<PAGE>

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

                                   FORM 10-Q

(Mark One)
   [X]    QUARTERLY REPORT UNDER SECTION 13 OR 5(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

          For the quarterly period ended June 30, 2001

                                       OR

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

          For the transition period from _____________ to _____________


                        Commission file number 000-29295

                                  BUY.COM INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                        33-0816584
     (State or other jurisdiction of                     (I.R.S. Employer
     incorporation or organization)                      Identification No.)

            85 Enterprise
        Aliso Viejo, California                                92656
  (Address of principal executive office)                    (Zip code)

                                 (949) 389-2000
              (Registrant's telephone number, including area code)

                                      N/A
       (Former name, former address and former fiscal year, if changed since
        last report)


     Indicate by check mark whether the registrant:  (1) has filed all documents
and reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.

                           Yes    X     No
                              --------    --------

The number of shares outstanding of the Registrant's Common Stock, par value
$0.0001, as of August 2, 2001 was 136,845,272.
<PAGE>

                                     INDEX
                                     -----

<TABLE>
<CAPTION>
PART I       FINANCIAL INFORMATION                                                                      Page
----------------------------------                                                                     -------

<S>          <C>                                                                                      <C>
Item 1.      Consolidated Financial Statements.....................................................         1

Item 2.      Management's Discussion and Analysis of Financial Condition and Results of
             Operations............................................................................         9

Item 3.      Quantitative and Qualitative Disclosures about Market Risk............................        25

PART II      OTHER INFORMATION
------------------------------

Item 1.      Legal Proceedings.....................................................................        26

Item 2.      Changes in Securities and Use of Proceeds.............................................        27

Item 3.      Defaults Upon Senior Securities.......................................................        27

Item 4.      Submission of Matters to a Vote of Security Holders...................................        27

Item 5.      Other Information.....................................................................        27

Item 6.      Exhibits and Reports on Form 8-K......................................................        27

             A.  Exhibits..........................................................................        27

             B.  Reports on Form 8-K...............................................................        27

Signatures.........................................................................................        28
</TABLE>

          In this report, "BUY.COM," the "Company," "we," "us" and "our"
collectively refers to BUY.COM INC. and its subsidiaries.

                                       i
<PAGE>

                                 BUY.COM INC.
                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                      ASSETS
                                                              June 30,    December 31,
                                                                2001         2000
                                                             ---------    ------------
<S>                                                          <C>          <C>
Current Assets:
 Cash and cash equivalents, including
    restricted cash of $2,098 and $27,000                    $  14,474        $ 56,656
 Marketable securities                                             -            10,769
 Accounts receivable, net of allowances of $2,522 and $2,813    10,134          19,424
 Prepaid expenses and other current assets                       8,577           7,141
                                                             ---------    ------------
       Total current assets                                     33,185          93,990
                                                             ---------    ------------
Property and equipment, net                                     12,833          18,500
Intangibles, net                                                 6,681          23,622
Other noncurrent assets                                            111             392
                                                             ---------    ------------
                                                             $  52,810        $136,504
                                                             =========    ============
          LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
 Accounts payable                                            $  11,814        $ 38,682
 Other liabilities and accrued expenses                          4,567           3,460
 Deferred revenue                                                2,129           3,400
 Obligation to joint ventures, net                                 -             7,156
 Current portion of long-term debt                                 255             250
                                                             ---------    ------------
       Total current liabilities                                18,765          52,948
                                                             ---------    ------------

Long-term debt, net of current portion                             196             324
                                                             ---------    ------------
                                                                18,961          53,272
Commitments and Contingencies (Note 6)
Stockholders' Equity:
 Common stock, $0.0001 par value;
  Authorized shares - 990,000,000
   Issued and outstanding--136,832,794 and 134,941,776
   at June 30, 2001 and December 31, 2000, respectively             13              13
 Additional paid-in capital                                    364,887         368,970
 Deferred compensation                                          (1,401)         (7,019)
 Accumulated deficit                                          (329,650)       (278,732)
                                                             ---------    ------------
       Total stockholders' equity                               33,849          83,232
                                                             ---------    ------------
                                                             $  52,810       $ 136,504
                                                             =========    ============

</TABLE>

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

                                       3
<PAGE>

                                 BUY.COM INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                           Quarter Ended June 30,        Six Months Ended June 30,
                                            2001            2000            2001            2000
                                        -------------   ------------    ------------    ------------
<S>                                     <C>             <C>             <C>             <C>
Net revenues                            $     94,863    $    193,199    $    219,464    $    400,815
Cost of goods sold                            83,720         181,442         193,920         380,185
                                        -------------   ------------    ------------    ------------

Gross profit                                  11,143          11,757          25,544          20,630

Operating expenses:
    Sales and marketing                        8,600          22,019          21,790          46,539
    Product development                        1,690           5,785           5,955          10,155
    General and administrative                 8,206          11,997          20,530          23,679
    Restructuring charge                         -               -            34,678             -
                                        -------------   ------------    ------------    ------------
     Total operating expenses                 18,496          39,801          82,953          80,373
                                        -------------   ------------    ------------    ------------

     Operating loss                           (7,353)        (28,044)        (57,409)        (59,743)

Other income (expense):
    Interest income                              354           2,312           1,055           3,700
    Other                                         12            (708)            137            (822)
                                        -------------   ------------    ------------    ------------

     Total other income (expense)                366           1,604           1,192           2,878
                                        -------------   ------------    ------------    ------------

Net loss before equity in income
 (losses) of joint ventures                   (6,987)        (26,440)        (56,217)        (56,865)

Equity in income (losses) of joint
 ventures, net                                 1,241          (7,194)          5,299          (9,615)
                                        -------------   ------------    ------------    ------------

Net loss                                $     (5,746)   $    (33,634)   $    (50,918)   $    (66,480)
                                        =============   ============    ============    ============

Net loss per share:
 Basic and diluted                      $      (0.04)   $      (0.26)   $      (0.37)   $      (0.54)

Shares used in computation of basic
 and diluted loss per share              136,579,611     131,226,802     135,904,623     123,385,494
</TABLE>

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

                                       4
<PAGE>

                                  BUY.COM INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                             Six Months Ended June 30,
                                                                2001        2000
                                                              --------    --------
<S>                                                           <C>         <C>
OPERATING ACTIVITIES
Net Loss                                                      $(50,918)   $(66,480)
Adjustments to reconcile net loss to cash
    used in operating activities:
  Depreciation                                                   2,848       2,363
  Amortization of deferred compensation and warrants             1,851       1,882
  Equity in (income) losses of joint ventures, net              (5,299)      9,615
  Amortization of goodwill and other intangibles                 4,170       5,813
  Non-cash restructuring charge                                 15,912         -
  Loss from the disposal of property and equipment                  13         906
  Changes in assets and liabilities:
   Accounts receivable                                           8,477      (6,239)
   Prepaid expenses and other current assets                    (1,778)     12,592
   Other noncurrent assets                                         281         236
   Accounts payable                                            (26,868)    (11,492)
   Other liabilities and accrued expenses                          827      (1,127)
   Deferred revenues                                            (1,271)      1,248
                                                              --------    --------
   Net cash used in operating activities                       (51,755)    (50,683)
                                                              --------    --------

INVESTING ACTIVITIES
 Net redemption(purchases) of marketable securities             10,769     (11,042)
 Purchase of property and equipment                                (22)     (5,422)
 Proceeds from sale of property and equipment                      -         1,853
 Investments in equity method investees                         (1,077)     (5,525)
                                                              --------    --------
  Net cash provided by (used in) investing activities            9,670     (20,136)
                                                              --------    --------
FINANCING ACTIVITIES
 Net proceeds from initial public offering                         -       192,226
 Repayments to stockholder                                         -        (5,000)
 Net proceeds from exercise of stock options                        26         863
 Repayments under line of credit and other obligations            (123)    (12,512)
                                                              --------    --------
  Net cash (used in) provided by financing activities              (97)    175,577
                                                              --------    --------
Net (decrease) increase in cash and cash equivalents           (42,182)    104,758

Cash and cash equivalents at beginning of period                56,656      24,693
                                                              --------    --------
Cash and cash equivalents at end of period                    $ 14,474    $129,451
                                                              ========    ========
Supplemental cash flow information:

     Cash paid for interest                                   $     25    $  1,343
                                                              ========    ========
     Stock issued in connection with domain purchases         $    -      $    316
                                                              ========    ========
     Assumption of liabilities in connection with acquisition $   (313)   $    -
                                                              ========    ========
     Net settlement of joint venture receivable               $    730    $    -
                                                              ========    ========
</TABLE>
       The accompanying notes are an integral part of these consolidated
statements.

                                       5
<PAGE>

                                  BUY.COM, INC
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


1.   COMPANY BACKGROUND

     BUY.COM INC. and its subsidiaries, collectively (the "Company" or
"BUY.COM"), is a multi-category Internet superstore, offering a selection of
brand name computer hardware and peripherals, software, books, videos, DVDs,
computer games, music, clearance equipment, consumer electronics, wireless
products and services and office supplies. Through ten online specialty stores,
the Company offers products in a convenient, intuitive shopping interface that
features extensive product information and multi-media presentations. The
Company's e-commerce portal, www.buy.com, links all of the ten specialty stores
and is designed to enhance the customer's online shopping experience 24 hours a
day, seven days a week. BUY.COM uses a business model that includes outsourcing
the majority of its operating infrastructure, such as distribution and
fulfillment functions, customer service and support, credit card processing, and
the hosting of the Company's system infrastructure and database servers.

     BUY.COM (formerly BuyComp, LLC and Buy Corp.) was organized in June 1997
and began offering products for sale through its web site in November 1997. From
BUY.COM's inception through mid-November 1997, the Company had no sales. During
this period, the Company's operating activities primarily involved the
development of the necessary infrastructure and the original BuyComp.com web
site. In August 1998, the Company changed its web site designation to
www.buy.com.
-----------

2.   BASIS OF PRESENTATION

     These financial statements were prepared based on the assumption that the
Company will continue as a going concern. In June 2001, the Company's credit
card processor (the "Processor") notified the Company that it intended to
discontinue its processing relationship with the Company as of September 1,
2001. Since over 90% of the Company's revenue is derived from credit card
transactions, if the Company is unable to secure a new credit card processing
relationship on acceptable terms, it is not likely that it would be able to
continue as a going concern (see Note 10).

     On August 10, 2001, the Company signed a definitive merger agreement with
SB Acquisition Inc., a company wholly-owned by Scott A. Blum, its founder. The
merger is subject to the approval of the Company's stockholders and other
closing conditions. If the merger is approved by the Company's stockholders and
all other conditions to closing are satisfied or waived, the merger is expected
to be completed by the end of November 2001. However, because many of the
closing conditions are beyond the Company's control, there can be no assurance
that the merger will be completed by the end of November 2001, if at all. If the
Company is unable to close the merger or obtain additional financing or complete
another sale or merger transaction, it is unlikely that the Company would be
able to continue as a going concern (see Note 10).

