<PAGE>

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

                                   FORM 10-Q

(Mark One)

  [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
       OF 1934

       For the quarterly period ended September 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.)

            27 Brookline
     Aliso Viejo, California                               92656
     (Address of principal executive office)             (Zip code)

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

                                 85 Enterprise
                        Aliso Viejo, California  92656
  (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 November 7, 2001 was 136,973,597.
<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.......     13

Item 3.     Quantitative and Qualitative Disclosures about Market Risk..................................     32

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

Item 1.     Legal Proceedings...........................................................................     33

Item 2.     Changes in Securities and Use of Proceeds...................................................     33

Item 3.     Defaults Upon Senior Securities.............................................................     34

Item 4.     Submission of Matters to a Vote of Security Holders.........................................     34

Item 5.     Other Information...........................................................................     34

Item 6.     Exhibits and Reports on Form 8-K............................................................     34

            A.  Exhibits................................................................................     34

            B.  Reports on Form 8-K.....................................................................     34

Signatures..............................................................................................     35
</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
                                                                                        September 30,          December 31,
                                                                                            2001                   2000
                                                                                     ------------------      ---------------
<S>                                                                                  <C>                     <C>
Current Assets:
       Cash and cash equivalents                                                     $            5,361      $        29,656
       Restricted cash                                                                                -               27,000
       Marketable securities                                                                          -               10,769
       Accounts receivable, net of allowances of $2,263 and $2,813                                9,800               19,424
       Prepaid expenses and other current assets                                                  5,351                7,141
                                                                                     ------------------      ---------------
                  Total current assets                                                           20,512               93,990
                                                                                     ------------------      ---------------
Property and equipment, net                                                                      11,167               18,500
Intangibles, net                                                                                  5,316               23,622
Other noncurrent assets                                                                           1,712                  392
                                                                                     ------------------      ---------------
                                                                                     $           38,707      $       136,504
                                                                                     ==================      ===============

                                               LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
       Accounts payable                                                              $            8,000      $        38,682
       Other liabilities and accrued expenses                                                     4,664                3,460
       Deferred revenue                                                                           1,866                3,400
       Obligation to joint ventures, net                                                              -                7,156
       Line of credit                                                                                 -                    -
       Current portion of long-term debt                                                            264                  250
                                                                                     ------------------      ---------------
                  Total current liabilities                                                      14,794               52,948
                                                                                     ------------------      ---------------
Long-term debt, net of current portion                                                              124                  324
                                                                                     ------------------      ---------------
                                                                                                 14,918               53,272
Commitments and Contingencies (Note 7)

Stockholders' Equity:
       Common stock, $0.0001 par value;
          Authorized shares - 990,000,000
            Issued and outstanding--136,973,597 and 134,941,776
            at September 30, 2001 and December 31, 2000, respectively                                13                   13
          Additional paid-in capital                                                            364,415              368,970
       Deferred compensation                                                                       (707)              (7,019)
       Accumulated deficit                                                                     (339,932)            (278,732)
                                                                                     ------------------      ---------------
                  Total stockholders' equity                                                     23,789               83,232
                                                                                     ------------------      ---------------
                                                                                     $           38,707      $       136,504
                                                                                     ==================      ===============
</TABLE>

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

                                       1
<PAGE>

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

<TABLE>
<CAPTION>
                                                                   Quarter Ended September 30,       Nine Months Ended September 30,
                                                                     2001               2000             2001               2000
                                                                 ------------       ------------     ------------     --------------
<S>                                                              <C>                <C>              <C>              <C>
 Net revenues                                                    $     75,528       $    190,150     $    294,992     $     590,965
 Cost of goods sold                                                    67,123            177,437          261,043           557,622
                                                                 ------------       ------------     ------------     -------------

 Gross profit                                                           8,405             12,713           33,949            33,343

 Operating expenses:
       Sales and marketing                                              7,346             21,229           29,136            67,768
       Product development                                              1,548              7,097            7,503            17,252
       General and administrative                                       6,929             11,715           27,460            35,394
       Restructuring charge, net                                        1,598                  -           36,276                 -
       Merger related expenses                                          1,480                  -            1,480                 -
                                                                 ------------       ------------     ------------     -------------
                  Total operating expenses                             18,901             40,041          101,855           120,414
                                                                 ------------       ------------     ------------     -------------

