice, and
the option or SPR will terminate upon the expiration of such period.
 
                                      50

<PAGE>
 
  Non-employee directors are entitled to participate in the Company's
Incentive Plan. The Incentive Plan provides for an automatic grant of an
option to purchase 16,666 shares of Common Stock (the "First Option") to each
non-employee director on the date on which the Incentive Plan becomes
effective or, if later, on the date on which the person first becomes a non-
employee director. After the First Option is granted to the non-employee
director, he or she will automatically be granted an option to purchase 4,166
shares (a "Subsequent Option") on November 1 of each subsequent year provided
he or she is then a non-employee director and, provided further, that on such
date he or she has served on the Board for at least six months. First Options
and each Subsequent Option will have a term of ten years. Twenty-five percent
of the shares subject to the First Option shall vest on the date twelve months
after the grant date of the option, and 1/48 of the shares subject to the
First Option and each Subsequent Option shall become exercisable each month
thereafter, provided that the optionee continues to serve as a director on
such dates. The exercise price of the First Option and each Subsequent Option
cannot have an exercise price lower be 100% of the fair market value per share
of the Company's Common Stock on the date of the grant of the option.
 
  1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors on
November 18, 1996 and approved by the stockholders on January 16, 1997. The
Company has reserved a total of 666,666 shares of Common Stock for issuance
under the Purchase Plan. Shares available for future issuance under the
Purchase Plan will be increased as of the first day of each new fiscal year
during the term of the Purchase Plan by the number of shares issued thereunder
in the prior fiscal year. The Purchase Plan, which is intended to qualify
under Section 423 of the Code, as amended, permits eligible employees of the
Company to purchase shares of Common Stock through payroll deductions of up to
ten percent of their compensation, up to a maximum of $21,250 for all purchase
periods ending within any calendar year. The Purchase Plan will be implemented
in a series of successive 6-month offering periods. However, the initial
offering period will begin on the effective date of this offering and will end
on the last trading day in the period ending June 1997.
 
  Individuals who are eligible employees on the start day of any offering
period may enter the Purchase Plan on that start date or on any subsequent
quarterly entry date (January 1, April 1, July 1 or October 1). Individuals
who become eligible employees after the start date of the offering period may
join the Purchase Plan on any subsequent quarterly entry date within that
period. Employees are eligible to participate if they are customarily employed
by the Company or any designated subsidiary for at least 20 hours per week and
for more than five months in any calendar year.
 
  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 the Company. Rights granted under the Purchase
Plan are not transferable by a participant other than by will, the laws of
descent and distribution, or as otherwise provided under the plan.
 
  The Purchase Plan will be administered by the Board of Directors or by a
committee appointed by the Board. The Board may amend or modify the Purchase
Plan at any time. The Purchase Plan will terminate on the last business day in
October 2006, unless sooner terminated by the Board.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  No interlocking relationship exists between the Company's Board of Directors
or Compensation Committee and the board of directors or compensation committee
of any other company, nor has any such interlocking relationship existed in
the past. The Compensation Committee of the Board of Directors currently
consists of Messrs. Coats and Fuchs.
 
                                      51

<PAGE>
 
EMPLOYMENT AGREEMENTS
 
  The Company does not presently have any employment contracts in effect with
the Chief Executive Officer or any of the Named Officers, except for Mr.
Lowell. Mr. Lowell has an employment offer letter which provides that he is
entitled to continue to receive his salary for a period of six months as
severance if he is terminated without cause within one year from the
commencement of his employment. Mr. Markovich also has an offer letter which
entitles him to receive a severance payment equal to six months' salary if he
is terminated without cause within one year of the commencement of his
employment. In addition, Mr. Lorimer has an offer letter which entitles him to
receive a severance payment equal to one year's salary (payable monthly) and
an acceleration of all outstanding options, if he is terminated without cause,
dies, becomes disabled or there occurs a change in control of the Company.
 
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
 
  The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors to the maximum extent permitted by Delaware law.
Delaware law provides that a corporation's certificate of incorporation may
contain a provision eliminating or limiting the personal liability of a
director for monetary damages for breach of their fiduciary duties as
directors, except for liability (i) for any breach of their duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General Corporation Law
or (iv) for any transaction from which the director derived an improper
personal benefit.
 
  The Company's Restated Bylaws provide that the Company shall indemnify its
directors and officers and may indemnify its employees and agents to the
fullest extent permitted by law. The Company believes that indemnification
under its Restated Bylaws covers at least negligence and gross negligence on
the part of indemnified parties.
 
  The Company has entered into agreements to indemnify its directors and
officers, in addition to the indemnification provided for in the Company's
Restated Bylaws. These agreements, among other things, indemnify the Company's
directors and officers for certain expenses (including attorneys' fees),
judgments, fines and settlement amounts incurred by any such person in any
action or proceeding, including any action by or in the right of the Company,
arising out of such person's services as a director or officer of the Company,
any subsidiary of the Company or any other company or enterprise to which the
person provides services at the request of the Company. The Company believes
that these provisions and agreements are necessary to attract and retain
qualified directors and officers.
 
                                      52

<PAGE>
 

                             CERTAIN TRANSACTIONS
 
  Pursuant to a Contribution Agreement and Plan of Reorganization dated May
31, 1996 among the Company, Auto-By-Tel, LLC, ABT Acceptance Company, LLC,
Peter R. Ellis, John C. Bedrosian, the John C. Bedrosian and Judith D.
Bedrosian Revocable Trust (the "Trust"), and Robert S. Grimes, the Company
issued to the Trust, Mr. Ellis and Mr. Grimes 5,354,166, 6,187,500 and 833,333
shares of Common Stock of the Company, respectively, in exchange for the
transfer to the Company of their respective membership interests in Auto-By-
Tel, LLC and ABT Acceptance Company, LLC. See Note 5.b of Notes to
Consolidated Financial Statements.
 
  On July 31, 1996, the Company issued to Robert S. Grimes, a director,
officer and significant stockholder of the Company, an option to purchase
250,000 shares of Common Stock of the Company at an exercise price of $0.60
per share, which option vests over two years.
 
  From time to time, the Company has advanced funds to Peter R. Ellis, the
Company's President and Chief Executive Officer. At no time did Mr. Ellis'
indebtedness to the Company exceed $30,000. The advances did not accrue
interest and were unsecured. The advances were made without a specific due
date. Advances were approved by Mr. Bedrosian, the Company's Chairman and
controlling stockholder. The advances were used to pay personal expenses of
Mr. Ellis and were retired by subsequent offsets to Mr. Ellis' salary and
bonus. The Company believes that these advances were in the best interest of
the Company and its stockholders because they allowed Mr. Ellis to meet his
personal needs without requiring an increase in salary or a larger bonus. As
of January 30, 1997, no advances to Mr. Ellis were outstanding. In the future,
the Company will not grant loans to officers or other key employees without
the prior approval of the Compensation Committee of the Board of Directors.
 
  On May 31, 1996 and June 28, 1996, John C. Bedrosian, a director and
significant stockholder of the Company made unsecured loans to the Company in
the amounts of $910,863 and $170,000, respectively. The loans accrued interest
at a simple rate of 8% per annum. These principal and all outstanding and
accrued interest outstanding under loans was repaid in full in a single
repayment on August 28, 1996 and all promissory notes evidencing such debt
were canceled. The Company believes that such loans were on terms more
favorable than the Company would have received from disinterested parties.
 
  In connection with the Company's lease of its principal offices, the Company
was required to establish a $175,000 letter of credit. On June 19, 1996, Mr.
Bedrosian co-signed this letter of credit and pledged a certificate of deposit
as collateral. Mr. Bedrosian has also personally guaranteed the Company's
Merchant Card Agreement, and has provided a personal guarantee to the
financial institution that issued the Company's corporate credit cards,
guaranteeing the payment of all outstanding indebtedness under these credit
facilities.
   
  On August 26, 1996, the Company issued 1,500,000 shares of Series A
Preferred Stock at $10.00 per share in a private placement for an aggregate
consideration of $15.0 million in cash and cancellation of indebtedness. The
holders of such Series A Preferred Stock are entitled to certain registration
rights with respect to the shares of Common Stock issued or issuable upon
conversion thereof. See "Description of Capital Stock--Registration Rights."
Each share of Series A Preferred Stock will convert on a five-for-three basis
into an aggregate of 2,500,000 shares of Common Stock (at a conversion price
of $6.00 per share) on or immediately prior to the closing of this offering.
In connection with such financing, the Company issued (i) 200,000 shares to
ContiTrade Services L.L.C. in exchange for $2,000,000 in cash, (ii) 400,000
shares to National Union Fire Insurance Company of Pittsburgh in exchange for
$4,000,000 in cash, (iii) 800,000 shares to General Electric Capital
Corporation in exchange for $8,000,000 in cash, and (iv) 100,000 shares to
Michael Fuchs in exchange for $1,000,000 in cash and cancellation of
indebtedness. Sales of Series A Preferred Stock were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act.
    
  On July 9, 1996 and August 13, 1996, Michael Fuchs, made unsecured loans to
the Company in the principal amount of $250,000 and $250,000, respectively.
These loans accrued interest at a simple rate of 10% per annum. All principal
and accrued interest under these loans was converted into Series A Preferred
Stock on
 
                                      53

<PAGE>
 
August 23, 1996 at $10.00 per share. No cash repayments of principal or
interest were made on such loans prior to their conversion. The Company
believes that such loans were on terms more favorable than the Company could
have received from disinterested parties. In September 1996, Mr. Fuchs was
appointed to the Company's Board of Directors.
   