     In connection with the execution of the merger agreement, the Company also
entered into a credit agreement and a security agreement with a trust controlled
by Scott A. Blum, pursuant to which it has access to a $4,000,000 line of credit
and up to an additional $5,000,000 to establish standby letters of credit for
the benefit of distributor and vendor partners. The security agreement grants
the Blum trust a security interest in substantially all of the Company's assets
to secure payment and performance of its obligations under the credit agreement.
In the event the merger agreement is terminated prior to completion of the
transaction, under substantially all circumstances, all outstanding debt under
the line of credit and letters of credit will become immediately due and
payable, and the Company will need to obtain additional financing or complete
another merger or sale transaction to repay its indebtedness in order to
continue as a going concern.  If the Company is unable to repay its indebtedness
under this credit facility, the Blum trust may foreclose on substantially all of
the Company's assets (see Note 10).

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                                       6
<PAGE>

Unaudited Interim Financial Information

     The interim consolidated financial statements as of June 30, 2001 have been
prepared by BUY.COM pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC") for interim financial reporting. These
consolidated statements are unaudited and, in the opinion of management, include
all adjustments (consisting of normal recurring adjustments and accruals)
necessary to present fairly the consolidated balance sheets, consolidated
operating results, and consolidated cash flows for periods presented in
accordance with generally accepted accounting principles.  The consolidated
balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date.  Operating results for the
quarter and six month period ended June 30, 2001 may not be indicative of the
results for the year ending December 31, 2001.  Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted in accordance
with the rules and regulations of the SEC.  These consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements, and accompanying notes, included in the Company's Form 10-K for the
year ended December 31, 2000.  Certain prior period amounts have been
reclassified to conform to the current year presentation.

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

Cash and Cash Equivalents

     For the purposes of consolidated statements of cash flows, the Company
considers investment instruments with an original maturity of three months or
less to be cash equivalents. The carrying amount of cash equivalents
approximates fair value because of the short-term maturity of those instruments.
Cash equivalents are comprised of investments in money market funds, government
mortgage backed bonds and highly rated corporate securities. Cash and cash
equivalents include restricted cash of $2.1 million as of June 30, 2001, and
$27.0 million as of December 31, 2000.

Revenue Recognition

     Net revenues include product sales net of returns and allowances,
advertising sales, warranty sales net of amounts paid to the national insurance
provider, and gross outbound shipping and handling charges. The Company
recognizes revenue from product sales, net of discounts, coupon redemption and
estimated sales returns, when the products are shipped to customers. Gross
outbound shipping and handling charges are included in net sales. The Company
provides an allowance for sales returns, which is based on historical
experience. In certain cases, credit card companies require the Company to
charge customers' credit cards to obtain authorization. In such cases, the
Company defers revenue recognition until it has confirmed shipment of the goods
to the customer. For all product sales transactions with its customers, the
Company acts as a principal, takes title to all products sold upon shipment,
bears credit risk, and bears inventory risk for returned products that the
Company is not able to return to suppliers, although these risks are mitigated
through arrangements with credit card issuers, shippers and suppliers.

     The Company recognizes revenue from advertising sales ratably over the term
of the advertising campaigns, which usually range from one to twelve months. To
the extent that advertising customers have paid the Company for advertisements
that have yet to be published on the Company's Web site, the Company defers
revenue recognition until such advertisements are delivered.  The Company has no
advertising contracts with a term in excess of one year.

     The Company receives activation commissions from wireless carriers for each
new wireless phone subscription it sells.  New subscription activation fees and
commissions generally are fully refundable if the subscriber cancels service
within the minimum period of continuous active service (generally 90 to 180
days). The Company recognizes net

                                       7
<PAGE>

commission revenue from activation fees and commissions when the subscription is
activated. The Company provides an allowance for deactivation which is based on
historical experience.

     The Company believes it operates under one segment.

Recent Accounting Pronouncements

     In April 2001, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF Issue 00-25, "Accounting
for Consideration from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products."  The consensus provides guidance on the
income statement classification of costs that are incurred by a vendor to or on
behalf of a customer in connection with the customer's purchase or promotion of
the vendor's products. The consensus is effective for quarters beginning after
December 15, 2001.  Management believes the impact of the adoption of this
consensus will be immaterial.

     In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each statement which apply to goodwill and intangible assets acquired prior
to June 30, 2001 will be adopted by the Company on January 1, 2002.  Management
has not determined the amount of impairment, if any, that would be required upon
adoption.

4.   BUSINESS ACQUISITIONS, DISPOSITIONS, AND INVESTMENTS

International Joint Ventures

     On March 7, 2001, the Company sold its interest in its United Kingdom joint
venture for $4.0 million to the John Lewis Partnership, a large retailer in the
United Kingdom.  In connection with the sale, the Company applied its proceeds
to the repayment of the Company's loan obligations to its joint venture partner.
The income recorded in the line item "Equity in income (losses) of joint
ventures, net" represents the Company's 50% share of joint venture losses that
the Company recorded during 1999 and 2000.   The Company's recorded losses in
1999 and 2000 were greater than the Company's liability required to fund such
losses.  On May 23, 2001, the Company made a final payment of $780,000 for their
remaining obligation to their Australian joint venture partner.  As of June 30,
2001, the Company has no further obligations with any of its joint venture
partners.

Restructuring Charge

     During the first quarter 2001, the Company initiated a restructuring of its
business and implemented a new operating plan.  The Company recorded a $34.7
million charge associated with such restructuring plan.  The charge is
substantially attributable to the impairment of goodwill associated with the
BuyGolf acquisition of $13.1 million, payment of severance and benefits for the
employees that were terminated during the first quarter of $2.1 million, the
write off of certain assets of $2.8 million, the write off of contract and lease
cancellation fees of $1.8 million and the remaining sponsorship fees related to
the Buy.com Tour of $14.9 million, as the Company does not believe that any
further benefits will be derived from its sponsorship agreement with the PGA
Tour.  As of June 30, 2001, the restructuring accrual is $1.3 million, which
primarily relates to the Company's contractual and lease obligations.

5.   MARKETABLE SECURITIES

                                       8
<PAGE>

     The Company's marketable securities, which consist primarily of high-
quality short-to-intermediate-term securities are classified as available-for-
sale and are reported at fair value.  The cost of these securities approximate
fair value; therefore, any unrealized gains or losses are immaterial.

6.   COMMITMENTS AND CONTINGENCIES

     On March 13, 2000 a class action suit was filed against the Company in the
U.S. District Court for the Central District of California alleging that the
Company collected, used and disclosed personally identifiable customer
information to their third party advertising server and other advertisers
without first informing customers or seeking their permission in violation of
several federal statutes.  The complaint sought damages of up to $10,000 per
class member per violation, actual and punitive damages, restitution, attorneys'
fees and costs plus injunctive and other equitable relief.  On April 7, 2000 a
companion lawsuit was filed in the Superior Court of the State of California,
County of Orange alleging violations of state statutory and common law based
upon the same facts and federal causes of action as alleged in the federal class
action. The complaint sought statutory damages of up to $5,000 per class member
per violation, plus actual and punitive damages or restitution, attorneys' fees
and costs and injunctive and other equitable relief. On April 25, 2000 a third
class action suit was filed in the United States District Court for the Central
District of California alleging violation of the same federal statutes as those
in the federal class action filed on March 13, 2000. As with the first two class
actions, the complaint alleged that the Company collected, used and disclosed
personally identifiable information of consumers without first informing them or
obtaining their consent. The complaint sought unspecified statutory damages,
compensatory damages, punitive damages, attorneys' fees and costs, plus
declaratory, injunctive and other equitable relief, including disgorgement of
all profits and restitution of all monies acquired by means of any act or
practice declared to be unlawful. The Company reached a global settlement for
the cases on June 26, 2001 that involves certain changes to the Company's
privacy practices and the payment of $400,000 in attorney fees which was paid
for by the Company's insurance carrier.  The lawsuits were dismissed with
prejudice in July 2001.

     On February 28, 2001, the Company filed suit against the PGA Tour in
federal district court, Central District of California, for breach of contract
based on its Buy.com Tour sponsorship agreement with the PGA Tour.  The Company
claims that the PGA Tour entered into an agreement with another party to provide
e-commerce services to them in violation of the Company's agreement.  The
Company is seeking rescission of its agreement, a return of its sponsorship
fees, including those secured by a $17,000,000 letter of credit, and additional
damages.  In March 2001, the PGA Tour filed a counterclaim against the Company
in the federal district court in the Central District of California.  The
counterclaim alleges that the Company breached its contract by declaring the
sponsorship agreement to be terminated, by demanding that the PGA Tour cease all
uses of the Company's trademark, by breaching the confidentiality provisions of
the sponsorship agreement and by taking action that adversely affects the
goodwill of the Buy.Com Tour. The PGA Tour seeks damages in excess of $75,000
and attorneys' fees.  Discovery is underway and a trial is set for December 4,
2001.

     On July 11, 2001, a class action complaint, titled Joel Abrams v. BUY.COM,
was filed against the Company alleging violations of the federal securities laws
by the Company, certain of its officers and/or directors, and the Company's
underwriters that participated in the IPO process.  Since July 11, 2001, several
other similar class action complaints have been filed against the Company
including: Richard Taylor v. BUY.COM (filed July 23, 2001), Robert Berkowitz v.
BUY.COM (filed July 16, 2001), Rutherford Dawson v. BUY.COM (filed August 1,
2001), Haas v. BUY.COM (filed August 15, 2001) and Goodman Espstein v. BUY.COM
(filed August 10, 2001).  Each of the class actions were filed in the United
States District Court, Southern District of New York on behalf of purchasers of
BUY.COM securities during the period between February 7, 2000 and December 6,
2000.  The complaints allege that the Company's prospectus was materially false
and misleading because it failed to disclose, among other things, that the
Company's underwriters had solicited and received excessive and undisclosed
commissions from certain investors.  The lawsuits also allege that the
underwriters engaged in actions that artificially inflated the price of the
stock.   Greg Hawkins and Mitch Hill have been named as defendants in each of
these cases in connection with their capacity as former officers and/or
directors of the Company.  Mr. Hawkins and Mr. Hill have indemnification
agreements with the Company.  The Company believes that other similar cases may
have been filed against the Company that are not yet known to it.  As of the
date of this quarterly report, the Company has not yet responded to any of these
complaints and each case is in its early stage.

                                       9
<PAGE>

     Several former employees of the Company have incurred adverse tax
consequences as a result of their exercise of non-qualified stock options.  One
of such employees has filed suit against the Company claiming that the Company
misrepresented the nature of the options and therefore should be responsible for
the adverse tax consequences. Another employee has provided a written demand to
the Company for relief from the adverse tax consequences incurred by such
employee. The Company could receive similar demands from other similarly
situated employees in the future.

     Management is unable to determine or predict the outcome of the above
litigation or its impact on the Company's financial condition or results of
operation. Accordingly, the Company has not recorded a provision for these
matters in its financial statements.

7.   LOSS PER SHARE

     Basic earnings per share is computed by dividing the net earnings available
to common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed by
dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.