                  Operating loss                                      (10,496)           (27,328)         (67,906)          (87,071)

 Other income (expense):
       Interest income                                                    115              2,015            1,170             5,715
       Other                                                              100                 30              237              (792)
                                                                 ------------       ------------     ------------     -------------

                  Total other income (expense)                            215              2,045            1,407             4,923

 Net loss before equity in income (losses) of joint ventures          (10,281)           (25,283)         (66,499)          (82,148)

 Equity in income (losses) of joint ventures, net                           -             (5,221)           5,299           (14,836)
                                                                 ------------       ------------     ------------     -------------

 Net loss                                                        $    (10,281)      $    (30,504)    $    (61,200)    $     (96,984)
                                                                 ============       ============     ============     =============

 Net loss per share:
   Basic and diluted                                             $      (0.08)      $      (0.23)    $      (0.45)    $       (0.77)

 Shares used in computation of basic and
     diluted loss per share                                       136,899,998        132,547,388      136,245,681       126,461,752
</TABLE>

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

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended September 30,
                                                                                     2001                       2000
                                                                                --------------             --------------
<S>                                                                             <C>                        <C>
OPERATING ACTIVITIES
Net Loss                                                                        $      (61,200)            $      (96,984)

Adjustments to reconcile net loss to cash
     used in operating activities:
   Depreciation                                                                          4,171                      3,539
   Amortization of deferred compensation and warrants                                    2,243                      2,542
   Equity in (income) losses of joint ventures, net                                     (5,299)                    14,836
   Amortization of goodwill and other intangibles                                        5,535                      9,050
   Non-cash restructuring charge                                                        16,275                          -
   Loss from the disposal of property and equipment                                         13                        909
   Changes in assets and liabilities:
        Accounts receivable                                                              8,811                     (6,642)
        Prepaid expenses and other current assets                                        1,279                     14,147
        Other noncurrent assets                                                         (1,320)                       271
        Accounts payable                                                               (30,682)                   (17,920)
        Other liabilities and accrued expenses                                             924                     (1,648)
        Deferred revenues                                                               (1,534)                     1,919
                                                                               ---------------             --------------
        Net cash used in operating activities                                          (60,784)                   (75,981)
                                                                               ---------------             --------------
INVESTING ACTIVITIES
  Decrease (increase) in restricted cash                                                27,000                    (26,200)
  Net redemption(purchases) of marketable securities                                    10,769                     (5,992)
  Purchase of property and equipment                                                       (42)                    (7,146)
  Proceeds from sale of property and equipment                                               -                      1,893
  Net proceeds received in connection with acquisition                                       -                        221
  Investments in equity method investees                                                (1,077)                    (8,140)
                                                                               ---------------             --------------
        Net cash provided by (used in) investing activities                             36,650                    (45,364)
                                                                               ---------------             --------------
FINANCING ACTIVITIES
  Net proceeds from initial public offering                                                  -                    192,095
  Repayments to stockholder                                                                  -                     (5,000)
  Net proceeds from exercise of stock options                                               25                      1,251
  Repayments under line of credit and other obligations                                   (186)                   (13,820)
                                                                               ---------------             --------------
       Net cash (used in) provided by financing activities                                (161)                   174,526
                                                                               ---------------             --------------
Net (decrease) increase in cash and cash equivalents                                   (24,295)                    53,181

Cash and cash equivalents at beginning of period                                        29,656                     24,693
                                                                               ---------------             --------------
Cash and cash equivalents at end of period                                     $         5,361             $       77,874
                                                                               ===============             ==============
</TABLE>

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

                                       3
<PAGE>

<TABLE>
<S>                                                                                     <C>                <C>
Supplemental cash flow information:

       Cash paid for interest                                                           $            40    $         1,358
                                                                                        ===============    ===============
       Stock issued in connection with domain purchases                                 $             -    $           316
                                                                                        ===============    ===============
       Reduction in value of stock issued to PGA Tour                                   $             -    $        (7,151)
                                                                                        ===============    ===============
       Assumption of liabilities in connection with acquisition                         $          (313)   $             -
                                                                                        ===============    ===============
       Net settlement of joint venture receivable                                       $           730    $             -
                                                                                        ===============    ===============
ACQUISITION

        Acquired all of the outstanding capital stock of Telstreet.com, Inc.