  On January 30, 1997, the Company issued 967,915 shares of Series B Preferred
Stock at $9.35 per share in a private placement or an aggregate consideration
of $9.05 million in cash. The holders of such Series B Preferred Stock are
entitled to certain registration rights with respect to the shares of Common
Stock issued or issuable upon conversion thereof. See "Description of Capital
Stock--Registration Rights." Each share of Series B Preferred Stock will
convert on a one-for-one basis into an aggregate of 967,915 shares of Common
Stock on or immediately prior to the closing of the Offering. In connection
with such financing, the Company issued (i) 133,690 shares to ContiTrade
Services L.L.C. in exchange for $1.25 million in cash, (ii) 267,380 shares to
National Union Fire Insurance Company of Pittsburgh in exchange for
$2.5 million in cash, (iii) 534,760 shares to General Electric Capital
Corporation in exchange for $5.0 million in cash, and (iv) 32,085 shares to
Michael Fuchs in exchange for $300,000 in cash. Sales of Series B Preferred
Stock were made in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act.     
 
  In 1996, the Company paid approximately $89,000 in legal fees and expenses
to Dewey Ballantine. Mr. Lorimer was a partner at Dewey Ballantine during
fiscal 1996. Mr. Lorimer joined Auto-By-Tel as Vice President, General Counsel
and Secretary in December 1996.
 
                                      54

<PAGE>
 
                      PRINCIPAL AND SELLING STOCKHOLDERS
 
  The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 31, 1997 and
as adjusted to reflect the sale of Common Stock offered hereby for (i) each
person or entity who is known by the Company to beneficially own five percent
or more of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each of the Named Officers, and (iv) all directors
and executive officers of the Company as a group:
 

<TABLE>   
<CAPTION>
                                      SHARES BENEFICIALLY OWNED                SHARES BENEFICIALLY
                                         PRIOR TO OFFERING(1)       NUMBER   OWNED AFTER OFFERING(1)
                                      -------------------------    OF SHARES -----------------------
NAME OR GROUP OF BENEFICIAL OWNERS        NUMBER        PERCENT     OFFERED     NUMBER       PERCENT
- ----------------------------------    ---------------   -------    --------- --------------  -------
<S>                                   <C>             <C>          <C>       <C>            <C>
Peter R. Ellis(2)....................       6,075,167       38.2%   400,000       5,675,167      29.1%
 c/o Auto-By-Tel Corporation
 18872 MacArthur Boulevard, Suite 200
 Irvine, California 92612-1400
John C. Bedrosian(3).................       5,354,166       33.7        --        5,354,166      27.5
 c/o Auto-By-Tel Corporation
 18872 MacArthur Boulevard, Suite 200
 Irvine, California 92612-1400
Jeffrey H. Coats(4)..................       1,868,093       11.8        --        1,868,093       9.6
General Electric Capital Corporation
 260 Long Ridge Road
 Stamford, Connecticut 06927
Robert S. Grimes(5)..................         958,333        6.0        --          958,333       4.9
 152 West 57th Street
 New York, NY 10019
National Union Fire Insurance........         934,046        5.9        --          934,046       4.8
 Company of Pittsburgh
 70 Pine Street
 19th Floor
 New York, New York 10270
W. Randolph Ellspermann..............          41,666          *        --           41,666         *
Mark W. Lorimer(6)...................               0          0        --                0         0
Michael J. Lowell(6).................               0          0        --                0         0
Brian B. MacDonald(6)................          41,666          *        --           41,666         *
John M. Markovich(6).................               0          0        --                0         0
Michael Fuchs(7).....................         198,751        1.3        --          198,751         *
All directors and executive officers
 as a group (8 persons)(8)...........      14,537,842       91.5    400,000      14,137,842      72.5
</TABLE>
    
- --------
 * Less than 1%
(1) Assumes no exercise of the Underwriters' over-allotment option. Beneficial
    ownership is determined in accordance with the rules of the Securities and
    Exchange Commission. In computing the number of shares beneficially owned
    by a person and the percentage ownership of that person, shares of Common
    Stock subject to options held by that person that are currently
    exercisable or exercisable within 60 days of January 31, 1997 are deemed
    outstanding. Such shares, however, are not deemed outstanding for the
    purposes of computing the percentage ownership of each other person.
    Except as indicated in the footnotes to this table and pursuant to
    applicable community property laws, each stockholder named in the table
    has sole voting and investment power with respect to the shares set forth
    opposite such stockholder's name.
(2) Includes 33,333 shares held by certain irrevocable trusts established for
    family members of Mr. Ellis as to which Mr. Ellis' spouse maintains sole
    voting power. Excludes 108,333 shares held by family members of Mr. Ellis
    as to which Mr. Ellis disclaims beneficial ownership.
(3) All shares are held in The John C. Bedrosian and Judith D. Bedrosian
    Revocable Trust in which Mr. Bedrosian maintains shared voting powers.
(4) Shares held by General Electric Capital Corporation. Mr. Coats is a
    managing director of GE Equity Capital Group, Inc., an affiliate thereof,
    and is a director of the Company. Excludes 16,666 shares subject to
    options granted to Mr. Coats, and subsequently assigned to General
    Electric Capital Corporation, none of which are exercisable within 60 days
    of January 31, 1997.
(5) Includes 125,000 shares subject to options exercisable within 60 days of
    January 31, 1997. Includes an aggregate of 8,333 shares held in
    irrevocable trusts as to which Mr. Grimes' spouse maintains sole voting
    power.
(6) Represents shares subject to options exercisable within 60 days of January
    31, 1997. Excludes 93,333, 500,000, 166,666, 83,333, and 200,000 shares
    subject to outstanding options granted to Messrs. Ellspermann, Lorimer,
    Lowell, MacDonald and Markovich, respectively, none of which are
    exercisable within 60 days of January 31, 1997.
(7) Excludes 16,666 shares subject to options granted to Mr. Fuchs, none of
    which are exercisable within 60 days of January 31, 1997.
(8) Includes 166,666 shares subject to options exercisable within 60 days of
    January 31, 1997.
 
                                      55

<PAGE>
 

                         DESCRIPTION OF CAPITAL STOCK
 
  Upon the closing of this offering, the outstanding Common Stock of the
Company will consist of 19,495,136 shares, $0.001 par value. As of January 31,
1997, there were 15,895,136 shares of Common Stock outstanding (assuming the
conversion of all outstanding shares of Preferred Stock) held of record by
approximately 26 stockholders.
 
COMMON STOCK
 
  A total of 50,000,000 shares of Common Stock of the Company will be
authorized upon the closing of the Offering. Holders of Common Stock are
entitled to one vote per share in all matters to be voted on by the
stockholders. Subject to the preferences of the Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available for payment. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock then
outstanding, if any. The Common Stock has no preemptive or conversion rights
or other subscription rights. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable, and the shares of Common Stock to be
issued upon completion of the Offering will be fully paid and non-assessable.
 
PREFERRED STOCK
 
  Pursuant to the Company's Amended and Restated Certificate of Incorporation,
the Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or
more series and to fix the designations, powers, preferences, privileges, and
relative participating, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the Common Stock. The Board of
Directors, without stockholder approval, can issue Preferred Stock with
voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of Common Stock. Preferred Stock could
thus be issued quickly with terms calculated to delay or prevent a change in
control of the Company or make removal of management more difficult.
Additionally, the issuance of Preferred Stock may have the effect of
decreasing the market price of the Common Stock, and may adversely affect the
voting and other rights of the holders of Common Stock. Upon the closing of
the Offering, no shares of Preferred Stock will be outstanding and the Company
has no plans to issue any of the Preferred Stock.
 
REGISTRATION RIGHTS
 
  Pursuant to an agreement between the Company and the holders (the "Holders")
of approximately 15,322,248 shares of Common Stock and securities convertible
into Common Stock (collectively, and as converted, the "Registrable
Securities"), the Holders are entitled to certain rights with respect to the
registration of such shares under the Act. If the Company proposes to register
any of its securities under the Act, either for its own account or for the
account of other Holders exercising registration rights, the Holders are
entitled to notice of such registration and are entitled to include shares of
Registrable Securities therein. Additionally, the Holders are also entitled to
certain demand registration rights pursuant to which they may require the
Company to file a registration statement under the Act at the Company's
expense with respect to their shares of Registrable Securities, and the
Company is required to use its best efforts to effect such registration. All
of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the
Company not to effect a requested registration within one year of an initial
public offering of the Company's securities, such as the Offering made hereby,
or if such requested registration would have an anticipated aggregate offering
to the public of less than $30,000,000.
 
                                      56

<PAGE>
 
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
 
 Anti-Takeover Law
 
  The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, Section 203 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 or unless the
interested stockholder acquired at least 85% of the corporation's voting stock
(excluding shares held by certain designated stockholders) in the transaction
in which it became an interested stockholder. 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. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within the previous three years did own,
15% or more of the corporation's voting stock.
 
 Limitation of Director and Officer Liability
 
  The Company's Amended and Restated Certificate of Incorporation and Bylaws
contain certain provisions relating to the limitation of liability and
indemnification of directors and officers. The Company's Amended and Restated
Certificate of Incorporation provides that directors of the Company may not be
held personally liable to the Company or its stockholders for a breach of
fiduciary duty, except for liability (i) for any breach of the director's duty
of loyalty to the Company or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of the law, (iii) under Section 174 of the Delaware General Corporation Law,
relating to prohibited dividends, distributions and repurchases or redemptions
of stock, or (iv) for any transaction from which the director derives an
improper benefit. In addition, the Company's Amended and Restated Certificate
of Incorporation and Bylaws provide that the Company shall indemnify its
directors and officers to the fullest extent authorized by Delaware law.
 
 No Stockholder Action by Written Consent
 
  Prior to the closing of the Offering, the Company's Amended and Restated
Certificate of Incorporation will provide that the stockholders can take
action only at a duly called annual or special meeting of stockholders.
Accordingly, stockholders of the Company will not be able to take action by
written consent in lieu of a meeting. This provision may have the effect of
deterring hostile takeovers or delaying changes in control or management of
the Company.
 
TRANSFER AGENT AND REGISTRAR
 
  ChaseMellon Shareholder Services, L.L.C. has been appointed as the transfer
agent and registrar for the Company's Common Stock. Its telephone number for
such purposes is (818) 971-4758.
 