     The following represents the calculations for basic and diluted net loss
per share (amounts in thousands, except share and per share data):


<TABLE>
<CAPTION>
                                        Quarter Ended                  Six Months Ended
                                 ----------------------------    ----------------------------
                                   June 30,        June 30,        June 30,        June 30,
                                     2001            2000            2001            2000
                                 ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>
                                         (unaudited)                       (unaudited)
Basic and diluted:
Net loss                         $     (5,746)   $    (33,634)   $    (50,918)   $    (66,840)
Weighted average common shares    136,579,611     131,226,802     135,904,623     123,385,494
                                 ------------    ------------    ------------    ------------
Net loss per common share        $      (0.04)   $      (0.26)   $      (0.37)   $      (0.54)
                                 ------------    ------------    ------------    ------------

</TABLE>

     All of the Company's stock options and warrants are excluded from diluted
loss per share since their effect is antidilutive.

8.   INCOME TAXES

     The Company incurred taxable losses for federal and state purposes for the
quarter and six month period ended June 30, 2001 and quarter and six month
period ended June 30, 2000. Accordingly, the Company did not incur any federal
income tax expense for those periods other than the minimum required taxes for
certain state and local jurisdictions.

     At June 30, 2001, the Company has net operating loss carryforwards related
to federal and state income taxes for which the Company has established a full
valuation allowance for the corresponding tax assets.

9.   STOCKHOLDERS' EQUITY

     Restricted Stock Program

     During the first quarter of 2001, the Company recorded a reversal of
deferred compensation of approximately $2.5 million due to the termination of
certain of its employees. The deferred compensation was related to restricted
stock awards that were designated, and reserved for issuance subject to
individual vesting schedules, for certain employees. The Company terminated the
employment of approximately 115 employees during the first quarter 2001, and as
a result, cancelled approximately 3.5 million shares that were reserved for
issuance under the Company's Restricted Stock Program. The Company also incurred
an expense of $269,000 related to the acceleration of the vesting schedules for
two employees' restricted stock awards. During the second quarter of 2001, the
Company recorded a reversal of approximately $277,000 due to the resignation of
one of its employees. The remaining deferred compensation charge related to the
Company's Restricted Stock Program is approximately $600,000, which is being
amortized using the straight-line method over the remaining six quarters of
vesting.

                                       10
<PAGE>

     The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans.  Accordingly, no deferred compensation charge is
recognized for any of its stock options when the exercise price of each option
equals or exceeds the fair value of the underlying common stock as of the grant
date for each stock option.  The Company records deferred compensation for the
difference at the grant date between the exercise price and the fair value of
the common stock underlying the options.  This amount is being amortized over
the vesting period of the individual options, which is generally 3 to 4 years.

10.   SUBSEQUENT EVENTS

      On June 22, 2001, the Processor notified the Company that it intended to
discontinue its processing relationship with the Company as of July 23, 2001.
The Processor's letter provided an opportunity for the Company to extend its
termination date beyond July 23, 2001, on the condition that the Processor would
increase its processing fee by 1% and would withhold 5% of the Company's daily
receipts as additional security. Subsequent to the Processor's June 22, 2001
letter, the Processor notified the Company that it had agreed to extend the
termination date of their relationship to September 1, 2001. The Processor
increased its processing fee by 1% and began withholding 5% of the Company's
daily receipt on July 24, 2001.

     On August 10, 2001, the Company signed a definitive merger agreement with
SB Acquisition Inc., a company wholly-owned by Scott A. Blum, the Company's
founder.  The merger agreement provides for the Company to merge with a
subsidiary of SB Acquisition, after which it will continue its operations as a
wholly-owned subsidiary of SB Acquisition. The merger is subject to approval of
the Company's stockholders and other closing conditions. If the merger is
approved by the Company's stockholders and all other conditions to closing are
satisfied or waived, the merger is expected to be completed by the end of
November 2001. If the merger is completed, each outstanding share of the
Company's common stock will be canceled and converted into the right to receive
$0.17 in cash from SB Acquisition.

     In addition, the Company entered into a credit agreement with a trust
controlled by Scott A. Blum, pursuant to which it has access to a $4,000,000
line of credit and up to an additional $5,000,000 to establish stand by letters
of credit for the benefit of its distributor and vendor partners.  The Company
has also entered into a security agreement with such Blum trust, pursuant to
which it granted the Blum trust a security interest in substantially all of its
assets to secure payment and performance of its obligations under the credit
agreement.  If the merger agreement is terminated prior to completion of the
transaction, under substantially all circumstances, all outstanding debt under
the line of credit and letters of credit will become immediately due and
payable.  In addition, if the Company cannot repay all of the outstanding
amounts due, including commitment fees and possible termination fees, the Blum
trust may foreclose on the Company's assets.

     On August 13, 2001, the Company initiated a further reduction in its
workforce.  This reduction will result in the elimination of approximately 50
full-time positions, or approximately 40% of the workforce.

     On August 14, 2001, the Company's securities were delisted from the Nasdaq
National Market, and are now quoted on the OTC Bulletin Board.

                                       11
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

This report contains forward-looking statements which include, but are not
limited to, statements concerning our ability to operate the business to
positive operating cash flow, the ability to successfully execute our operating
plan, the need for additional capital, the ability to raise additional working
capital on acceptable terms, the ability to retain key employees, management
personnel and our Board of Directors, the ability to effectively transition a
new management team, the ability to maintain the support of our distributor and
vendor partners, the ability to maintain other key corporate relationships, the
ability to achieve our revenue goals in light of softening demand for consumer
products, projected revenues, expenses, gross profit and income and the success
of pending litigation. In addition, with respect to our merger with SB
Acquisition, Inc., the following factors, among others, could cause actual
events to differ materially from those described herein: inability to satisfy
various conditions to the closing of the merger, including failure of our
stockholders to approve the merger or failure to obtain any necessary regulatory
approvals; the costs related to the merger; the effect of the merger and/or
interim financing on creditor, vendor, supplier, customer or other business
relationships; and the results and effects of our inability to pay any amounts
under the interim financing if the merger is not consummated.  These forward-
looking statements are based on our current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by us. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates," "may," "will" and variations of these words or
similar expressions are intended to identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances, including any underlying
assumptions, are forward-looking statements. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, our actual results could
differ materially and adversely from those expressed in any forward-looking
statements as a result of various factors. The section entitled "Risk Factors"
set forth at the end of Part I, Item 2 of this report, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this report and similar discussions in our other filings with the Securities and
Exchange Commission ("SEC") discuss some of the important risk factors that may
affect our business, results of operations and financial condition. You should
carefully consider those risks, in addition to the other information in this
report and in our other filings with the SEC, before deciding to invest in our
company or to maintain or increase your investment. We undertake no obligation
to revise or update publicly any forward-looking statements for any reason.

OVERVIEW

     BUY.COM is a multi-category Internet superstore that offers a broad
selection of brand name computer hardware and peripherals, software, books,
videos, DVDs, computer games, music, clearance products, consumer electronics,
office supplies and products, and wireless products and services at everyday low
prices. BUY.COM was organized as a California limited liability company in June
1997 under the name BuyComp LLC and was incorporated in Delaware as Buy Corp. in
August 1998. In November 1998, we changed our name to BUY.COM INC.

     We derive revenues principally from the sale of products and, to a lesser
extent, from paid advertisements on our Web site. We recognize product revenue
upon shipment of products. We generally recognize advertising revenue straight
line over the period of time an advertisement runs on our site. In some
circumstances, our agreements with advertisers require consumer action, in which
case, we recognize advertising revenue when the consumer action is completed.

     We have employed a business model that includes outsourcing the majority of
our infrastructure to leading national distribution and fulfillment providers
with established expertise. Through this model, we capitalize on the cost
efficiencies achieved by our distribution providers and minimize our
infrastructure and operating expenses, enabling us to pass significant savings
on to our customers. Additionally, by aligning with leading distributors in each
of our product categories, we can use their significant inventories and
distribution capabilities to offer a broader selection of products at lower
costs than traditional retailers can.

                                       12
<PAGE>

     Consistent with our merchandising strategy, we have raised prices on many
of our products. We intend to continue these selective price increases, and as a
result, may experience decreased sales volumes.  For this reason, our ability to
become and remain profitable depends upon our ability to maintain our net
revenues and gross margins consistent with the assumptions underlying our new
operating plan. Over recent quarters we have not achieved revenue growth and in
fact, we expect our net revenue for 2001 to be significantly less than our net
revenue for the year ended December 31, 2000, and we cannot be certain that we
will ever become profitable.

     To date, our sales of computer hardware and software products have
accounted for the vast majority of our net revenues. Our sales of products in
other categories constituted less than 20% of our net revenues for the quarter
and six months ended June 30, 2001 and for the quarter and six months ended June
30, 2000.  None of our other product categories individually constituted more
than 10% of our net revenues during these periods.  Product sales, including
shipping and handling, accounted for 95.0% and 94.5% of net revenues for the
quarter and six month period ended June 30, 2001, respectively, and 95.4% and
95.8% of net revenues for the quarter and six month period ended June 30, 2000,
respectively.

     Shipping and handling net revenues were $3.8 million and $9.2 million for
the quarter and six month period ended June 30, 2001, respectively, and $6.7
million and $14.8 million for the quarter and six month period ended June 30,
2000, respectively.  Shipping and handling results are a direct function of our
product sales and are an integral part of our merchandising and pricing strategy
and may fluctuate based on promotional programs. Accordingly, we believe
shipping and handling net revenues and the corresponding gross profit on these
net revenues cannot be viewed independent of product sales and gross profit. The
gross profit on our shipping and handling net revenues was $218,000 and $826,000
for the quarter and six month period ended June 30, 2001, respectively, and $1.2
million and $3.1 million for the quarter and six month period ended June 30,
2000, respectively.

     We currently generate additional revenues from vendor co-op advertising as
well as media advertising. Vendor co-op advertising is a standard practice in
the retailing sector, where product vendors set aside certain amounts of
advertising funds to be paid to retailers in exchange for specific marketing and
in-store placement of their products. We also generate advertising media revenue
from click-through advertisements that direct the customer to the advertiser's
Web site. These media advertising revenues are generally derived from short-term
advertising contracts in which we typically guarantee a minimum number of
advertising impressions to be delivered to users over a specified period of time
for a fixed fee. In the cases where we guarantee a minimum number of advertising
impressions, we defer a portion of the advertising revenues until the minimum
number of impressions has been achieved.  Advertising sales accounted for 5.7%
and 6.4% of net revenues for the quarter and six month period ended June 30,
2001, respectively, and 5.7% and 5.3% of net revenues for the quarter and six
month period ended June 30, 2000, respectively.

     Our net revenues are also net of coupon redemptions. Coupon redemptions
result in a reduction of gross revenues in the period the coupons are redeemed
by an amount equal to the value of the coupons redeemed. Coupon redemptions were
$842,000 and $2.1 million, or 0.7% and 0.9% of net revenues, for the quarter and
six month period ended June 30, 2001, respectively, and $2.2 million and $4.4
million, or 1.1% of net revenues, for the quarter and six month period ended
June 30, 2000, respectively.