        The following table outlines the assets acquired, liabilities assumed
        and cash received:


         Fair value of assets acquired                                                  $             -    $         8,470
         Less:
                         Liabilities assumed                                                          -             (1,641)
                         Fair value of common stock issued                                            -             (7,050)
                                                                                        ---------------    ---------------
         Cash received in connection with acquisition                                   $             -    $           221
                                                                                        ===============    ===============
</TABLE>

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

                                       4
<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 and wireless
products and services. Through its 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 its 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. 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 approval of the
Company's stockholders and other closing conditions. Provided that 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 4)

     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 stand by letters of credit for
the benefit of its distributor and vendor partners. As of September 30, 2001 the
Company has not drawn any amounts under this credit facility. 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 4)

     In addition, since August 30, 2001, Mr. Blum has agreed to guarantee
certain obligations of the Company to its credit card processors. In connection
with those guarantees, the Company entered into reimbursement agreements and
security agreements with Mr. Blum, which agreements require that the Company
repay any amounts he pays under the

                                       5
<PAGE>

guarantees and that such obligations are secured by security agreements for
substantially all of its assets. Mr. Blum has not paid any amounts under these
guarantees as of September 30, 2001. If the Company is unable to repay any of
these amounts paid by Mr. Blum on its behalf, Mr. Blum may foreclose on
substantially all of the Company's assets. Also, if the Company is unable to
successfully complete its merger with SB Acquisition Inc., it is uncertain
whether it will be able to maintain its credit card processing relationships.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Unaudited Interim Financial Information

     The interim consolidated financial statements as of September 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 nine month period ended September 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, as amended. 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
amounts 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.

Restricted Cash

     Restricted cash is comprised of cash which is restricted to secure certain
letter of credit obligations.

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

                                       6
<PAGE>

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 commission revenue from activation fees and
commissions when the subscription is activated. The Company provides an
allowance for deactivation that 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 June 2001 the Financial Accounting Standards Board (FASB) issued
Statement of Financial 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 non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization 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 that 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.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a long-
lived asset, except for certain obligations of lessees. SFAS 143 requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002 (with earlier
application being encouraged). The Company does not expect the adoption of SFAS
143 to have a material impact on its financial condition and results of
operations.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations
 - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring

                                       7
<PAGE>

Events and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). The provisions of SFAS 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001, with early application encouraged and generally are to be applied
prospectively. The Company does not expect the adoption of SFAS 144 to have a
material impact on its financial condition and results of operations.

4.   DEFINITIVE MERGER AGREEMENT

     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 and major stockholder. 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 closing
conditions 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 cancelled and converted into the right to
receive $0.17 in cash from SB Acquisition.

     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 stand by letters of credit for
the benefit of its distributor and vendor partners. As of September 30, 2001 the
Company has not drawn any amounts under this credit facility. 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. 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.

     In addition, since August 30, 2001, Mr. Blum has agreed to guarantee
certain obligations of the Company to its credit card processors. In connection
with those guarantees, the Company entered into reimbursement agreements and
security agreements with Mr. Blum, which agreements require that the Company
repay any amounts he pays under the guarantees and that such obligations are
secured by security agreements for substantially all of its assets. Mr. Blum has
not paid any amounts under these guarantees as of September 30, 2001. If the
Company is unable to repay any of these amounts paid by Mr. Blum on its behalf,
Mr. Blum may foreclose on substantially all of the Company's assets. Also, if
the Company is unable to successfully complete its merger with SB Acquisition
Inc., it is uncertain whether it will be able to maintain its credit card
processing relationships.