                                      57

<PAGE>
 
                        SHARES ELIGIBLE FOR FUTURE SALE
 
  Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time. Upon
completion of the Offering, based upon shares outstanding as of January 31,
1997, the Company will have outstanding an aggregate of 19,495,136 shares of
Common Stock, assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, the 4,000,000 shares
sold in the Offering will be freely tradeable without restriction or further
registration under the Securities Act, except that any shares purchased by
"affiliates" of the Company, as that term is defined in Rule 144 of the
Securities Act ("Affiliates"), may generally only be sold in compliance with
the limitations of Rule 144 described below.
 
SALES OF RESTRICTED SHARES
 
  The remaining 15,495,136 shares of Common Stock held by existing
stockholders are "restricted securities" under Rule 144 ("Restricted Shares").
The number of shares of Common Stock available for sale in the public market
is limited by restrictions under the Securities Act and lock-up agreements
under which the holders of such shares have agreed not to sell or otherwise
dispose of any of their shares for a period of 180 days after the date of this
Prospectus (the "lock-up period") without the prior written consent of
Montgomery Securities. On the date of this Prospectus, no shares other than
the 4,000,000 offered hereby will be eligible for sale. In addition, following
the expiration of the lock-up period, none of the Restricted Shares will
become available for sale in the public market until the expiration of their
two year holding periods.
 
  In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least two years (including
the holding period of any prior owner, except if the prior owner was an
Affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately
194,951 shares immediately after the Offering); or (ii) the average weekly
trading volume of the Common Stock on the Nasdaq National Market during the
four calendar weeks preceding the filing of a notice on Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least three years (including the holding period of any prior owner
except an Affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144; therefore, unless otherwise restricted, "144(k) shares" could be
sold immediately upon the completion of the Offering. All of the Restricted
Shares, however, will have been held for less than one year upon completion of
the Offering.
 
  Upon completion of the Offering, the holders of 15,322,248 shares of Common
Stock, or their transferees, will be entitled to certain rights with respect
to the registration of such shares under the Securities Act. See "Description
of Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
 
OPTIONS
 
  The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance for options
outstanding under the Option Plan and the Incentive Plan and reserved for
issuance under the Purchase Plan. See "Management--Stock Plans." Such
registration statement is expected to be filed and become effective as soon as
practicable after the effective date of this offering. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to Affiliates, be available for sale in the open
market, unless such shares are subject to vesting restrictions with the
 
                                      58

<PAGE>
 
Company or the lock-up agreements described above. A total of 4,197,500 shares
have been reserved for issuance under the Option Plan, the Incentive Plan and
the Purchase Plan. As of January 31, 1997, options to purchase 2,405,565
shares of Common Stock were issued and outstanding under the Option Plan and
no options had been granted under the Incentive Plan. See "Management--Stock
Plans."
 
  In addition, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of the Company (other than an affiliate)
who purchased shares from the Company in connection with a compensatory stock
or option plan or other written agreement is eligible to resell such shares 90
days after the effective date of this offering in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period,
contained in Rule 144.
 
LOCK-UP AGREEMENTS
 
  All officers, directors, and other stockholders of the Company have agreed
not to sell, offer, contract or grant any option to sell, make any short sale,
pledge, transfer, establish an open "put equivalent position" within the
meaning of the Rule 16a-1(h) under the Securities Exchange Act of 1934, as
amended, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock for a period
of 180 days after the date of this Prospectus, without the prior written
consent of Montgomery Securities. In addition, under the terms of the Option
Plan and Incentive Plan, holders of options to purchase Common Stock are
obligated not to sell or transfer any shares of the Company during such 180-
day period if so requested by the Company or the underwriters. See
"Underwriting."
 
                                      59

<PAGE>
 

                                 UNDERWRITING
 
  The Underwriters named below, represented by Montgomery Securities, Cowen &
Company and Robertson, Stephens & Company LLC (the "Representatives"), have
severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters are committed to purchase all of such shares, if any
are purchased.
 

<TABLE>
<CAPTION>
                           UNDERWRITER                          NUMBER OF SHARES
                           -----------                          ----------------
   <S>                                                          <C>
   Montgomery Securities.......................................
   Cowen & Company.............................................
   Robertson, Stephens & Company LLC...........................
                                                                   ---------
     Total.....................................................    4,000,000
                                                                   =========
</TABLE>

 
  The Representatives have advised the Company that the Underwriters initially
propose to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers
a concession of not more than $  per share, and the Underwriters may allow,
and such dealers may reallow, a concession of not more than $  per share to
certain other dealers. After the initial public offering, the offering price
and other selling terms may be changed by the Representatives. The shares of
Common Stock are offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
 
  The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 600,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial shares of Common Stock to
be purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed to purchase such additional
shares in approximately the same proportion as set forth in the above table.
The Underwriters may purchase such shares only to cover over-allotments made
in connection with the offering.
 
  The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
 
  The shares of Common Stock offered hereby have not been and will not be
qualified for distribution under the securities legislation of any of the
provinces of Canada. Accordingly, the shares of Common Stock offered hereby
may not be distributed in Canada, except pursuant to a prospectus exemption
under applicable securities legislation. Each Underwriter has agreed that it
will not distribute any shares of Common Stock in Canada except in accordance
with a prospectus exemption under applicable securities legislation.
 
  All of the Company's officers, directors and stockholders have agreed that
they will not, without the prior written consent of Montgomery Securities
(which consent may be withheld in its sole discretion) and subject to certain
limited exceptions, directly or indirectly, sell, offer, contract or grant any
option to sell, make any short sale, pledge, transfer, establish an open "put
equivalent position" within the meaning of the Rule 16a-1(h) under the
Securities Exchange Act of 1934, as amended, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
currently owned either of record or beneficially by them for a period
commencing on the date of this Prospectus and continuing to a date 180 days
after the first date any of the shares of Common Stock offered hereby are
released by the Underwriters for sale to the public. Montgomery Securities
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to these lock-up agreements. In
 
                                      60

<PAGE>
 
addition, the Company has agreed that, for a period of 180 days after the date
of this Prospectus, it will not, without the consent of Montgomery Securities,
issue, offer, sell or grant options to purchase or otherwise dispose of any
equity securities or securities convertible into or exchangeable for equity
securities except for (i) the shares of Common Stock offered hereby, (ii)
shares of Common Stock issued pursuant to the exercise of outstanding options
and (iii) options to purchase shares of Common Stock granted pursuant to the
Incentive Plan and shares of Common Stock issued pursuant to the exercise of
such options. See "Management--Stock Plans" and "Shares Eligible for Future
Sale."
 
  Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations are the history of, and prospects for, the
Company and the industry in which it competes, an assessment of the Company's
management, its past and present operations and financial performance, the
prospects for future earnings of the Company, the present state of the
Company's development, the general condition of the securities markets at the
time of the Offering, the market prices of and demand for publicly traded
common stocks of companies in recent periods and other factors deemed
relevant.
 
  In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may overallot in
connection with the Offering, creating a short position in the Common Stock
for their own account. In addition, to cover overallotments or to stabilize
the price of the Common Stock, the Underwriters may bid for, and purchase,
shares of Common Stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the Common Stock in the Offering if the syndicate repurchases
previously distributed Common Stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in
these activities and may end any of these activities at any time.
 
  The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
 
  The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
 
                                      61

<PAGE>
 

                                 LEGAL MATTERS
 
  The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, Palo Alto,
California. Certain legal matters in connection with the Common Stock offered
hereby will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, Los Angeles, California.
 

                                    EXPERTS
 
  The consolidated financial statements as of and for the period from
inception (January 31, 1995) to December 31, 1995 and as of and for the year
ended December 31, 1996 appearing in this Prospectus and Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as set forth in their report with respect thereto and are
included herein in reliance upon the authority of said firm as experts in
giving said report.
 
                            ADDITIONAL INFORMATION
 
  A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission (the "Commission"), Washington, D.C. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to such
Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office, 450 Fifth Street, N.W., Washington, D.C. 20549, the New York
Regional Office located at 7 World Trade Center, 13th Floor, New York, NY
10048, and the Chicago Regional Office located at Northwestern Atrium Center,
500 West Madison Street, Chicago, IL 60661, and copies of all or any part
thereof, including any exhibit thereto, may be obtained from the Commission
upon the payment of certain fees prescribed by the Commission. The Commission
maintains a World Wide Web Site that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of the site is
http://www.sec.gov.
 
 
                                      62

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                                AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
   <S>                                                                      <C>
   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-7
</TABLE>

 
                                      F-1

<PAGE>
 

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Shareholders of
Auto-By-Tel Corporation:
 
  We have audited the accompanying consolidated balance sheets of Auto-By-Tel
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the period from inception (January 31, 1995) to
December 31, 1995 and the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Auto-By-Tel Corporation
and subsidiaries as of December 31, 1995 and 1996, and the results of their
operations and their cash flows for the period from inception (January 31,
1995) to December 31, 1995 and the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
 
 
                                                    ARTHUR ANDERSEN LLP
 
Orange County, California
January 22, 1997,

(except Note 8, as to which the date is January 30, 1997)
 