     We have incurred significant losses since our inception and our cost of
sales and operating expenses have increased dramatically. This trend reflects
the costs associated with our increased efforts to promote the BUY.COM brand,
build market awareness, attract new customers, recruit personnel, build
operating infrastructure, and develop and expand our Web site and related
transaction processing systems.  Consequently, in February 2001, we initiated a
restructuring plan to reduce costs and conserve our cash resources, and in
August 2001, we  terminated approximately 50 other employees to further reduce
our operating expenses.  Consistent with our plan, we have reduced our marketing
budget, Web site development, and technology and operating infrastructure
development. We still believe, however, that we will continue to incur
substantial operating losses in the near term, and we may never achieve
profitability.

                                       13
<PAGE>

     On August 10, 2001, we signed a definitive merger agreement with SB
Acquisition Inc., a company wholly-owned by Scott A. Blum, our founder.  The
merger agreement provides for us to merge with a subsidiary of SB Acquisition,
after which we will continue our operations as a wholly-owned subsidiary of SB
Acquisition. The merger is subject to the approval of our stockholders and other
closing conditions. If the merger is approved by our stockholders and all other
conditions to closing are satisfied or waived, the merger is expected to be
completed by the end of November 2001. However, because many of the closing
conditions are beyond our control, there can be no assurance that the merger
will be completed by the end of November 2001, if at all. If we are unable to
close the merger or obtain additional financing or complete another sale or
merger transaction, it is unlikely that we would be able to continue as a going
concern. If the merger is completed, each outstanding share of our common stock
will be canceled and converted into the right to receive $0.17 in cash from SB
Acquisition.  In connection with the execution of the merger agreement, we also
entered into a credit agreement with a trust controlled by Scott A. Blum,
pursuant to which we have access to a $4,000,000 line of credit and up to an
additional $5,000,000 to establish standby letters of credit for the benefit of
our distributor and vendor partners.  We also entered into a security agreement
with Blum's trust, pursuant to which we granted such trust a security interest
in substantially all of our assets to secure payment and performance of our
obligations under the credit agreement.  If the merger agreement is terminated
prior to completion of the transaction, under substantially all circumstances,
all outstanding debt under the line of credit and letters of credit will become
immediately due and payable.  In addition, if we cannot repay all of the
outstanding amounts due, including commitment fees and possible termination
fees, the Blum trust may foreclose on our assets.

RESULTS OF OPERATIONS

Net revenues

     Net revenues were $94.9 million and $219.5 million for the quarter and six
month period ended June 30, 2001, respectively, and $193.2 million and $400.8
million for the quarter and six month period ended June 30, 2000, respectively,
representing a 51% and a 45% decrease, respectively. We believe the decrease in
net revenues is primarily attributable to decreased product sales as a result of
the price increases on many of our products including a reduction in sales and
marketing expenditures and an overall weakening in consumer demand for
technology products. We intend to continue selective price increases, and as a
result, we may experience continued decreased sales volumes.

Gross profit

     Gross profit is calculated as net revenue less the cost of sales which
includes the cost of products sold, shipping costs, and the related distribution
and fulfillment costs.  Gross profits were $11.1 million and $25.5 million for
the quarter and six month period ended June 30, 2001, respectively, and $11.8
million and $20.6 million for the quarter and six month period ended June 30,
2000, respectively.  Gross margins increased to 11.7% and 11.6% for the quarter
and six month period ended June 30, 2001, respectively, as compared to 6.1% and
5.1% for the quarter and six month period ended June 30, 2000, respectively. We
believe the increase in gross margin was primarily due to the price increases on
many of our product sales.

Sales and marketing expenses

     Sales and marketing expenses consist primarily of advertising and
promotional expenses, as well as credit card fees, outsourced customer service
fees, and payroll associated with our advertising and marketing personnel.
Sales and marketing expenses were $8.6 million and $21.8 million for the quarter
and six month period ended June 30, 2001 and $22.0 million and $46.5 million for
the quarter and six month period ended June 30, 2000, respectively, representing
a decrease of 61% and 53%, respectively.  Sales and marketing expenses as a
percentage of net revenues decreased to 9.1% and 9.9% the quarter and six month
period ended June 30, 2001 as compared to 11.4% and 11.6% for the six months
ended June 30, 2000.  The decrease, both as a percentage of net revenues and in
absolute dollars, was primarily attributable to the reduction of our advertising
campaigns consistent with our restructuring plan implemented during the first
quarter of 2001.  We expect marketing and sales expenses to continue to decrease
in absolute dollars as compared to the same periods in the previous year.

                                       14
<PAGE>

Product development expenses

     Product development expenses consist primarily of personnel and other
expenses associated with developing and enhancing our Web site, as well as
associated facilities and related expenses.  Product development expenses were
$1.7 million and $6.0 million for the quarter and six month period ended June
30, 2001, respectively, and $5.8 million and $10.2 million for the quarter and
six month period ended June 30, 2000, respectively, representing a decrease of
71% and 41%, respectively.  Product development expenses as a percentage of net
revenues decreased to 1.8% for the quarter ended June 30, 2001, as compared to
3.0% for the quarter ended June 30, 2000.  Product development expenses as a
percentage of net revenues increased to 2.7% for the six month period ended June
30, 2001, as compared to 2.5% for the six month period ended June 30, 2000.  The
decrease in absolute dollars was primarily due to a decrease in outside
consulting costs.  We intend to continue to enhance our Web site and technology
and information systems, however consistent with our restructuring plan, we
expect product development expenses to decrease in absolute dollars as compared
to the same periods in the previous year.  Also, in accordance with
authoritative guidance, certain costs are capitalized and amortized over the
estimated useful lives of the applicable assets.

General and administrative expenses

     General and administrative expenses consist primarily of payroll and
related expenses for executive and administrative personnel, facilities
expenses, professional fees, depreciation and amortization, and other general
corporate expenses.  General and administrative expenses were $8.2 million and
$20.5 million for the quarter and six month period ended June 30, 2001,
respectively, and $12.0 million and $23.7 million for the quarter and six month
period ended June 30, 2000, respectively, representing a decrease of 32% and
13%, respectively.  General and administrative expenses as a percentage of net
revenues increased to 8.6% and 9.3% for the quarter and six month period ended
June 30, 2001, respectively, as compared to 6.2% and 5.9% for the quarter and
six month period ended June 30, 2000, respectively.  Consistent with our
restructuring plan, we expect general and administrative expenses to continue to
decrease in absolute dollars, as compared to the same periods in the previous
year, due to our staff reductions and our reduction of other general and
corporate expenses.

Restructuring charge

     We incurred a restructuring expense of $34.7 million for the three months
ended March 31, 2001 which was related to a one-time charge associated with the
restructuring of our business and the implementation of our new operating plan.
The charge is primarily attributable to the impairment of the goodwill
associated with the BuyGolf acquisition of $13.1 million, payment of severance
and benefits for the employees that were terminated during the first quarter of
$2.1 million, the write-off of certain assets of $2.8 million, the write-off of
contract and lease cancellation fees of $1.8 million, and the remaining
sponsorship fees related to the Buy.com Tour of $14.9 million, as we do not
believe that any further benefits will be derived from the sponsorship with the
PGA Tour.

Other income (expense)

     Total other income was $366,000 and $1.2 million for the quarter and six
month period ended June 30, 2001, respectively, and $1.6 million and $2.9
million for the quarter and six month period ended June 30, 2000, respectively.
The decrease was largely due to the decrease in interest income during the
quarter and six month period ended June 30, 2001 as a result of lower cash
balances in our accounts.

                                       15
<PAGE>

Equity in income (losses) of joint ventures, net

     Equity in income (losses) of joint ventures, net, was $1.2 million and $5.3
million for the quarter and six month period ended June 30, 2001, respectively,
and negative $7.2 million and negative $9.6 million for the quarter and six
month period ended June 30, 2000, respectively.  During 2000, we decided to
discontinue our joint venture in Australia, and in March 2001, we sold our
United Kingdom joint venture. The income during the quarter and six month period
ended June 30, 2001 relates to the amounts previously expensed during 1999 and
2000 as our share of the operating losses for the joint ventures, which upon the
sale of the United Kingdom joint venture, was greater than the amount required
to fund these joint ventures.  The losses during the quarter and six month
period ended June 30, 2000 consisted of 50% of the losses of the international
joint ventures and BuyTravel.com LLC during that period.  The joint ventures
were at an early stage of operations and were incurring net losses, which we
recorded as an equity method investment.

Liquidity and Capital Resources

     As of June 30, 2001, our principal sources of liquidity consisted of $14.5
million of cash and cash equivalents compared to $56.7 million of cash and cash
equivalents and $10.8 million of marketable securities at December 31, 2000. As
of June 30, 2001, approximately $2.1 million of our cash is characterized as
restricted to secure our obligations under a letter of credit.

     Net cash used in operating activities was $51.8 million and $50.7 million
for the six month period ended June 30, 2001 and 2000, respectively.  Net
operating cash flows for the six month period ended June 30, 2001 were primarily
attributable to the net losses of $50.9 million partially offset by non-cash
charges of $19.4 million related to depreciation and amortization, equity in
income (losses) of joint ventures, and a non-cash restructuring charge, as well
as $20.3 million of cash used in changes in operating assets and liabilities and
the loss from the disposal of property and equipment. Cash used in changes in
operating assets and liabilities is primarily a function of a decrease in our
accounts payable, an increase in prepaid expenses and a decrease in deferred
revenues, offset by a decrease in accounts receivable and an increase in other
liabilities and accrued expenses relating to our restructuring accrual.  Net
operating cash flows for the six month period ended June 30, 2000 were primarily
attributable to the net losses, an increase in accounts receivable, an increase
in prepaid expenses and other current assets, and a decrease in accounts
payable, other liabilities and accrued expenses, partially offset by non-cash
depreciation and amortization and an increase in deferred revenues.

     Net cash provided by investing activities was $9.7 million for the six
month period ended June 30, 2001 and primarily consists of the redemption of
marketable securities offset by purchases of property and equipment and cash
paid for investments in equity method investees.  Net cash used in investing
activities for the six month period ended June 30, 2000 was $20.1 million and
primarily consisted of purchase of property and equipment and cash paid for
investments in equity method investees, partially offset by the proceeds from
the sale of property and equipment.

     Net cash used in financing activities was $97,000 for the six month period
ended June 30, 2001 and primarily consists of repayments under credit
obligations offset by proceeds from the exercise of stock options.  Net cash
provided by financing activities was $175.6 million for the six months ended
June 30, 2000 as a result of the net proceeds from our initial public offering
in February 2000 and proceeds from the exercise of stock options, partially
offset by the repayment of our credit facility and a promissory note to a
stockholder.

     As of June 30, 2001, our principal commitments consisted primarily of
obligations in connection with our capital and operating leases.

          In 1999 and 2000, we focused significant efforts and financial
resources on sales and marketing activities to build our brand, increase
customer traffic to our Web site and enhance our customer loyalty.  We also
committed significant financial resources to the development of our Web site,
transaction processing systems and network infrastructure.  However, during the
first quarter in 2001, we initiated a restructuring of our business and
implemented a new operating plan designed to accelerate our ability to achieve
positive operating cash flow.  As part of the plan, we significantly reduced the
size of our workforce and made further expense reductions for the business in
the areas of marketing and advertising, product development and general and
administrative.  Our new operating plan also requires us to refine our

                                       16
<PAGE>

gross margin strategy and continue to increase prices on many of our products.
As a result, we expect that our sales volumes for 2001 will be significantly
less than our sales volumes for 2000.