5.   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 September
30, 2001, the Company has no further obligations to 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

                                       8
<PAGE>

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. During the third quarter, the Company initiated a further reduction in its
workforce resulting in an additional severance and benefit charge of $630,000.
The Company also wrote-off excess property and equipment of $363,000 and accrued
for contract and lease cancellation fees of $1.5 million in connection with the
Company's decision to relocate its corporate offices. The Company has made
certain assumptions in its accrual of additional contract and lease cancellation
fees with regard to the timing and amount that the Company may receive for a
sublease of its previous corporate offices. Actual results could differ
significantly from the Company's estimates. As of September 30, 2001, the
restructuring accrual is $2.3 million, which primarily relates to the Company's
contractual and lease obligations. The Company also reversed approximately
$914,000 of its restructuring charge, of which $400,000 related to a
reimbursement from the PGA Tour due to a shortfall in the number of required
tournament events.



                       Restructuring Charge-Rollforward
                       Quarter Ending September 30, 2001
                                (in thousands)

<TABLE>
<CAPTION>
                                                Reserve                                              Charge             Reserve
                                             Balance as of      Charged to        Adjustment        Against          Balance as of
                                             June 30, 2001       Expense          of Reserve        Reserve       September 30, 2001
                                             -------------      ----------        ----------        -------       ------------------
<S>                                          <C>                <C>               <C>               <C>           <C>
        Description
        -----------
Intangibles                                  $           -      $        -        $       -        $      -          $          -
PGA Sponsorship Agreement                              589               -             (914)            325                     -
Severance and Benefits                                   -             630                -            (437)                  193
Excess Property and Equipment                            -             363                -            (336)                   27
Contract and Lease Cancellation Fees                   728           1,519                -            (176)                2,071
                                             -------------       ---------        ---------        --------          ------------
                                             $       1,317       $   2,512        $    (914)       $   (624)         $      2,291
                                             =============       =========        =========        ========          ============
</TABLE>




                       Restructuring Charge-Rollforward
                     Nine Months Ending September 30, 2001
                                (in thousands)

<TABLE>
<CAPTION>
                                                  Reserve                                            Charge             Reserve
                                               Balance as of       Charged to     Adjustment        Against          Balance as of
                                             December 31, 2000       Expense      of Reserve        Reserve       September 30, 2001
                                             -----------------     ----------     ----------       --------       ------------------
<S>                                          <C>                   <C>            <C>              <C>            <C>
          Description
          -----------
Intangibles                                      $           -     $   13,084     $        -       $(13,084)           $         -
PGA Sponsorship Agreement                                    -         14,908           (914)       (13,994)                     -
Severance and Benefits                                       -          2,740              -         (2,547)                   193
Excess Property and Equipment                                -          3,191           (140)        (3,024)                    27
Contract and Lease Cancellation Fees                         -          3,267            140         (1,336)                 2,071
                                                 -------------    -----------     ----------       --------            -----------
                                                 $           -    $    37,190     $     (914)      $(33,985)           $     2,291
                                                 =============    ===========     ==========       ========            ===========
</TABLE>


     The Company performed an impairment analysis on its long-lived assets and
goodwill at March 31, 2001, during the quarter in which the restructuring was
initiated. The restructuring was determined to be a triggering event for the
analysis under SFAS 121. At that time, the Company had made the decision to exit
the sporting goods e-retail business and therefore determined that all goodwill
associated with the BuyGolf.com acquisition would have no future benefit.
Additionally, it was determined that the triggering event of the restructure did
not have an impact on the remaining two components of goodwill, which relate to
the Company's Speedserve and Telstreet acquisitions. Speedserve was acquired in
November 1998, which enabled the Company to enter the book, video, and game
retail markets, and continues to have

                                       9
<PAGE>

a benefit to the Company that was not altered by the restructuring. Telstreet
was acquired in August 2000, which enabled the Company to enter into the
wireless/cellular telephone retail markets and continues to have a benefit to
the Company that was not altered by the restructuring. In addition, Telstreet
having been acquired within 12 months qualified as a current acquisition and is
presumed to not be impaired by the restructure. At September 30, 2001 the
Company re-evaluated the existence of triggering events and determined that
nothing had occurred during the second or third quarter that would cause further
impairment of the Company's long-lived assets beyond that included in the amount
at March 31, 2001.

6.   MARKETABLE SECURITIES

     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.

7.   COMMITMENTS AND CONTINGENCIES

     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 February
2002.