                                      F-2

<PAGE>
 
                    AUTO-BY-TEL CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 

<TABLE>
<CAPTION>
                                     DECEMBER 31,               PRO FORMA
                                ------------------------   STOCKHOLDERS' EQUITY
                                   1995         1996       DECEMBER  31, 1996
                                -----------  -----------  ---------------------
                                                               (UNAUDITED)
                                                               (NOTE 8.C.)
<S>                             <C>          <C>          <C>
            ASSETS
Current assets:
  Cash and cash equivalents,
   includes restricted amounts
   of $0 and $985,000,
   respectively................ $    48,000  $ 9,062,000
  Accounts receivable, net of
   allowance for doubtful
   accounts of $20,000 and
   $162,000, respectively......      14,000      298,000
  Prepaid advertisement........         --       716,000
  Other........................     114,000      186,000
                                -----------  -----------
    Total current assets.......     176,000   10,262,000
Property and equipment, net....     102,000    1,425,000
Other assets...................       7,000      611,000
                                -----------  -----------
    Total assets............... $   285,000  $12,298,000
                                ===========  ===========
 LIABILITIES AND STOCKHOLDERS'
             EQUITY
Current liabilities:
  Accounts payable............. $    87,000  $   651,000
  Deferred revenue.............     356,000    2,326,000
  Customer deposits............         --       554,000
  Other current liabilities....      16,000      771,000
  Due to shareholder...........     816,000          --
                                -----------  -----------
    Total current liabilities..   1,275,000    4,302,000
                                -----------  -----------
Commitments and contingencies
Stockholders' equity:
  Convertible preferred stock,
   Series A, $0.001 par value,
   1,500,000 shares authorized;
   none issued and outstanding
   at December 31, 1995;
   1,500,000 shares issued and
   outstanding at December 31,
   1996, aggregate liquidation
   preference of $15,000,000
   (5,000,000 shares
   authorized, none issued and
   outstanding, pro forma).....         --         2,000       $       --
  Common stock, $0.001 par
   value; 16,666,666 shares
   authorized; none issued and
   outstanding at December 31,
   1995; 12,427,221 shares
   issued and outstanding at
   December 31, 1996
   (50,000,000 shares
   authorized, 15,895,136
   shares issued and
   outstanding, pro forma).....         --        12,000            16,000
  Members' interests/additional
   paid-in capital.............      40,000   15,073,000        24,121,000
  Deferred compensation........         --       (26,000)          (26,000)
  Accumulated deficit..........  (1,030,000)  (7,065,000)       (7,065,000)
                                -----------  -----------       -----------
    Total stockholders' equity
     (deficit).................    (990,000)   7,996,000       $17,046,000
                                -----------  -----------       -----------
    Total liabilities and
     stockholders' equity...... $   285,000  $12,298,000
                                ===========  ===========
</TABLE>

 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                      F-3

<PAGE>
 
                    AUTO-BY-TEL CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 

<TABLE>
<CAPTION>
                                               INCEPTION
                                           (JANUARY 31, 1995)
                                                   TO            YEAR ENDED
                                           DECEMBER 31, 1995  DECEMBER 31, 1996
                                           ------------------ -----------------
<S>                                        <C>                <C>
Revenues..................................    $   274,000        $ 5,025,000
                                              -----------        -----------
Operating expenses:
  Marketing and advertising...............        476,000          4,439,000
  Selling, training and support...........        454,000          3,193,000
  Technology development..................         99,000          1,393,000
  General and administrative..............        275,000          2,159,000
                                              -----------        -----------
                                                1,304,000         11,184,000
                                              -----------        -----------
    Loss from operations..................     (1,030,000)        (6,159,000)
                                              -----------        -----------
Other income (expense):
  Interest income.........................            --             148,000
  Interest expense........................            --             (24,000)
                                              -----------        -----------
                                                      --             124,000
                                              -----------        -----------
    Net loss..............................    $(1,030,000)       $(6,035,000)
                                              ===========        ===========
Net loss per common and common equivalent
 share....................................    $      (.07)       $      (.38)
                                              ===========        ===========
Weighted average common and common
 equivalent shares outstanding............     15,262,262         15,792,293
                                              ===========        ===========
</TABLE>

 
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-4

<PAGE>
 
                    AUTO-BY-TEL CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                              
                                                              
                                                              
                              SERIES A                        
                            CONVERTIBLE                        MEMBERS'
                          PREFERRED STOCK     COMMON STOCK     INTEREST/
                          ---------------- ------------------ ADDITIONAL
                          NUMBER OF        NUMBER OF            PAID-IN      DEFERRED   ACCUMULATED   STOCKHOLDERS'
                           SHARES   AMOUNT   SHARES   AMOUNT    CAPITAL    COMPENSATION   DEFICIT    EQUITY (DEFICIT)
                          --------- ------ ---------- ------- -----------  ------------ -----------  ----------------
<S>                       <C>       <C>    <C>        <C>     <C>          <C>          <C>          <C>
Balance, Inception
 (January 31, 1995).....        --  $  --         --  $   --  $       --     $    --    $       --      $      --
 Sale of members'
  interest in ABT for
  cash..................        --     --         --      --       40,000         --            --          40,000
 Net loss...............        --     --         --      --          --          --     (1,030,000)    (1,030,000)
                          --------- ------ ---------- ------- -----------    --------   -----------     ----------
Balance, December 31,
 1995...................        --     --         --      --       40,000         --     (1,030,000)      (990,000)
                          --------- ------ ---------- ------- -----------    --------   -----------     ----------
 Sale of members'
  interest in ABTAC for
  cash..................        --     --         --      --       50,000         --            --          50,000
 Issuance of Common
  Stock in exchange for
  members' interest.....        --     --  12,374,999  12,000     (12,000)        --            --             --
 Issuance of Common
  Stock options with an
  exercise price of
  $0.60 per share.......        --     --         --      --       87,000     (87,000)          --             --
 Issuance of Series A
  Preferred Stock at
  $10.00 per share for
  cash, net of costs of
  $135,000..............  1,450,000  2,000        --      --   14,363,000         --            --      14,365,000
 Issuance of Series A
  Preferred Stock at
  $10.00 per share upon
  conversion of debt....     50,000    --         --      --      500,000         --            --         500,000
 Issuance of Common
  Stock for services in
  August 1996...........        --     --      10,000     --       20,000         --            --          20,000
 Issuance of Common
  Stock upon exercise of
  stock options.........        --     --      42,222     --       25,000         --            --          25,000
 Amortization of
  deferred compensation.        --     --         --      --          --       61,000           --          61,000
 Net loss...............        --     --         --      --          --          --     (6,035,000)    (6,035,000)
                          --------- ------ ---------- ------- -----------    --------   -----------     ----------
Balance, December 31,
 1996...................  1,500,000 $2,000 12,427,221 $12,000 $15,073,000    $(26,000)  $(7,065,000)    $7,996,000
                          ========= ====== ========== ======= ===========    ========   ===========     ==========
</TABLE>

 
 
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-5

<PAGE>
 
                    AUTO-BY-TEL CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 

<TABLE>
<CAPTION>
                                              INCEPTION
                                          (JANUARY 31, 1995)     YEAR ENDED
                                         TO DECEMBER 31, 1995 DECEMBER 31, 1996
                                         -------------------- -----------------
<S>                                      <C>                  <C>
Cash flows from operating activities:
  Net loss..............................     $(1,030,000)        $(6,035,000)
  Adjustments to reconcile net loss to
   net cash used in operating
   activities--
    Depreciation and amortization.......          25,000             178,000
    Provision for bad debt..............          20,000             145,000
    Amortization of deferred
     compensation.......................             --               61,000
    Changes in assets and liabilities:
      Increase in accounts receivable...         (34,000)           (429,000)
      Increase in prepaid advertisement.             --             (716,000)
      Increase in other current assets..        (114,000)            (72,000)
      Increase in other assets..........          (7,000)           (604,000)
      Increase in accounts payable......          87,000             564,000
      Increase in deferred revenue......         356,000           1,970,000
      Increase in customer deposits.....             --              554,000
      Increase in other current
       liabilities......................          16,000             775,000
                                             -----------         -----------
        Net cash used in operating
         activities.....................        (681,000)         (3,609,000)
                                             -----------         -----------
Cash flows from investing activities:
  Purchases of property and equipment...        (127,000)         (1,501,000)
                                             -----------         -----------
Cash flows from financing activities:
  Proceeds from sale of common stock....             --               25,000
  Proceeds from sale of members'
   interest in ABT......................          40,000                 --
  Proceeds from sale of members'
   interest in ABTAC....................             --               50,000
  Proceeds from issuance of Series A
   Preferred Stock, net.................             --           14,365,000
  Proceeds from issuance of notes
   payable..............................         816,000             765,000
  Repayments of notes payable...........             --           (1,081,000)
                                             -----------         -----------
        Net cash provided by financing
         activities.....................         856,000          14,124,000
                                             -----------         -----------
Net increase in cash and cash
 equivalents............................          48,000           9,014,000
Cash and cash equivalents, at beginning
 of period..............................             --               48,000
                                             -----------         -----------
Cash and cash equivalents, at end of
 period.................................     $    48,000         $ 9,062,000
                                             ===========         ===========
Supplemental disclosures of cash flow
 information:
  Cash paid during the period for income
   taxes................................     $     2,000         $     4,000
                                             ===========         ===========
  Cash paid during the period for
   interest.............................     $       --          $    24,000
                                             ===========         ===========
Supplemental disclosure of noncash
 activities:
  During August 1996, 50,000 shares of
   Series A Preferred Stock were issued
   in exchange for $500,000 previously
   advanced to the Company under three
   notes payable.

  During September 1996, 10,000 shares
   of Common Stock with a fair market
   value of $20,000 were issued for
   consulting services
  During May 1996, 12,374,999 shares of
   Common Stock were issued to founding
   shareholders in exchange for members'
   interests
</TABLE>

 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      F-6

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  a. The Company
 
  Auto-By-Tel Corporation (the Company) is establishing a nationally branded
Internet-based marketing service for new and used vehicles and related
consumer services. The Company's Web site (www.autobytel.com) enables
consumers to gather information on automobiles and light duty trucks
(vehicles) and shop for vehicles and related consumer services from their home
or office. The Company's services are free to consumers and, to date, the
Company has derived substantially all of its revenues from fees paid by
subscribing dealerships located in the United States and Canada.
 