     On June 22, 2001, one of our credit card processors notified us that they
intended to discontinue their processing relationship as of July 23, 2001.
Their letter provided an opportunity for us to extend the termination date
beyond July 23, 2001, on the condition that the processor would increase its
processing fee by 1% and would withhold 5% of our daily receipts as additional
security.  Subsequent to the June 22, 2001 letter, the processor notified us
that they had agreed to extend the termination date of their relationship to
September 1, 2001. The processor increased their processing fee by 1% and began
withholding 5% of our daily receipt on July 24, 2001.  Since over 90% of our
revenue is derived from credit card transactions, if we are unable to secure a
new credit card processing relationship on acceptable terms, it is unlikely that
we would be able to continue as a going concern.

     On August 10, 2001, we signed a definitive merger agreement with SB
Acquisition Inc., a company wholly-owned by Scott A. Blum, our founder.  The
merger agreement provides for us to merge with a subsidiary of SB Acquisition,
after which we will continue our operations as a wholly-owned subsidiary of SB
Acquisition. The merger is subject to approval of our stockholders and other
closing conditions. If the merger is approved by our stockholders and all other
conditions to closing are satisfied or waived, the merger is expected to be
completed by the end of November 2001. However, because many of the closing
conditions are beyond our control, there can be no assurance that the merger
will be completed by the end of November 2001, if at all. If we are unable to
close the merger or obtain additional financing or complete another sale or
merger transaction, it is unlikely that we would be able to continue as a going
concern. If the merger is completed, each outstanding share of our common stock
will be canceled and converted into the right to receive $0.17 in cash from SB
Acquisition.

     In connection with the execution of the merger agreement, we also entered
into a credit agreement with a trust controlled by Scott A. Blum, pursuant to
which we have access to a $4,000,000 line of credit and up to an additional
$5,000,000 to establish standby letters of credit for the benefit of our
distributor and vendor partners.    We also entered into a security agreement
with the Blum trust, pursuant to which we granted such trust a security interest
in substantially all of our assets to secure payment and performance of our
obligations under the credit agreement.  If the merger agreement is terminated
prior to completion of the transaction, under substantially all circumstances,
all outstanding debt under the line of credit and letters of credit will become
immediately due and payable.  In addition, if we cannot repay all of the
outstanding amounts due, including commitment fees and possible termination
fees, the Blum trust may foreclose on our assets.

RISK FACTORS

     Before deciding to invest in us or to maintain or increase your investment,
you should carefully consider the risks described below, in addition to the
other information contained in this report and in our other filings with the
SEC, including our annual report on Form 10-K, as amended.  The risks and
uncertainties described below are not the only ones facing our company.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also affect our business operations, or the
successful completion of our merger with SB Acquisition, Inc.  If any of these
risks actually occur, our business, financial condition or results of operation
could be seriously harmed.  In that event, the market price for our common stock
could decline and you may lose all or part of your investment.


                         RISKS RELATING TO THE COMPANY


We must successfully execute our new operating plan to achieve profitability

                                       17
<PAGE>

     In early 2001, we initiated a restructuring of our business and implemented
a new operating plan designed to accelerate our ability to achieve positive
operating cash flow.  As part of the new operating plan, we significantly
reduced the size of our workforce and made further significant expense
reductions for the business in the areas of marketing and advertising, product
development and general and administrative.  To successfully execute against our
operating plan, we must adhere to our expense reductions and work to achieve the
revenue and gross margin targets incorporated as underlying assumptions to our
operating plan.  If we are unable to manage our operating expenses and increase
our gross margins, without experiencing significant deterioration in our
projected sales volumes, we will be unable to achieve positive operating cash
flow.  Further, we have significantly reduced our marketing and advertising
budget for 2001, and we cannot guarantee that we will be able to maintain the
visitor traffic levels, visitor conversion rates, customer purchase activity and
the general brand awareness that we have had in the past.  Our ability to
achieve our annual and quarterly revenue and gross margin goals could also be
negatively impacted by the softening consumer demand for technology and
entertainment products, as well as the weakening general economic conditions and
decreasing consumer confidence.

     Our new operating plan is based on assumptions made by management regarding
various revenue, gross margin and operating expense items.  We cannot guarantee
that the assumptions that we have relied upon in developing our operating plan
will be accurate, or that future events or results will conform to our
expectations or assumptions.  For example, we did not achieve our revenue goals
for the second quarter of 2001, and consequently, we must modify the assumptions
underlying our operating plan.  If our other assumptions are inaccurate, or our
expectations prove to be erroneous in light of future events, or if we are
unable to maintain the support of our vendors, distributors, third party
advertisers and other key corporate relationships regardless of the success of
our new operating plan, we will need to raise more working capital before we
achieve positive operating cash flow.  Besides the financing commitments
provided as a part of our merger with SB Acquisition, Inc., we currently do not
have any commitments for additional financing, and we cannot be certain that
additional financing will be available when and to the extent required, or that,
if available, it will be on acceptable terms.  If adequate funds are not
available on acceptable terms, we may not be able to fund our operations and our
business could fail.

In light of certain perceptions regarding our financial condition, our
customers, distributors and vendor partners may decide not to do business with
us

     Due to concerns regarding our financial condition and our perceived ability
to fulfill our financial and other obligations, our customers, distributors,
third party advertisers, vendor partners and other corporate partners and
service providers may decide not to conduct business with us, or may conduct
business with us on terms that are less favorable than those customarily
extended by them. For example, our distributors could seek to limit our credit
terms or otherwise reduce their support of our business, forcing us to leverage
our operating cash by repaying our unsecured credit lines with them or
increasing the amount of our secured credit lines.  Further, since June 2001, we
have received several notices from one of our credit card processors that they
do not intend to renew our agreement with them, that our relationship will
terminate on September 1, 2001, that they would begin withholding 5% of our
daily receipts as additional security, and that they would increase our
processing fee by 1%.   If we are unable to secure a new credit card processing
relationship on acceptable terms, it is unlikely that we would be able to
continue as a going concern.

     Further, if our customers, vendor partners and third party advertisers
choose to do less business with us, our net sales would decrease and our gross
profits would be significantly impacted by reduced sales volumes, including a
corresponding decrease in co-op advertising revenue, and reduced media
advertising sales.

Our ability to continue operations, independent of a merger transaction or the
receipt of additional financing, is unlikely

     We executed a definitive merger agreement with SB Acquisition, Inc., a
company wholly-owned by Scott A. Blum, our founder.  Pursuant to the terms of
the merger agreement, a subsidiary of SB Acquisition will merge with and into
us, and each issued and outstanding share of our common stock will be converted
into the right to receive $0.17 in cash from SB Acquisition, Inc.  The closing
of the merger is conditioned upon the approval of our stockholders and other
closing conditions.  If our stockholders approve the merger and the other
conditions to closing are satisfied or waived, we expect the merger to be
completed before November 30, 2001.  However, because many of the closing
conditions are beyond our control, there can be no assurance that the merger
will be completed by the end of November 2001, if at all.  If we are unable to
close the merger, obtain additional financing or complete another sale or
merger transaction, it is unlikely that we would be able to continue as a going
concern.

We have encumbered substantially all of our assets in connection with our credit
facility

     In connection with the execution of the merger agreement, we entered into a
credit agreement and a security agreement with a trust controlled by Scott A.
Blum, pursuant to which we have access to a $4,000,000 line of credit and up to
an additional $5,000,000 to establish standby letters of credit for the benefit
of our distributor and vendor partners. The security agreement grants the Blum
trust a security interest in substantially all of our assets to secure payment
and performance of our obligations under the credit agreement.  In the event the
merger agreement is terminated prior to completion of the transaction, under
substantially all circumstances, all outstanding debt under the line of credit
and letters of credit will become immediately due and payable, and we will need
to obtain additional financing or complete another merger or sale transaction to
repay our indebtedness in order to continue as a going concern.  If we are
unable to repay our indebtedness under this credit facility, the Blum trust may
foreclose on substantially all of our assets.

Our common stock was delisted from the Nasdaq National Market

     On August 14, 2001, the Nasdaq National Market delisted our common stock.
Our common stock is quoted and currently trading on the OTC Bulletin Board.  The
trading volume of our common stock may decline significantly or cease
altogether, and the market price of our common stock may decline further, and
you may lose some or all of your investment.

                                       18
<PAGE>

We have incurred substantial losses and we may continue to incur losses for the
foreseeable future

     We have not achieved profitability since our inception, and we incurred net
losses of $66.5 million and $50.9 million for the six month period ended June
30, 2000 and 2001, respectively.  Although we recently initiated a restructuring
of our business designed, in part, to significantly reduce costs in a number of
areas, we expect to continue to incur substantial costs and expenses related to:

   -  the implementation of our business model and our pricing strategies;

   -  brand development, marketing and other promotional activities;

   -  the expansion of our existing product and service offerings;

   -  the continued development and maintenance of our Web site, transaction
      processing systems and network infrastructure;

   -  the development of strategic relationships; and

   -  our ability to effectively merchandise and manage our product mix.

     Further, because we sell many of our products at very competitive prices,
we have low and sometimes negative gross margins on our product sales.  Our
ability to become profitable depends on, among other things:

   -  our ability to generate and sustain net sales, consistent with the
      assumptions underlying our new operating plan, with improved gross
      margins;

   -  our ability to maintain reasonable operating expense levels;

   -  our ability to generate significant advertising revenue; and

   -  our ability to provide other higher margin products and services.

     If we are unable to manage and reduce our operating expenses and costs,
while at the same time increasing our gross margins and without experiencing a
significant deterioration in our sales volumes, we will be unable to achieve
positive operating cash flow.  If we do not achieve positive operating cash flow
in a timely manner that is consistent with our operating plan, our business
could fail. In the first two quarters of 2001, our revenues decreased
substantially from prior periods. As a result, we believe that we will continue
to incur substantial operating losses in the near term, and we may never achieve
profitability.

Our growth and operating results could be impaired if we are unable to meet our
future capital needs

     Our projections of future cash needs and cash flows are subject to
substantial uncertainty, and if our current cash balances and our existing
credit facilities are insufficient to meet our anticipated operating cash needs,
our business will fail.  The factors that may impair our ability to effectively
operate our business and manage our operating cash include, but are not limited
to:

   -  our ability to retain the support of our distributor and vendor partners,
      including but not limited to our credit card processors;

   -  our ability to maintain other key corporate relationships; and

   -  our ability to maintain sales volumes and gross margins consistent with
      our operating plan.

     We may also seek to sell additional equity securities, obtain other lines
of credit or seek other ways to fund our operations in the event we require
additional working capital to operate our business. Besides the financing
commitments

                                       19
<PAGE>

provided as a part of our merger with SB Acquisition, Inc., we do not have any
commitments for additional financing and we cannot be certain that additional
financing will be available when and to the extent required, or that, if
available, it will be on acceptable terms. If adequate funds are not available
on acceptable terms, we may not be able to fund our operations, and our business
will fail. Further, if we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our stockholders will
be diluted. Also, any new securities could have rights, preferences and
privileges senior to those of our common stock.

We rely on a relatively new management team and need to retain our existing
personnel to effectively operate our business

     Several of our executive officers recently joined the company in connection
with our restructuring, and we may experience difficulty assimilating these new
officers into our business operations.  For example, in February 2001 we hired
Robert R. Price as our new Chief Financial Officer and in August 2001 he became
our President as well.  Our success depends, in part, upon his ability to
successfully transition the new management team and to retain existing
management.  Further, our business is largely dependent on the personal efforts
and abilities of other members of senior management, as well as other key
personnel. In January and February 2001, we terminated the employment of
approximately 115 employees, and in August 2001, we terminated approximately 50
other employees.  The retention of our remaining employees is key to our
success.  Any of our officers or employees can terminate their employment
relationship at any time. We do not maintain key person life insurance on any
member of our management team. The loss of any key employee or our inability to
attract or retain other qualified employees could harm our business and results
of operations.

Our business may suffer as a result of our reduction in workforce

     In January and February 2001, we initiated a restructuring of our business
and terminated the employment of approximately 115 employees, and in August
2001, we terminated approximately 50 other employees. These reductions in
workforce may negatively impact our ability to conduct business and serve our
customers, distributors and vendor partners in a manner comparable with past
practice, which could cause our business to suffer significantly.  For example,
we recently changed our customer support organization to discontinue telephone
support to our customers and only provide e-mail customer support.  Although we
believe our new customer support program is adequate, there can be no assurance
that our customers will not become dissatisfied and choose to shop at another
destination.  Further, our workforce reduction and loss of key management
personnel could cause concern among our distributors, vendors, third party
advertisers and other critical corporate relationships.

SOFTBANK and its affiliates control a majority of our outstanding common stock
which enables them to control many significant corporate actions

     SOFTBANK and its affiliates own approximately 28% of our outstanding stock
as of June 30, 2001. In addition, as a result of a voting trust agreement with
our largest stockholder, approximately 44% of our stock outstanding as of June
30, 2001 must be voted by the trustees to mirror the voting of all shares that
are not subject to the terms of the voting trust agreement on significant
stockholder actions, as defined in the voting trust agreement. On routine
stockholder actions, the trustees have the discretion to vote the trust shares
in any manner determined by a majority of the trustees. Because SOFTBANK and its
affiliates will control a majority of the shares not subject to the voting
trust, they effectively control the vote of a majority of our common stock on
significant corporate actions. This control by SOFTBANK and its affiliates could
have a substantial impact on matters requiring the vote of the stockholders,
including the proposed merger with a subsidiary of SB Acquisition, Inc. As a
part of the merger with a subsidiary of SB Acquisition, Inc., certain of the
SOFTBANK affiliates executed a voting agreement with us in which they agreed to
vote their shares in favor of the merger if a majority of the holders of common
stock, excluding those shares held by SOFTBANK, Scott Blum and their affiliates,
vote in favor of the merger.

Ingram Micro's failure to supply and fulfill our computer hardware and software
products could reduce our revenues and harm our business

     We depend on Ingram Micro, Inc. to provide the majority of our computer
hardware and software products and to fulfill our customers' orders. To date, a
substantial majority of our product sales revenue has been derived from computer
hardware and software products acquired from Ingram Micro. We cannot guarantee
that Ingram Micro will continue to supply a sufficient quantity of inventory on
a timely basis to satisfy our order requirements. If Ingram Micro were to
terminate or refuse to renew our distribution arrangement, we would have to
purchase our computer hardware and software products from other distributors. In
such event, we cannot be certain that other distributors could be effectively
and efficiently integrated into our distribution systems to provide comparable
fulfillment, processing and shipping services to our customers in a timely
manner. In addition, in the event we do not purchase at least $350.0 million of
products from Ingram Micro during the term of our agreement with them, our
current pricing schedules could be revised. Our distribution agreement with
Ingram Micro terminates in March 2002.

     Because Ingram Micro is our primary source for computer hardware and
software products, we are subject to risks associated with Ingram Micro's
ability to replenish its inventory in a timely manner. Our customers' orders
could be significantly delayed if we need to seek other distributors to fulfill
those customers' orders. In addition, our distribution agreement with Ingram
Micro does not require them to set aside any amount of inventory to fulfill our
orders or to give our orders priority over other resellers to whom they sell.
Furthermore, some vendors may decide, for reasons outside our

                                       20
<PAGE>

control, not to offer particular products for sale on the Internet. These
vendors may also cause Ingram Micro not to sell products to us. Ingram Micro's
delay or inability to supply our orders would substantially harm our business.

     Our future success also depends on our ability to provide timely and
accurate order fulfillment. We depend on Ingram Micro to process and ship
substantially all of the computer hardware and software products that we sell to
our customers. However, we have limited control over their shipping and
processing procedures. Ingram Micro's systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications failure,
physical and electronic break-ins, earthquakes and similar events. We do not
carry sufficient business interruption insurance to compensate us for losses
that could occur as a result of Ingram Micro's inability to perform for any
reason.

We are dependent on several third party providers to fulfill a number of our
retail functions.  If these parties are unwilling or unable to continue
providing services to us, our business could be seriously harmed

     We are currently dependent on our distribution and fulfillment providers to
manage inventory, process orders and distribute products to our customers in a
timely manner. In addition to our contract with Ingram Micro for computer
hardware and software products and for the fulfillment of our consumer
electronics products, we have supply and distribution contracts with Ingram
Entertainment Inc. for videos, DVDs and games, Direct Source Distributing, Inc.
for our clearance products, Valley Media, Inc. for music products, Global Trade,
Inc. and DBL Distributing, Inc. for consumer electronics products and United
Stationers Supply Co. for office products and supplies. We do not have long-term
agreements with any of these third parties. We purchase all of our books from
the Ingram Book Company, which are shipped and processed by Ingram Fulfillment
Services, Inc. We are also dependent on various supply and fulfillment partners,
including Brightpoint, Inc., and various wireless service providers for the
products and services offered in our wireless store. If we do not maintain our
existing relationships with these providers on acceptable commercial terms, we
may not be able to continue to offer a broad selection of merchandise at low
prices, and customers may refuse to shop at our online store. In addition,
manufacturers may decide, for reasons outside our control, not to offer
particular products for sale on the Internet. If we are unable to supply
products to our customers, or if other product manufacturers refuse to allow
their products to be sold via the Internet, our business will suffer severely.

     We rely on our distributors to fulfill a number of traditional retail
functions, including maintaining inventory and preparing merchandise for
shipment to individual customers. In the future, our vendors may not be willing
to provide these services at competitive rates. In addition, vendors may refuse
to develop the communications technology necessary to support our direct
shipment infrastructure. We also have no effective means to ensure that our
providers will continue to perform these services to our satisfaction. Our
customers could become dissatisfied and cancel their orders or decline to make
future purchases if we or our providers are unable to deliver products on a
timely basis. If our customers become dissatisfied with our distributors and
third party service providers, our reputation and the BUY.COM brand could
suffer.

     Our operations are also heavily dependent upon a number of other third
parties for customer service and support, credit card processing, and hosting
our system infrastructure and database servers. In addition, our distributors
and fulfillment providers use the Federal Express Corporation, United Parcel
Service and the United States Postal Service to deliver substantially all of our
products. If the services of any of these third parties become unsatisfactory,
our customers may experience lengthy delays in receiving their orders, and we
may not be able to find a suitable replacement on a timely basis or on
commercially reasonable terms.

If we are not able to generate significant advertising revenue, we may not be
able to achieve profitability

     Our future success will depend in part on the willingness of product
manufacturers and other advertisers to advertise on our Web site. There is
significant uncertainty about the demand for and market acceptance of Internet
advertising.  We cannot assure you that the market for Internet advertising will
expand, become sustainable or that we will be able to continue to provide an
attractive forum for advertisers. If the market for Internet advertising fails
to develop or if we do not provide an attractive forum for advertisers, our
business may not achieve profitability.

     Because our advertising revenues carry higher gross margins than our
product sales, any decline in our advertising revenues would have a
disproportionate impact on our overall gross margin. For example, since we
expect our net sales to

                                       21
<PAGE>

decrease in 2001, compared to the year ended December 31, 2000, our co-op
advertising revenue should correspondingly decline, thus reducing our
advertising revenue. If our advertising revenues decline, we may not be able to
replace these revenues through other programs or through our product sales, and
we may be unable to achieve profitability.

We have only been operating our online business since November 1997 and face
challenges related to early stage companies in rapidly evolving markets

     We were founded in June 1997 and began our online operations in November
1997. You should consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies in the rapidly evolving online
commerce market. These risks include, but are not limited to, an unpredictable
business environment, the difficulty of raising working capital, the difficulty
of attracting and retaining qualified management personnel and the use of our
business model.  To address these risks, we must, among other things:

   -  access sufficient capital to fund the implementation of our business
      model;

   -  increase our sales volumes and gross margins while limiting our operating
      expenses;

   -  expand our customer base;

   -  enhance our brand recognition;

   -  expand our product and service offerings;

   -  access sufficient product inventory to fulfill our customers' orders;

   -  successfully implement our business and marketing strategy;

   -  provide high quality customer service and order processing;

   -  respond effectively to competitive and technological developments; and

   -  attract and retain qualified personnel.

System failures could prevent access to our online store and harm our business
and results of operations

     Our sales would decline and we could lose existing or potential customers
if they are not able to access our online store or if our online store,
transaction processing systems or network infrastructure do not perform to our
customers' satisfaction. Any network interruptions or problems with our Web site
could:

   -  prevent customers from accessing our online stores;

   -  reduce our ability to fulfill orders;

   -  reduce the number of products that we sell;

   -  cause customer dissatisfaction; or

   -  damage our reputation.

     We have experienced brief computer system interruptions in the past, and
these interruptions may recur.  In the future, we may need to expand and upgrade
our technology, transaction processing systems and network infrastructure
significantly. We may not be able to make timely upgrades to our systems and
infrastructure to accommodate the number of customers visiting our Web site.

                                       22
<PAGE>

     Our systems and operations are also vulnerable to damage or interruption
from a number of sources, including fire, flood, power loss, telecommunications
failure, physical and electronic break-ins, earthquakes and other similar
events. Our servers are also vulnerable to computer viruses, physical or
electronic break-ins and similar disruptions. Any substantial disruption of this
sort could completely impair our ability to generate revenues from our Web site.
We do not presently have a formal disaster recovery plan in effect and do not
carry sufficient business interruption insurance to compensate us for losses
that could occur.

Our business model is new and unproven, and we may not be able to achieve
profitability

     We are subject to risks due to the unproven and evolving nature of our
business model and aggressive pricing strategy. The success of our business
model depends on the volume of customers that visit our Web site and purchase
our products, as well as our ability to generate significant online advertising
revenues. To this end, we have worked hard to build our brand name and enhance
our customer loyalty by selling our products at extremely low prices and
maintaining very low, and sometimes negative, gross margins on our product
sales. We have implemented various strategies to improve our gross margins,
including raising prices on many of the products we sell.  Raising the prices on
our merchandise could cause product sales to decline.  If the amount of traffic
to our Web site decreases due to price increases, a reduced marketing budget, a
weakening demand for technology and entertainment products or otherwise, we may
become less attractive to our current and potential advertisers. As a result,
our margins and advertising revenues may decline.