  The business commenced operations as a limited liability company (See Note
5.b.).
 
  b. Principles of Consolidation
 
  The accompanying consolidated financial statements include the accounts of
the Company, its predecessors (See Note 5.b.) and its wholly-owned
subsidiaries: Auto-By-Tel Marketing Corporation, Auto-By-Tel Acceptance
Corporation, Auto-By-Tel Insurance Services, Inc. and Auto-By-Tel Canada,
Inc.. All intercompany transactions and balances have been eliminated.
 
  c. Cash and Cash Equivalents
 
  All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents and those with maturities
greater than three months are considered to be short-term investments.
 
  d. 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. Leasehold improvements are stated at cost.
Amortization is provided using the straight-line method over the lesser of the
lease term or the estimated useful lives of the respective assets.
 
  e. Revenue Recognition
 
  Substantially all revenues to date have consisted of marketing fees paid by
franchises of subscribing dealerships. These marketing fees are comprised of
an initial fee, a monthly fee and an annual fee. The initial fee and annual
fee are recognized ratably over the service period of 12 months. The monthly
fee is recognized in the period the service is provided. Deferred revenue is
comprised of unamortized initial and annual fees.
 
  f. Advertising and Promotion Costs
 
  Advertising and promotion costs consist primarily of fees paid to automotive
information providers, online services providers, online search engines and
print advertising. Advertising and promotion costs are recorded as expense in
the period that the advertisement appears or the service is provided.
 
  g. Technology Development
 
  Technology development expenses consist primarily of personnel and related
compensation costs and contract labor to support software development and
configuration and implementation of the Company's Internet, telecommunications
and support system infrastructure. Technology development expenditures are
charged to expense as incurred.
 
 
                                      F-7

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  h. Stock-Based Compensation
 
  The Company accounts for stock-based compensation issued to employees using
the intrinsic value based method as prescribed by APB Opinion No. 25
"Accounting for Stock Issued to Employees" (APB No. 25). Under the intrinsic
value based method, compensation is the excess, if any, of the fair value of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. Compensation, if any, is recognized over the
applicable service period, which is usually the vesting period.
 
  In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). This standard, if fully adopted, changes the
methods of accounting for employee stock-based compensation plans to the fair
value based method. For stock options, fair value is determined using an
option-pricing model that takes into account the stock price at the grant
date, the exercise price, the expected life of the option, the volatility of
the underlying stock (not applicable for private entities), expected dividends
and the risk-free interest rate over the expected life of the option.
Compensation expense, if any, is recognized over the applicable service
period, which is usually the vesting period.
 
  The adoption of the accounting methodology of SFAS No. 123 is optional and
the Company has elected to continue accounting for stock-based compensation
issued to employees using APB No. 25; however, pro forma disclosures as if the
Company adopted the cost recognition requirements under SFAS No. 123 are
required to be presented (See Note 7).
 
  i. Income Taxes
 
  The Company accounts for income taxes using the asset and liability method
as prescribed by SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109).
Under the asset and liability method, deferred income tax assets and
liabilities are determined based on the differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
currently enacted tax rates and laws.
 
  Prior to May 31, 1996, the business operated as limited liability companies
taxed as partnerships under the provisions of the Internal Revenue Code of
1986 (Internal Revenue Code). Under those provisions, the Company was not
subject to corporate income taxes on its taxable income. Instead, the
Company's taxable income or loss prior to May 31, 1996 is includable in the
individual income tax returns of its members.
 
  Effective May 31, 1996, as a result the reorganization under the terms of a
Contribution Agreement and Plan of Organization, the business was reorganized
as a C Corporation under the provisions of the Internal Revenue Code (See Note
5.b.). The reorganization required that the Company record the cumulative tax
effect of temporary differences between book income and taxable income as
deferred tax assets and deferred tax liabilities (net of valuation allowance)
in accordance with SFAS No. 109. At May 31, 1996, the cumulative tax effect of
these temporary differences was immaterial.
 
  j. Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
                                      F-8

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  k. Fair Value of Financial Instruments
 
  The carrying amount of the Company's financial instruments approximates fair
value.
 
  l. Concentration of Credit Risk
 
  Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
and accounts receivable. Substantially all of the Company's cash and cash
equivalents are invested in one money market fund with underlying assets
consisting primarily of commercial paper.
 
  To date, accounts receivable have been derived from marketing fees billed to
franchises of subscribing dealerships located in the United States and Canada.
The Company generally requires no collateral. The Company maintains reserves
for potential credit losses; historically, such losses have been minor and
within management's expectations. From inception (January 31, 1995) through
December 31, 1996, no subscribing dealership franchise accounted for greater
than 10% of the accounts receivable or revenue of the Company.
 
  The Company conducts its business within one industry segment within the
United States and Canada. 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.
 
  m. Foreign Currency Translation
 
  Assets and liabilities of the Canadian operations are remeasured from
Canadian dollars into U.S. dollars in accordance with Financial Accounting
Standards Board Statement No. 52. Revenues and expenses are translated at
average monthly exchange rates prevailing during the period. Resulting
translation adjustments are immaterial.
 
  n. New Accounting Pronouncements
 
  The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" on January 1, 1996.
This standard requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of this standard did not have a
material impact on the consolidated financial statements.
 
  o. Net Loss Per Share
 
  Net loss per share is computed based on the weighted average number of
shares of common stock outstanding and common equivalent shares from stock
options (under the treasury stock method, if dilutive). In accordance with
certain SEC Staff Accounting Bulletins, such computations include all common
equivalent shares (using the treasury stock method and the anticipated public
offering price) issued twelve months prior to the filing of the Initial Public
Offering (IPO) as if they were outstanding for all periods presented.
Furthermore, common equivalent shares from convertible preferred stock that
will automatically convert upon the completion of the Company's proposed IPO
are included in the calculation for all periods presented as if converted
using the treasury stock method.
 
                                      F-9

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
(2) PROPERTY AND EQUIPMENT
 
  Property and equipment consists of the following:
 

<TABLE>
<CAPTION>
                                DECEMBER 31,
                             --------------------
                               1995       1996                 ASSET LIVES
                             --------  ----------  -----------------------------------
   <S>                       <C>       <C>         <C>
   Computer hardware.......  $ 88,000  $1,125,000  3 years
   Furniture and equipment.    39,000     412,000  3 years
   Leasehold improvements..       --       77,000  5 years or term of lease if shorter
                             --------  ----------
                              127,000   1,614,000
   Less--Accumulated
    depreciation and
    amortization...........   (25,000)   (189,000)
                             --------  ----------
                             $102,000  $1,425,000
                             ========  ==========
</TABLE>

 
(3) DUE TO SHAREHOLDER
 
  During 1995 and 1996, the Company's Chairman and co-founder advanced funds
to the Company totaling $1,081,000. During 1996, these advances were converted
to notes that were payable on demand and bore interest at a rate of 8% per
annum. These notes were paid in full using the proceeds of the Series A
Preferred Stock offering (See Note 5.a).
 
(4) INCOME TAXES
 
  No provision for federal and state income taxes has been recorded as the
Company incurred net operating losses through December 31, 1996. As of
December 31, 1996, the Company had approximately $4.7 million of federal and
state net operating loss carryforwards available to offset future taxable
income; such carryforwards expire in various years through 2011. Under the Tax
Reform Act of 1986, the amounts of and benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three year period. As of
December 31, 1996, the effect of such limitation, if imposed, has not been
determined.
 
  Net deferred income tax assets, totaling approximately $2.0 million at
December 31, 1996, consist primarily of the tax effect of net operating loss
carryforwards, reserves and accrued expenses which are not yet deductible for
tax purposes. The Company has provided a full valuation allowance on these
deferred income tax assets because of the uncertainty regarding their
realization.
 
(5) STOCKHOLDERS' EQUITY
 
  a. Series A Convertible Preferred Stock
 
  On August 22, 1996, the Board of Directors of the Company authorized
1,500,000 shares of Series A Convertible Preferred Stock (Series A Preferred).
On August 23, 1996, the Company completed the sale of 1,500,000 shares of
Series A Preferred at $10.00 per share through a private placement offering.
Of the total shares sold, 50,000 shares were issued to an individual in
exchange for $500,000 previously advanced to the Company under three notes
payable. In addition, $1,081,000 of the proceeds were used to repay notes due
to the Company's Chairman and co-founder.
 
                                     F-10

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Each share of Series A Preferred will be automatically converted into 1.67
shares of common stock upon the earliest of (i) the closing of an underwritten
public offering of the Company's common stock with a minimum per share price
of $9.00 per share, and minimum aggregate proceeds of $30 million; (ii) the
written consent of two-thirds of the holders of Series A Preferred; or (iii)
when fewer than 300,000 shares of Series A Preferred remain outstanding. Each
share of Series A Preferred is also convertible into 1.67 shares of common
stock at the option of the holder. The Company has reserved 2,500,000 shares
of common stock to permit the conversion of the Series A Preferred.
 
  Holders of Series A Preferred are entitled to one vote for each share of
common stock into which such shares of Series A Preferred may be converted
except with respect to election of directors, whereby the holders, voting
separately as a class, shall be entitled to elect one director (to be
increased to two directors if the authorized number of total directors is
increased to greater than five members). Each share of Series A Preferred
entitles the holder to receive noncumulative dividends, if and when declared
by the Board of Directors, prior to any dividend paid on the common stock.
Dividends, if any, on Series A Preferred shall be declared at an annual rate
of $0.80 per share. As of December 31, 1996, no dividends have been declared.
 
  In the event of liquidation, the Series A Preferred has preference over the
common stock in the amount of $10.00 per share, plus declared but unpaid
dividends.
 
  b. Common Stock
 
  Auto-By-Tel LLC (ABT), a California limited liability company, was organized
in January 1995 and began operations in March 1995. ABT Acceptance Company LLC
(ABTAC), an affiliated Company under common control, was formed in February
1996. ABT and ABTAC (the LLC's) were reorganized as of May 31, 1996 pursuant
to the terms of a Contribution Agreement and Plan of Organization (the
Agreement) entered into by all of the members of the LLC's. Under the terms of
the Agreement, the interests of the members were transferred to Auto-By-Tel
Corporation, a Delaware corporation, in a tax-free transaction. As the LLC's
were under common control, the reorganization was accounted for in a manner
similar to a pooling-of-interests whereby the assets and liabilities of ABT
and ABTAC were transferred to the Company at their historical cost. In
consideration for their respective ownership interests, the members of ABT and
ABTAC received 12,374,999 shares of common stock of the Company.
 
  c. Stock Split and Increase of Authorized Shares
 
  On November 24, 1996, the Board of Directors authorized a 5-for-3 stock
split (the Stock Split) of the Company's Common Stock. All references in the
financial statements to number of shares, per share amounts and market prices
of the Company's common stock have been retroactively restated to reflect the
effect of the Stock Split. The Board of Directors has also approved, effective
upon the completion of the IPO, a recapitalization that would increase the
total of authorized shares of Common Stock to 50,000,000 and an increase in
the total number of authorized shares of preferred stock to 7,467,915.
 