     Our ability to achieve profitability also depends on our ability to
effectively manage our operating costs.  To this end, we have implemented a
restructuring plan that requires less headcount to operate our business, less
resources dedicated to the development of our system infrastructure, operating
systems and other capital expenditures and a more efficient use of the resources
dedicated to marketing and promoting our Web site.  If we are unable to manage
our operating expenses, while at the same time increasing our gross margins, and
without experiencing a significant deterioration in our sales volumes, we will
be unable to achieve profitability.  Further, since our new operating plan
requires significantly less resources focused on the operation of our business,
we may not be able to achieve high levels of customer satisfaction, and
consequently, we may lose existing and potential customers.

Online security risks could seriously harm our business

     A significant barrier to e-commerce and online communications is the secure
transmission of confidential information over public networks. Anyone who is
able to circumvent our security measures could misappropriate proprietary
information or cause interruptions in our operations. We may be required to
expend significant capital and other resources to protect against potential
security breaches or to alleviate problems caused by any breach. We rely on
licensed encryption and authentication technology to provide the security and
authentication necessary for secure transmission of confidential information,
including credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments may
result in a compromise or breach of the algorithms that we use to protect
customer transaction data. In the event someone circumvents our security
measures, it could seriously harm our business and reputation, and we could lose
customers. Security breaches could also expose us to a risk of loss or
litigation and possible liability for failing to secure confidential customer
information.

If sales from our computer products decline, our operating results will suffer

     Our operating results substantially depend on product revenue from the sale
of computer hardware, software products and peripherals.  To date, a substantial
majority of our product sales revenues are derived from computer hardware and
software products.  We expect that revenue from these products will continue to
represent more than a majority of our total product revenues during the next
twelve months.  We could experience declines in these product sales due to
several factors, including, but not limited to:

   -  a general economic slowdown or "softness" in consumer demand for
      technology-related products;

   -  increased price competition from our competitors;

                                       23
<PAGE>

   -  technological obsolescence of the computer hardware, software and
      peripheral products that we offer;

   -  decisions by manufacturers of computer products to curtail or eliminate
      the sale of products or categories of products over the Internet or by us;
      or

   -  decreased customer demand for computer hardware, software and peripheral
      products.

     If we are unable to maintain our current sales levels of computer hardware,
software and peripheral products, our financial condition and results of
operations would suffer.

We must continue to develop and maintain the BUY.COM brand, which is costly and
may not generate corresponding revenues

     Maintaining and strengthening the BUY.COM brand is an important factor in
attracting new customers, building customer loyalty and attracting advertisers.
In the past, our initiatives have involved significant expenditures.  However,
as part of our restructuring plan, we have significantly reduced the resources
allocated to our promotional strategies.  If our remaining promotional efforts
are unsuccessful, we may not be able to recover these expenses or increase our
revenues or margins consistent with our operating plan.  Further, we also
believe potential customers and advertisers are driven to our online store
because of our strong brand recognition. If advertisers do not believe our Web
site is an effective marketing and sales channel for their merchandise, or if
customers do not perceive us as offering a desirable way to purchase
merchandise, our branding efforts will suffer and we may lose customers.

Our ability to build and strengthen the BUY.COM brand depends largely on:

   -  our ability to allocate sufficient marketing dollars on our advertising
      and promotional efforts given our financial position;

   -  the success of our advertising and promotional efforts;

   -  our ability to provide our customers with a broad range of products at
      competitive prices with timely fulfillment; and

   -  our ability to provide high quality customer service.

     Our marketing budget has been significantly reduced as a result of our
effort to achieve positive operating cash flow.  We cannot be certain that our
reduced marketing budget will successfully drive customer acquisition or that
this allocation of resources will provide additional revenues equal to this
dedication of our resources.  If we fail to promote and maintain our brand, or
if we incur excessive expenses attempting to promote and maintain our brand, our
business may suffer.

Our future operating results may fluctuate and cause the price of our common
stock to decline

     Our limited operating history and the emerging nature of the markets in
which we operate make it difficult to accurately predict our future revenues. We
expect that our revenues and operating results will fluctuate significantly from
quarter to quarter, due to a variety of factors, many of which are beyond our
control. If our quarterly revenues or operating results fall below the
expectations of investors or securities analysts, the price of our common stock
could significantly decline. The factors that could cause our operating results
to fluctuate include, but are not limited to:

  -  fluctuations in the amount of customer spending on the Internet;

  -  our ability to maintain our distributor, vendor and other key corporate
     relationships;

  -  our ability to maintain the operation of all of our specialty stores;

                                       24
<PAGE>

  -  our ability to generate significant advertising revenues;

  -  our ability to build and maintain customer loyalty;

  -  the introduction of new or enhanced Web pages, services, products and
     strategic alliances by us and our competitors;

  -  price competition on the Internet or higher wholesale prices in general;

  -  the success of our brand building and marketing campaigns;

  -  our ability to effectively merchandise and manage our product mix;

  -  increases in the cost of online or offline advertising;

  -  unexpected increases in shipping costs or delivery times;

  -  government regulations related to use of the Internet for commerce;

  -  our ability to maintain, upgrade and develop our Web site, transaction
     processing systems and network infrastructure;

  -  technical difficulties, system downtime, power outages or Internet
     brownouts;

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

  -  general economic conditions and economic conditions specific to the
     Internet and online commerce.

If we do not respond to technological change, our stores could become obsolete,
and we could lose customers

     The development of our Web site entails significant technical and business
risks. To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online stores. The Internet
and the e-commerce industry are characterized by:

   -  rapid technological change;

   -  changes in customer requirements and preferences;

   -  frequent new product and service introductions embodying new technologies;
      and

   -  the emergence of new industry standards and practices.

     However, we have significantly reduced the resources dedicated to the
enhancement of our network infrastructure and operating systems.  If we are
unable to maintain our existing systems and create a positive customer
experience, our revenues may decline and our business will suffer.

     The evolving nature of the Internet could also render our existing online
stores and systems obsolete.  Our success will depend, in part, on our ability
to:

   -  license or acquire leading technologies useful in our business;

                                       25
<PAGE>

   -  enhance our existing online stores;

   -  maintain and enhance our network infrastructure and transaction processing
      systems;

   -  develop new services and technology that address the increasingly
      sophisticated and varied needs of our current and prospective customers;
      and

   -  adapt to technological advances and emerging industry and regulatory
      standards and practices in a cost-effective and timely manner.

     Future advances in technology may not be beneficial to, or compatible with
our business. Furthermore, we may not use new technologies effectively or adapt
our Web site and transaction processing systems to customer requirements or
emerging industry standards on a timely basis, or at all, depending on our
financial condition. If we are unable to adapt to changing market conditions or
user requirements in a timely manner, our stores may become obsolete and we will
lose customers.

We may be subject to liability for sales and other taxes

     We currently collect sales or other similar taxes on the shipment of goods
in the States of California, Indiana, and Massachusetts. However, one or more
states could seek to impose additional income tax obligations or sales tax
collection obligations on out-of-state companies, such as ours, which engage in
or facilitate online commerce. Any new taxes on the sale of products and
services through the Internet or the income derived from these sales could
substantially impair the growth of e-commerce and adversely affect our ability
to become profitable. Furthermore, since our service is available over the
Internet in multiple states and in foreign countries, these jurisdictions may
require us to qualify to do business in these states and foreign countries. If
we fail to qualify in a jurisdiction that requires us to do so, we could face
liabilities for taxes and penalties.

We may be unable to protect our Internet domain names, which are essential to
our business

     Our Internet domain names are critical to our brand recognition and our
overall success. We have many registered domain names relating to our brand,
including BUY.COM.  If we are unable to protect these domain names, our
competitors could capitalize on our brand recognition.  The acquisition and
maintenance of domain names generally are regulated by governmental agencies and
their designees. The regulation of domain names in the United States and in
foreign countries has changed and is subject to further change in the future. As
a result, we may be unable to acquire or maintain relevant domain names in the
United States and in other countries where we conduct business. Furthermore, we
may be unable to protect our domain names or prevent third parties from
acquiring domain names that are similar to, infringe upon or otherwise decrease
the value of our domain names, trademarks and other intellectual property
rights.

Our operating results could be impaired if we become subject to burdensome
government regulations and legal uncertainties concerning the Internet

     Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:

   -  user privacy;

   -  pricing, usage fees and taxes;

   -  content;

   -  copyrights;

   -  distribution;

                                       26
<PAGE>

   -  characteristics and quality of products and services; and

   -  online advertising and marketing.

     The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our advertising revenues and
margins and increase our cost of doing business. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many important issues,
including property ownership, intellectual property, export of encryption
technology, libel and personal privacy.  The application of laws and regulations
from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could also harm our business.

If we are unable to successfully defend against pending legal actions against
us, we could face substantial liabilities

     We are currently a party to pending legal actions against us, the outcomes
of which are uncertain and could result in significant judgments against us.

     In March 2001, the PGA Tour filed a counterclaim against us in the federal
district court in the Central District of California.  The counterclaim alleges
that we breached our contract with them by declaring our sponsorship agreement
to be terminated, by demanding that the PGA Tour cease all uses of our
trademark, by breaching the confidentiality provisions of our agreement with
them and by taking action that adversely affects the goodwill of the BUY.COM
Tour.  The PGA Tour seeks damages in excess of $75,000 and attorneys' fees.

     In July and August 2001, several class action lawsuit were filed against us
in the U.S. District Court for the Southern District of New York alleging, among
other things, that our IPO prospectus failed to disclose excessive commissions
earned by the underwriters of our IPO and alleging that the underwriters engaged
in conduct that artificially inflated the price of our stock.  The cases seek an
undisclosed amount of damages, and each case is in its early stage.

     Defending against these lawsuits may involve significant expense and
diversion of management's resources. Furthermore, due to the inherent
uncertainties of litigation, we may not prevail in these actions. In addition,
our ongoing operations may continue to subject us to significant litigation and
costs in the future. For a more detailed description of these legal actions, see
"Part II, Item 1, Legal Proceedings."

The success of our business depends on the continued growth of the Internet as a
viable commercial marketplace

     Our success depends upon the widespread acceptance of the Internet as a
vehicle to purchase products. The e-commerce market is at an early stage of
development, and demand and continued market acceptance is uncertain. We cannot
predict the extent to which customers will shift their purchasing habits from
traditional to online retailers. If customers or manufacturers are unwilling to
use the Internet to conduct business and exchange information, our business will
fail. It is possible that the Internet may not become a viable long-term
commercial marketplace due to the potentially inadequate development of the
necessary network infrastructure, the delayed development of enabling
technologies and performance improvements and the high cost of shipping
products. The commercial acceptance and use of the Internet may not continue to
develop at historical rates or may not develop as quickly as we expect. In
addition, concerns over security and privacy may inhibit the growth of the
Internet.