                                     F-11

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(6) COMMITMENTS
 
  a. Operating Leases
 
  The Company has an operating lease for its corporate office facilities which
expires in 2001. At December 31 , 1996, future minimum lease payments under
this noncancelable, five year operating lease are as follows:
 

<TABLE>
<CAPTION>
   YEAR ENDING DECEMBER 31,
   ------------------------
   <S>                                                                  <C>
      1997............................................................. $142,000
      1998.............................................................  184,000
      1999.............................................................  204,000
      2000.............................................................  218,000
      2001.............................................................  150,000
                                                                        --------
                                                                        $898,000
                                                                        ========
</TABLE>

 
  Rent expense was $22,000 and $92,000 for the period from inception (January
31, 1995) to December 31, 1995 and the year ended December 31, 1996,
respectively.
 
  b. Marketing Agreements
 
  The Company has multi-year agreements with automotive information providers
that make available to consumers vehicle research data over the Internet. Such
agreements are generally for a term of three to five years and require that
the Company pay fees to these companies based on the volume of information
received by the Company from these services. The minimum annual commitments
under these agreements aggregate to $120,000.
 
  c. Letter of Credit
 
  In connection with the Company's lease of its principal offices, the
Company's Chairman co-signed a letter of credit and pledged a personal
certificate of deposit as collateral. The Company's chairman has also
personally guaranteed the Company's Merchant Card Agreement, and has provided
a personal guarantee to the financial institution that issued the Company's
corporate credit cards, guaranteeing the payment of all outstanding
indebtedness under these credit facilities.
 
  As of December 31, 1996, the Company had total outstanding letters of credit
of approximately $1.0 million collateralized by restricted cash balances of
approximately $985,000.
 
  d. Advertisement Purchase Commitment
 
  In November 1996, the Company entered into a commitment to purchase
approximately $1.0 million in a television advertisement to be aired during
the Super Bowl in January 1997. Such costs will be expensed in the first
quarter of 1997, when the advertisement appears.
 
(7) STOCK PLANS
 
  1996 Stock Option Plan. The Company's 1996 Stock Option Plan (the Option
Plan) was approved by the Board of Directors and the stockholders on May 18,
1996. The Option Plan provides 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 grant to employees, consultants
and directors of nonstatutory stock options.
 
                                     F-12

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Under the Option Plan, the exercise price of all incentive stock options
granted under the Option Plan cannot be lower than the fair market value of
the Common Stock 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 the Company, 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 1996 Option Plan may be up to 10 years. On
October 23, 1996, the Board of Directors terminated the Option Plan and no
further options may be granted thereunder. Upon termination, options to
purchase an aggregate of 1,305,833 shares of Common Stock at an exercise price
of $0.60 per share were outstanding under the Option Plan.
 
  1996 Stock Incentive Plan. The Company's 1996 Stock Incentive Plan (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 (SPRs). The Incentive Plan was approved by the Board of
Directors on October 23, 1996, amended by the Board of Directors on November
24, 1996 and approved by the stockholders on January 16, 1997. A total of
2,268,333 shares of Common Stock are currently reserved for issuance under the
Incentive Plan. Shares available for future grant under the Incentive Plan
will be increased as of the first day of each new fiscal year during the term
of the Incentive Plan by the number of shares issuable upon exercise of
options granted thereunder in the previous fiscal year, net of returns.
 
  Non-employee directors are entitled to participate in the Company's
Incentive Plan. The Incentive Plan provides for an automatic grant of an
option to purchase 16,666 shares of Common Stock to each non-employee director
on the date on which the Incentive Plan becomes effective or, if later, on the
date on which the person first becomes a non-employee director. In each
successive year the non-employee director shall automatically be granted an
option to purchase 4,166 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 shall have a term of ten years. Such options vest at various rates
over 36 months and the exercise price per share shall be 100% of the fair
market value of the Company's Common Stock on the date of the grant of the
option.
 
  1996 Employee Stock Purchase Plan. The Company's 1996 Employee Stock
Purchase Plan (the Purchase Plan) was adopted by the Board of Directors on
November 18, 1996 and approved by the stockholders on January 16, 1997. The
Company has reserved a total of 666,666 shares of Common Stock for issuance
under the Purchase Plan. Shares available for future issuance under the
Purchase Plan will be increased as of the first day of each new fiscal year
during the term of the Purchase Plan by the number of shares issued thereunder
in the prior fiscal year. The Purchase Plan, which is intended to qualify
under Section 423 of the Code, as amended, permits eligible employees of the
Company 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.
 
  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 the Company. Rights granted under the Purchase
Plan are not transferable by a participant other than by will, the laws of
descent and distribution, or as otherwise provided under the plan.
 
  During the year ended December 31, 1996, the Company granted options under
the aforementioned plans to purchase an aggregate of 2,352,066 shares of
Common Stock at various exercise prices ranging from $0.60 to $7.50 per share.
During the year ended December 31, 1996, the Company has recorded, based upon
an
 
                                     F-13

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
independent appraisal obtained by the Company's Board of Directors, $87,000 of
deferred compensation expense relating to certain options. This amount will be
amortized over the vesting periods of the options, which is generally one to
three years. Amortization of deferred compensation for the year ended December
31, 1996 was $61,000.
 
  A summary of the status of the Company's stock options as of December 31,
1996 and changes during the period is presented below:

<TABLE>
<CAPTION>
                                                                      WEIGHTED-
                                                                       AVERAGE
                                                                      EXERCISE
                                                            OPTIONS     PRICE
                                                           ---------  ---------
   <S>                                                     <C>        <C>
   Outstanding at December 31, 1995......................        --       --
   Granted...............................................  2,352,066   $ 2.16
   Exercised.............................................    (42,222)    0.60
   Canceled..............................................    (29,029)    0.60
                                                           ---------   ------
   Outstanding at December 31, 1996......................  2,280,815   $ 2.21
                                                           =========   ======
   Options exercisable at December 31, 1996..............    586,111   $ 0.60
                                                           =========   ======
   Options available for future grant....................  1,250,000
                                                           =========
   Weighted-average fair value of options granted during
    the year whose exercise price is less than the market
    price of the stock on the grant date (254,167
    options).............................................  $    1.63   $ 0.60
                                                           =========   ======
   Weighted-average fair value of options granted during
    the year whose exercise price exceeds the market
    price of the stock on the grant date (2,097,899
    options).............................................  $    0.77   $ 2.35
                                                           =========   ======
</TABLE>

 
  The fair value of each option granted during 1996 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 effectively zero
(required for public companies only), (iii) weighted-average risk-free
interest rate of approximately 6.70%, and (iv) expected life of 6 years.
 
  The following table summarizes information about stock options outstanding
at December 31, 1996:
 

<TABLE>
<CAPTION>
                    OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
     -------------------------------------------------------------------------------
                                         WEIGHTED-AVERAGE   NUMBER
     EXERCISE PRICE   NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
     --------------   ------------------ ---------------- ----------- --------------
     <S>              <C>                <C>              <C>         <C>
         $0.60            1,262,482         9.5 years       586,111       $0.60
         $3.00              741,667         9.8 years           --          --
         $6.00               12,500         9.9 years           --          --
         $7.50              264,166         9.9 years           --          --
</TABLE>

 
  Had compensation cost for the Company's 1996 grants for its stock-based
compensation plan been determined consistent with SFAS No. 123, the Company's
net loss, and net loss per common share for the year ended December 31, 1996
would approximate the pro forma amounts below:
 

<TABLE>
<CAPTION>
                                                      AS REPORTED   PRO FORMA
                                                      -----------  -----------
   <S>                                                <C>          <C>
   Net loss.......................................... $(6,035,000) $(6,270,000)
                                                      ===========  ===========
   Net loss per common share......................... $     (0.38) $     (0.40)
                                                      ===========  ===========
</TABLE>

 
 
                                     F-14

<PAGE>
 
                            AUTO-BY-TEL CORPORATION
                               AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
 
(8) SUBSEQUENT EVENTS AND PRO FORMA PRESENTATION
 
  a. Series B Convertible Preferred Stock Sale
 
  On January 24, 1997, the Board of Directors of the Company authorized
967,915 shares of Series B Convertible Preferred Stock (Series B Preferred).
On January 30, 1997, the Company completed the sale of 967,915 shares of
Series B Preferred at $9.35 per share through a private placement offering.
 
  Each share of Series B Preferred will be automatically converted into one
share of common stock upon the earliest of (i) the closing of an underwritten
public offering of the Company's common stock with a minimum per share price
of $9.00 per share, and minimum aggregate proceeds of $30 million; (ii) the
written consent of two-thirds of the holders of Series B Preferred; or (iii)
when fewer than 300,000 shares of Series B Preferred remain outstanding. Each
share of Series B Preferred is also convertible into one share of common stock
at the option of the holder. The Company has reserved 1,309,686 shares of
common stock to permit the conversion of the Series B Preferred.
 
  Holders of Series B Preferred are entitled to one vote for each share of
common stock into which such shares of Series B Preferred may be converted
except with respect to election of directors, whereby the holders, voting
separately as a class, shall be entitled to elect one director (to be
increased to two directors if the authorized number of total directors is
increased to greater than five members). Each share of Series B Preferred
entitles the holder to receive noncumulative dividends, if and when declared
by the Board of Directors, prior to any dividend paid on the common stock.
Dividends, if any, on Series B Preferred shall be declared at an annual rate
of $0.75 per share. No dividends have been declared.
 