We face intense competition in various retail segments and some of our
competitors may be better positioned to capitalize on the rapidly growing e-
commerce market

     The e-commerce market is new, rapidly evolving and intensely competitive.
Many of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing, technical, management and other resources than we do. Some
of our competitors have and may continue to use aggressive pricing or inventory
availability practices and devote substantially more resources to Web site and

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system development than us. We expect that competition will further intensify in
the future. New technologies and the expansion of existing technologies may also
increase the competitive pressure we face. Increased competition may result in
reduced operating margins, loss of market share and diminished brand
recognition.

     We believe that the primary competitive factors in the online market
include brand recognition, price, product selection, ease of use, customer
service, available content and value added services. We currently compete with a
variety of online vendors that specialize in computer hardware and software
products, as well as those who sell books, music, videos, DVDs and other
entertainment products, consumer electronics, office supplies and products and
wireless products and services. Moreover, all of the products we sell in our
online stores are typically available from traditional retailers. Consequently,
we must compete with companies in the online commerce market as well as the
traditional retail industry.

     We would also realize significant competitive pressure if any of our
distribution providers were to initiate their own retail operations. Since our
distributors have access to merchandise at very low costs, they could sell
products at lower prices and maintain a higher gross margin on their product
sales than we can. In this event, our current and potential customers may decide
to purchase directly from these distributors. Increased competition from any
distributor capable of maintaining high sales volumes and acquiring product at
lower prices than us could significantly reduce our market share.

If we are unable to protect our trademarks and intellectual property rights, our
reputation and brand could be impaired, and we could lose customers

     We regard our trademarks, trade secrets and similar intellectual property
as critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, providers and others to protect our proprietary rights. We cannot be
certain that we have taken adequate steps to protect our proprietary rights,
especially in countries where the laws may not protect our rights as fully as in
the United States. In addition, third parties may infringe or misappropriate our
proprietary rights, and we could be required to incur significant expenses to
preserve them. We have applied for the registration of some of our trademarks
and service marks in the United States and some other countries. Even if we are
able to register these names, registration may not adequately protect us against
infringement by others. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our products
and services are made available online. If we are not able to protect our
trademarks and other intellectual property, we may experience difficulties in
achieving and maintaining brand recognition and customer loyalty.

Intellectual property claims against us could be costly and result in the loss
of significant rights

     Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notices of claims of infringement of
intellectual property rights, and we expect to receive other notices in the
future. We cannot predict whether third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will adversely affect our business. If we are forced to defend
against any of these claims, whether meritless or not, we may face costly
litigation and diversion of technical and management personnel. As a result of
these disputes, we may have to expend significant resources to develop or
acquire non-infringing property. Alternatively, we may need to pursue royalty or
licensing agreements, which may not be available on acceptable terms, if at all.

Our stock price may be volatile and has recently declined in a significant way

     The trading price of our common stock is likely to be volatile and could
fluctuate widely in response to many of the following factors, some of which are
beyond our control:

   -  variations in our operating results, such as our inability to meet our
      estimated revenue targets for the quarters ended June 30, 2000, September
      30, 2000, December 31, 2000, March 31, 2001 and June 30, 2001;

   -  the delisting of our common stock from the Nasdaq National Market;

   -  our ability, or inability, to raise additional working capital;

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<PAGE>

   -  announcements of technological innovations, new services or product lines
      by us or our competitors;

   -  changes in our business model and operating strategies;

   -  our ability to attract and retain members to our Board of Directors;

   -  changes in expectations of our future financial performance, including
      financial estimates by securities analysts and investors;

   -  changes in operating and stock price performance of other Internet and
      online commerce companies;

   -  conditions or trends in the Internet industry;

   -  additions or departures of key personnel; and

   -  future sales of our common stock.

     Domestic and international stock markets often experience significant price
and volume fluctuations.  These fluctuations, as well as general economic and
political conditions unrelated to our performance, may adversely affect the
price of our common stock.

     From February 8, 2000 (the first day of public trading of our common
stock), through June 30, 2001, the high and low sales prices for our common
stock fluctuated between $27.50 and $0.22. In the past, following periods of
volatility in the market price of their securities, many companies have been the
subject of securities class action litigation. Such litigation could result in
substantial costs and a diversion of management's attention and resources and
would cause the price of our common stock to fall.

A large number of shares may be sold into the public market in the near future,
which may cause the market price of our common stock to decline significantly,
even if our business is doing well

     A substantial number of shares of our common stock are eligible for resale
as a result of the expiration of time restrictions imposed by law and by
contract.  We have also recently implemented an employee equity incentive
program that provides for the issuance of shares of common stock to certain
executives that may also be sold.  Sales of such additional shares could reduce
the market price of our common stock.

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<PAGE>

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our exposure to market rate risk for changes in interest rates is related
primarily to our investment portfolio.  We have not used derivative financial
instruments in our investment portfolio.  Our short-term investments are
comprised of U.S. government obligations and public corporate debt securities.
Interest rate fluctuations impact the carrying value of the portfolio. We do not
believe that the future market risks related to the above securities will have
material adverse impact on our financial position, results of operations or
liquidity.

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<PAGE>

                          PART II -- OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     On March 13, 2000 a class action suit was filed against us in the U.S.
District Court for the Central District of California alleging that we
collected, used and disclosed personally identifiable customer information to
our third party advertising server and other advertisers without first informing
our customers or seeking their permission in violation of several federal
statutes.  The complaint sought damages of up to $10,000 per class member per
violation, actual and punitive damages, restitution, attorneys' fees and costs
plus injunctive and other equitable relief.  On April 7, 2000 a companion
lawsuit was filed in the Superior Court of the State of California, County of
Orange alleging violations of state statutory and common law based upon the same
facts and federal causes of action as alleged in the federal class action. The
complaint sought statutory damages of up to $5,000 per class member per
violation, plus actual and punitive damages or restitution, attorneys' fees and
costs and injunctive and other equitable relief. On April 25, 2000 a third class
action suit was filed in the United States District Court for the Central
District of California alleging violation of the same federal statutes as those
in the federal class action filed on March 13, 2000. As with the first two class
actions, the complaint alleged that we collected, used and disclosed personally
identifiable information of our consumers without first informing them or
obtaining their consent. The complaint sought unspecified statutory damages,
compensatory damages, punitive damages, attorneys' fees and costs, plus
declaratory, injunctive and other equitable relief, including disgorgement of
all profits and restitution of all monies acquired by means of any act or
practice declared to be unlawful. We reached a global settlement for the cases
on June 26, 2001 that involves certain changes to our privacy practices and the
payment of $400,000 in attorney fees which was paid for by our insurance
carrier.  The lawsuits were dismissed with prejudice in July 2001.

     On February 28, 2001, we filed suit against the PGA Tour in federal
district court, Central District of California, for breach of contract based on
our BUY.COM Tour sponsorship agreement with the PGA Tour. We claim that the PGA
Tour entered into an agreement with another party to provide e-commerce services
to them in violation of our agreement. We are seeking rescission of our
agreement, a return of our sponsorship fees, including those secured by a
$17,000,000 letter of credit, and additional damages. In March 2001, the PGA
Tour filed a counterclaim against us in the federal district court in the
Central District of California. The counterclaim alleges that we breached our
contract with them by declaring our sponsorship agreement to be terminated, by
demanding that the PGA Tour cease all uses of our trademark, by breaching the
confidentiality provisions of our agreement with them and by taking action that
adversely affects the goodwill of the BUY.COM Tour. The PGA Tour seeks damages
in excess of $75,000 and attorneys' fees. Discovery is underway and a trial is
set for December 4, 2001.

     On July 11, 2001, a class action complaint, titled Joel Abrams v. BUY.COM,
was filed against us, in addition to certain of our officers and/or directors,
and our underwriters that participated in the IPO process, alleging a violation
of federal securities laws.  Since July 11, 2001, several other similar class
action complaints have been filed against us including: Richard Taylor v.
BUY.COM (filed July 23, 2001), Robert Berkowitz v. BUY.COM (filed July 16,
2001), Rutherford Dawson v. BUY.COM (filed August 1, 2001), Haas v. BUY.COM
(filed August 15, 2001) and Goodman Espstein v. BUY.COM (filed August 10, 2001).
Each of the class actions were filed in the United States District Court,
Southern District of New York on behalf of purchasers of BUY.COM securities
during the period between February 7, 2000 and December 6, 2000.  The complaints
allege that our prospectus was materially false and misleading because it failed
to disclose, among other things, that our underwriters had solicited and
received excessive and undisclosed commissions from certain investors.  The
lawsuits also allege that the underwriters engaged in actions that artificially
inflated the price of the stock.   Greg Hawkins and Mitch Hill have been named
as defendants in each of these cases in connection with their capacity as former
officers and/or directors of BUY.COM.  Mr. Hawkins and Mr. Hill have
indemnification agreements with us.  We believes that other similar cases may
have been filed against us that are not yet known.  We have not yet responded to
any of these complaints and each case is in its early stages.

     Although we intend to defend ourselves vigorously, each of these actions
could result in significant expenses and diversion of management time and other
resources. Further, the outcome of the actions filed against us is uncertain.
Therefore, we can give no assurance that we will prevail in these suits against
us. See "Risk Factors--If we are unable to successfully defend against pending
legal actions against us, we could face substantial liabilities."

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     Although we are not aware of any other material legal proceedings pending
against us, we are from time to time subject to ordinary course litigation and
disputes between our customers, employees and us.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) Use of Proceeds from Sales of Registered Securities. On February 11, 2000,
we completed an initial public offering (the "Offering") of our common stock,
$0.0001 par value. The shares of common stock sold in the Offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (the "Registration Statement") (Reg. No. 333-89737) that
was declared effective by the SEC on February 7, 2000. All 16,100,000 shares of
common stock registered under the Registration Statement (including 2,100,000
shares sold pursuant to the exercise of the Underwriters' over-allotment option)
were sold at a price of $13.00 per share. After deducting the underwriting
discounts and commissions and Offering expenses, we received net proceeds from
the Offering of approximately $192.1 million. As of June 30, 2001, we had used
approximately $177.6 million of the net proceeds from the Offering for capital
expenditures associated with system upgrades and expansion, marketing
activities, including our sponsorship of the buy.com Tour, repayment of certain
indebtedness, investments in our joint ventures, and to fund operating losses
and for working capital all as described elsewhere in this report. Except for
the repayment of a $5.0 million debt to The Scott A. Blum Separate Property
Trust, none of the net proceeds of the Offering were paid directly or indirectly
to any director, officer, general partner of our or their associates, persons
owning 10% or more of any class of equity securities, or an affiliate of ours,
other than in the form of wages or salaries and bonuses paid out in the ordinary
course of business.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

A.  Exhibits

    None.

B.  Reports on Form 8-K

    None.

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                                   SIGNATURES

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

                             BUY.COM INC.
                             (Registrant)



                             By:
                                ------------------------------------------------
                                Robert R. Price
                                Chief Financial Officer (principal financial and
                                accounting officer)

Dated:  August 19, 2001

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                                 EXHIBIT INDEX

Exhibit Number                    Description


A.  Exhibits

    None.


B.  Reports on Form 8-K

    None.

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