  In the event of liquidation, the Series B Preferred has preference over the
common stock in the amount of $9.35 per share, plus declared but unpaid
dividends.
 
  b. Stock Option Grants
 
  On January 24, 1997 the Company granted options to various employees to
purchase 124,750 shares of common stock at an exercise price of $8.80 per
share, the estimated fair market value as determined by the Board of
Directors.
 
  c. Unaudited Pro Forma Presentation
 
  On January 24, 1997, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of its common stock in connection with an IPO. If
the offering is consummated under the terms presently anticipated, each share
of Series A and Series B Convertible Preferred Stock outstanding at January
30, 1997 will automatically convert to 1.67 and 1.0 shares, respectively, of
common stock upon closing of the IPO. The effect of the sale of the Series B
Preferred discussed above and the conversion of Series A Preferred outstanding
at December 31, 1996 (See Note 5.a) has been reflected in the accompanying
unaudited pro forma balance sheet as of December 31, 1996.
 
 
 
                                     F-15

<PAGE>
 
================================================================================
 
  No dealer, salesperson or other person has been authorized to give any
information or to make any representations in connection with this offering
other than those contained in this Prospectus, and if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
other than the shares of Common Stock to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
 
                             ---------------------
 
 
                              TABLE OF CONTENTS
 
                             ---------------------
 

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Prospectus Summary.........................................................   3
Risk Factors...............................................................   6
Use of Proceeds............................................................  17
Dividend Policy............................................................  17
Capitalization.............................................................  18
Dilution...................................................................  19
Selected Consolidated Financial Data.......................................  20
Management's Discussion and Analysis of Financial
 Condition and Results of Operations.......................................  21
Business...................................................................  28
Management.................................................................  44
Certain Transactions.......................................................  53
Principal and Selling Stockholders.........................................  55
Description of Capital Stock...............................................  56
Shares Eligible for Future Sale............................................  58
Underwriting...............................................................  60
Legal Matters..............................................................  62
Experts....................................................................  62
Additional Information.....................................................  62
Index to Consolidated Financial Statements................................. F-1
</TABLE>

 
  Until        , 1997 (25 days after the date of this Prospectus) all dealers
effecting transactions in the registration securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
 
================================================================================

================================================================================

 
                                4,000,000 SHARES
 
                              [LOGO OF AUTO-BY-TEL]
 
                                   COMMON STOCK
 
                                  ---------------
 
                                    PROSPECTUS
   
                                  ---------------
 
                               MONTGOMERY SECURITIES
  
                                  COWEN & COMPANY
 
                           ROBERTSON, STEPHENS & COMPANY
 
 
                                      , 1997
 
================================================================================

<PAGE>
 

                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
 
  The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
 

<TABLE>
     <S>                                                             <C>
     SEC Registration Fee........................................... $   19,068
     NASD Filing Fee................................................      6,710
     Nasdaq National Market Listing Fee.............................     49,000
     Blue Sky Qualification Fees and Expenses.......................      5,000
     Printing and Engraving Expenses................................    150,000
     Legal Fees and Expenses........................................    400,000
     Accounting Fees and Expenses...................................    350,000
     Transfer Agent and Registrar Fees..............................      7,500
     Directors' and Officers' Insurance.............................    250,000
     Miscellaneous..................................................     62,722
                                                                     ----------
       Total........................................................ $1,300,000
                                                                     ==========
</TABLE>

 

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
  The Underwriters have agreed to indemnify the Company, its directors and
each person who controls it within the meaning of Section 15 of the Securities
Act with respect to any statement in or omission from the Registration
Statement or the Prospectus or any amendment or supplement thereto if such
statement or omission was made in reliance upon information furnished in
writing to the Company by the Underwriters specifically for or in connection
with the preparation of the Registration Statement, the Prospectus, or any
such amendment or supplement thereto.
 
  Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii)
arising under Section 174 of the Delaware General Corporation Law; or (iv) for
any transaction from which the director derived an improper personal benefit.
 
  The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any
other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, vote of stockholders or otherwise.
Article IX of the Company's Amended and Restated Certificate of Incorporation
eliminates the personal liability of directors and officers to the fullest
extent permitted by the laws of the state of Delaware.
 
  The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against any such
person in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
 
                                     II-1

<PAGE>
 

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
  Since the Company's inception, the Company has made the following sales of
securities that were not registered under the Securities Act:
 
1. On May 31, 1996, the Company issued and sold 12,374,999 shares of Common
   Stock in exchange for membership interests in Auto-By-Tel LLC and Auto-By-
   Tel Acceptance Corporation LLC, in reliance on the exemption from
   registration provided by Section 4(2) of the Securities Act.
 
2. During the period from July 3, 1996 through January 30, 1997, the Company
   issued options to purchase an aggregate of 2,476,816 shares of Common Stock
   pursuant to the Option Plan in reliance on Rule 701 promulgated under the
   Securities Act.
   
3. On August 26, 1996, the Company issued and sold 1,500,000 shares of Series
   A Preferred Stock in a private placement for an aggregate consideration of
   $15.0 million in cash and cancellation of indebtedness. In connection with
   such financing, the Company issued (i) 200,000 shares to ContiTrade
   Services L.L.C. in exchange for $2,000,000 in cash, (ii) 400,000 shares to
   National Union Fire Insurance Company of Pittsburgh in exchange for
   $4,000,000 in cash, (iii) 800,000 shares to General Electric Capital
   Corporation in exchange for $8,000,000 in cash, and (iv) 100,000 Michael
   Fuchs in exchange for $1,000,000 in cash and cancellation of indebtedness.
   Sales of Series A Preferred Stock were made in reliance on the exemption
   from registration provided by Section 4(2) of the Securities Act.     
 
4. On August 27, 1996, the Company issued and sold 6,000 shares to a
   consultant of the Company in reliance on Rule 701 promulgated under the
   Securities Act.
   
5. On January 30, 1997, the Company issued and sold 967,915 shares of Series B
   Preferred Stock in a private placement for an aggregate consideration of
   $9.05 million in cash. In connection with such financing, the Company
   issued (i) 133,690 shares to ContiTrade Services L.L.C. in exchange for
   $1.25 million in cash, (ii) 267,380 shares to National Union Fire Insurance
   Company of Pittsburgh in exchange for $2,500,003 million in cash, (iii)
   534,760 shares to General Electric Capital Corporation in exchange for
   $5.0 million in cash, and (iv) 32,085 shares to Michael Fuchs in exchange
   for $300,000 in cash. Sales of Series B Preferred Stock were made in
   reliance on the exemption from registration provided by Section 4(2) of the
   Securities Act.     
 

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
  (a) EXHIBITS
 

<TABLE>   
 <C>        <S>
  1.1+      Form of Underwriting Agreement (draft of January 24, 1997)
  3.1+      Restated Certificate of Incorporation of the Company certified by
             the Secretary of State of the State of Delaware
  3.2+      Restated Bylaws of Auto-By-Tel Corporation adopted October 23, 1996
  4.1+      Form of Stock Certificate
  4.2+      Amended and Restated Investors' Rights Agreement dated January 30,
             1997 among Registrant and the Investors named in Exhibit A thereto
  5.1       Opinion and Consent of Wilson Sonsini Goodrich & Rosati
            Form of Indemnification Agreement between the Company and its
 10.1+      directors and officers
 10.2+      Employment Offer Letter dated October 24, 1996 from Registrant to
             Mark W. Lorimer
 10.3+      Employment Offer Letter dated December 16, 1996 from Registrant to
             John M. Markovich
</TABLE>
    
 
                                     II-2

<PAGE>
 

<TABLE>   
 <C>           <S>
 10.4+         Employment Offer Letter dated October 20, 1996 from Registrant
                to Michael Lowell
 10.5+         1996 Stock Option Plan and related agreements
 10.6+         1996 Stock Incentive Plan and related agreements
 10.7+         1996 Employee Stock Purchase Plan
 10.8*+        Marketing Agreement dated July 22, 1996 among Auto-By-Tel
                Acceptance Corporation, a subsidiary of the Registrant
                ("ABTAC"), the Registrant, as guarantor of the obligations of
                ABTAC, and AIU Insurance Company, American International South
                Insurance Company, American Home Assurance Company, American
                International Insurance Company, American International
                Insurance Company of California, Inc., Illinois National
                Insurance Company, Minnesota Insurance Company, National Union
                Fire Insurance Company of Pittsburgh, PA and the Insurance
                Company of the State of Pennsylvania
 10.9*+        Marketing Agreement dated March 27, 1996 between Registrant and
                Microsoft Corporation
 10.10*+       Advertising Agreement dated October 15, 1996 between Registrant
                and Digital City Inc.
 10.11*+       Marketing Agreement dated February 8, 1996 between Registrant
                and Edmund Publications Corporation
 10.12*+       Referral Agreement dated September 6, 1996 between Registrant
                and Automotive Information Center
 10.13(a)-(h)+ Forms of Dealership Subscription Agreements
 10.14+        Lease Agreement dated June 1996 between Registrant and McDonnell
                Douglas Realty Company
 10.15+        Sublease Agreement dated October 31, 1996 between Registrant and
                Silicon Valley Bank
 10.16*+       Financing Inquiry Referral Agreement dated October 25, 1996
                among Registrant, as obligor, Auto-By-Tel Acceptance
                Corporation and Chase Manhattan Automotive Financial
                Corporation
 10.17*+       Service Agreement dated as of February 1, 1997 between
                Registrant and Integrated Warranty Services, Inc.
 10.18*+       Marketing and Application Processing Agreement dated February 1,
                1997 between General Electric Capital Auto Financial Services,
                Inc., Auto-By-Tel Acceptance Corporation ("ABTAC") and
                Registrant, as guarantor of the obligations of ABTAC
 11.1+         Statement Regarding Computation of Per Share Earnings
 21.1+         Subsidiaries of the Company
 23.1          Consent of Arthur Andersen LLP, Independent Public Accountants
                (see Page II-5)
 23.2          Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit
                5.1)
 23.3+         Consent of J.D. Power and Associates
 24.1+         Power of Attorney (see Page II-6)
 27.1+         Financial Data Schedule
</TABLE>
    
- --------
 + Previously filed.
++ To be filed by amendment.
*  Confidential treatment has been requested for certain portions which have
   been blacked out in the copy of the exhibit filed with the Commission. The
   omitted information has been filed separately with the Commission pursuant
   to the application for confidential treatment.
 
  (b)FINANCIAL STATEMENT SCHEDULES
 
Schedule II--Valuation and Qualifying Accounts
 

ITEM 17. UNDERTAKINGS
 
    (a) The undersigned Registrant hereby undertakes to provide to the
  underwriter at the closing specified in the underwriting agreement
  certificates in such denominations and registered in such names as required
  by the underwriter to permit prompt delivery to each purchaser.
 
                                     II-3

<PAGE>
 
    (b) Insofar as indemnification for liabilities arising under the
  Securities Act may be permitted to directors, officers and controlling
  persons of the Registrant pursuant to the foregoing provisions, or
  otherwise, the Registrant has been advised that in the opinion of the
  Commission such indemnification is against public policy as expressed in
  the Securities Act and is, therefore, unenforceable. In the event that a
  claim for indemnification against such liabilities (other than the payment
  by the Registrant of expenses incurred or paid by a director, officer or
  controlling person of the Registrant in the successful defense of any
  action, suit or proceeding) is asserted by such director, officer or
  controlling person in connection with the securities being registered, the
  Registrant will, unless in the opinion of its counsel the matter has been
  settled by controlling precedent, submit to a court of appropriate
  jurisdiction the question whether such indemnification by it is against
  public policy as expressed in the Securities Act and will be governed by
  the final adjudication of such issue.
 
    (c) The undersigned Registrant hereby undertakes that:
 
  (i) For purposes of determining any liability under the Securities Act, the
   information omitted from the form of prospectus filed as part of this
   Registration Statement in reliance upon Rule 430A and contained in a form
   of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
   497(h) under the Securities Act shall be deemed to be part of this
   Registration Statement as of the time it was declared effective; and
 
  (ii) For the purpose of determining any liability under the Securities Act,
   each post-effective amendment that contains a form of prospectus shall be
   deemed to be a new registration statement relating to the securities
   offered therein, and the offering of such securities at the time shall be
   deemed to be the initial bona fide offering thereof.
 
 
                                     II-4

<PAGE>
 
                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
  As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
 
 
                                          ARTHUR ANDERSEN LLP
 
Orange County, California
   
March 21, 1997     
 
                                     II-5

<PAGE>
 

                                  SIGNATURES
   
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT ON FORM S-1 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF IRVINE, STATE OF CALIFORNIA, ON THE 21ST DAY OF MARCH, 1997.     
 
                                 Auto-by-Tel Corporation
 
                                 By: /s/ Mark W. Lorimer
                                     ------------------------------------------
                                     MARK W. LORIMER
                                     VICE PRESIDENT, GENERAL COUNSEL AND
                                     SECRETARY
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
 

<TABLE>     
<CAPTION> 

            SIGNATURE                        TITLE                   DATE
            ---------                        -----                   ----
<S>                                <C>                         <C> 
         Peter R. Ellis*           President Chief             March 21, 1997
_________________________________   Executive Officer          
         PETER R. ELLIS             (Principal Executive       
                                    Officer) and Director
 
        John C. Bedrosian*         Chairman of the Board       March 21, 1997
_________________________________                              
        JOHN C. BEDROSIAN                                      
 
        John M. Markovich*         Chief Financial Officer     March 21, 1997
_________________________________   (Principal Financial       
        JOHN M. MARKOVICH           and Accounting Officer)    
 
        Robert S. Grimes*          Executive Vice President    March 21, 1997
_________________________________   and Director               
        ROBERT S. GRIMES                                       
 
        Jeffrey H. Coats*          Director                    March 21, 1997
_________________________________                              
        JEFFREY H. COATS                                       
 
          Michael Fuchs*           Director                    March 21, 1997
_________________________________                              
          MICHAEL FUCHS                                        
 
*By:     /s/ Mark W. Lorimer
_________________________________
         Mark W. Lorimer, 
         Attorney-in-Fact

</TABLE>
      
 
                                     II-6

<PAGE>
 

                                 EXHIBIT INDEX
 

<TABLE>   
<CAPTION>
  EXHIBIT NO.                             DESCRIPTION
 -------------                            -----------
 <C>           <S>
  1.1+         Form of Underwriting Agreement (draft of January 24, 1997)
  3.1+         Restated Certificate of Incorporation of the Company certified
                by the Secretary of State of the State of Delaware
  3.2+         Restated Bylaws of Auto-By-Tel Corporation adopted October 23,
                1996
  4.1+         Form of Stock Certificate
  4.2+         Amended and Restated Investors' Rights Agreement dated January
                30, 1997 among Registrant and the Investors named in Exhibit A
                thereto
  5.1          Opinion and Consent of Wilson Sonsini Goodrich & Rosati
               Form of Indemnification Agreement between the Company and its
 10.1+         directors and officers
 10.2+         Employment Offer Letter dated October 24, 1996 from Registrant
                to Mark W. Lorimer
 10.3+         Employment Offer Letter dated December 16, 1996 from Registrant
                to John M. Markovich
 10.4+         Employment Offer Letter dated October 20, 1996 from Registrant
                to Michael Lowell
 10.5+         1996 Stock Option Plan and related agreements
 10.6+         1996 Stock Incentive Plan and related agreements
 10.7+         1996 Employee Stock Purchase Plan
 10.8*+        Marketing Agreement dated July 22, 1996 among Auto-By-Tel
                Acceptance Corporation, a subsidiary of the Registrant
                ("ABTAC"), the Registrant, as guarantor of the obligations of
                ABTAC, and AIU Insurance Company, American International South
                Insurance Company, American Home Assurance Company, American
                International Insurance Company, American International
                Insurance Company of California, Inc., Illinois National
                Insurance Company, Minnesota Insurance Company, National Union
                Fire Insurance Company of Pittsburgh, PA and the Insurance
                Company of the State of Pennsylvania
 10.9*+        Marketing Agreement dated March 27, 1996 between Registrant and
                Microsoft Corporation
 10.10*+       Advertising Agreement dated October 15, 1996 between Registrant
                and Digital City Inc.
 10.11*+       Marketing Agreement dated February 8, 1996 between Registrant
                and Edmund Publications Corporation
 10.12*+       Referral Agreement dated September 6, 1996 between Registrant
                and Automotive Information Center
 10.13(a)-(h)+ Forms of Dealership Subscription Agreements
 10.14+        Lease Agreement dated June 1996 between Registrant and McDonnell
                Douglas Realty Company
 10.15+        Sublease Agreement dated October 31, 1996 between Registrant and
                Silicon Valley Bank
 10.16*+       Financing Inquiry Referral Agreement dated October 25, 1996
                among Registrant, as obligor, Auto-By-Tel Acceptance
                Corporation and Chase Manhattan Automotive Financial
                Corporation
 10.17*+       Service Agreement dated as of February 1, 1997 between
                Registrant and Integrated Warranty Services, Inc.
 10.18*+       Marketing and Application Processing Agreement dated February 1,
                1997 between General Electric Capital Auto Financial Services,
                Inc., Auto-By-Tel Acceptance Corporation ("ABTAC") and
                Registrant, as guarantor of the obligations of ABTAC
 11.1+         Statement Regarding Computation of Per Share Earnings
 21.1+         Subsidiaries of the Company
</TABLE>
    

<PAGE>
 

<TABLE>   
<CAPTION>
 EXHIBIT
   NO.                                DESCRIPTION
 -------                              -----------
 <C>     <S>
  23.1   Consent of Arthur Andersen LLP, Independent Public Accountants (see
          Page II-5)
  23.2   Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1)
  23.3+  Consent of J.D. Power and Associates
  24.1+  Power of Attorney (see Page II-6)
  27.1+  Financial Data Schedule
</TABLE>
    
- --------
 + Previously filed.
++ To be filed by amendment.
*  Confidential treatment has been requested for certain portions which have
   been blacked out in the copy of the exhibit filed with the Commission. The
   omitted information has been filed separately with the Commission pursuant
   to the application for confidential treatment.





<PAGE>
 
                                                                     EXHIBIT 5.1
                                                                     -----------

                      WILSON SONSINI GOODRICH & ROSATI
                          PROFESSIONAL CORPORATION
                             650 PAGE MILL ROAD
                      PALO ALTO, CALIFORNIA 94304-1050
                           TELEPHONE: 415-493-9300
                           FACSIMILE: 415-493-6811
                                WWW.WSGR.COM
                               March 21, 1997

Auto-By-Tel Corporation
18872 MacArthur Boulevard
Suite 200
Irvine, California 92612-1400

     RE:  REGISTRATION STATEMENT ON FORM S-1
          ----------------------------------

Ladies and Gentlemen:

     We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on January 31, 1997 (Registration No.
333-20831) as amended (the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of up to 4,600,000
shares of your Common Stock, par value $.001 per share (the "Shares").  The
Shares include an over-allotment option granted to the underwriters of the
offering to purchase 600,000 shares.  We understand that the Shares are to be
sold to the underwriters of the offering for resale to the public as described
in the Registration Statement.  As your legal counsel, we have examined the
proceedings taken, and are familiar with the proceedings proposed to be taken,
by you in connection with the sale and issuance of the Shares.

     It is our opinion that, upon completion of the proceedings
 being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, including the proceedings being taken in order to permit such
transaction to be carried out in accordance with applicable state securities
laws, the Shares, when issued and sold in the manner described in the
Registration Statement and in accordance with the resolutions adopted by the
Board of Directors of the Company, will be legally and validly issued, fully
paid and nonassessable.

     We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendments thereto.

                                       Very truly yours,

                                       WILSON SONSINI GOODRICH & ROSATI
                                       Professional Corporation

                                       /s/ Wilson Sonsini Goodrich & Rosati