     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), Goodman Espstein v. BUY.COM
(filed August 10, 2001), Leo and Josie Castillo v. BUY.COM (filed August 15,
2001) and Mohammad Jawed Akhtar v. BUY.COM (filed August 17, 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.

     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.

                                       10
<PAGE>

     Management is unable to determine or predict the outcome of the above
litigation and claims, or their 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.

8.   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                             Nine Months Ended
                                              ------------------------------------      -------------------------------------
                                               September 30,        September 30,        September 30,         September 30,
                                                   2001                 2000                 2001                  2000
                                              ---------------      ---------------      ---------------       ---------------
                                                           (unaudited)                               (unaudited)
<S>                                           <C>                  <C>                  <C>                   <C>
Basic and diluted:
Net loss                                        $    (10,281)        $    (30,504)        $    (61,200)        $    (96,984)
Weighted average common shares                   136,899,998          132,547,388          136,245,681          126,461,752

Net loss per common share                       $      (0.08)        $      (0.23)        $      (0.45)        $      (0.77)
</TABLE>


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

9.   INCOME TAXES

     The Company incurred taxable losses for federal and state purposes for the
quarter and nine month period ended September 30, 2001 and quarter and nine
month period ended September 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 September 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.

10.  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. During the third quarter of 2001, the Company recorded a
reversal of approximately $231,000 due to the further reduction of the
workforce. The remaining deferred compensation charge related

                                       11
<PAGE>

to the Company's Restricted Stock Program is approximately $265,000, which is
being amortized using the straight-line method over the remaining five quarters
of vesting.

     In connection with the completion of the proposed merger, the vesting of
all outstanding Company stock options and other stock awards will accelerate and
such stock options and stock awards will become exercisable. Accordingly,
holders who exercise their stock options or other stock awards and pay the
exercise or purchase price therefore prior to completion of the proposed merger
will receive shares of Company common stock and will be entitled to receive the
merger consideration. If the merger is completed, all Company stock options or
other stock awards will be cancelled upon completion of the merger. Deferred
compensation will be recorded in connection with this acceleration and other
change in control benefits will be recorded under existing employee agreements.

     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.

Nasdaq Delisting

     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.  RELATED PARTY TRANSACTIONS

     In August 2001, the Company executed a non-exclusive marketing agreement
with Thinkbig Marketing Group LLC, an agent retained to requisition, manage,
create and produce advertising for the Company. The Company has agreed to pay
Thinkbig a retainer fee of $50,000 per month, a ten percent commission on all
advertising placements made on its behalf, and their actual costs incurred in
performing their services under the agreement. The term of the agreement is for
90 days with an automatic thirty-day renewal period unless otherwise terminated.
Mr. Blum indirectly has a 50% interest in Thinkbig Marketing Group LLC.

     Since August 30, 2001, Mr. Blum has agreed to guarantee certain obligations
of the Company to its credit card processors. In connection with those
guarantees, the Company entered into reimbursement agreements and security
agreements with Mr. Blum, which agreements require that the Company repay any
amounts he pays under the guarantees and that such obligations are secured by
security agreements for substantially all of its assets. Mr. Blum has not paid
any amounts under these guarantees as of September 30, 2001. If the Company is
unable to repay any of these amounts paid by Mr. Blum on its behalf, Mr. Blum
may foreclose on substantially all of the Company's assets.

     In September 2001, the Company entered into a facilities lease agreement
with the Blum separate property trust for approximately 20,000 square feet of
office space located in Aliso Viejo, California to serve as its corporate
headquarters. Under the terms of the lease agreement, the Company pays
approximately $30,000 per month and it has the option to terminate such lease
upon 30 days notice.

                                       12
<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. 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. 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: our 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. You should
carefully consider all of these 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
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.

         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

                                       13
<PAGE>

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 nine months ended September 30, 2001 and for the quarter and nine months
ended September 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 95.2% and 94.7% of net
revenues for the quarter and nine month period ended September 30, 2001,
respectively, and 95.9% and 95.8% of net revenues for the quarter and nine month
period ended September 30, 2000, respectively.

         Shipping and handling net revenues were $3.3 million and $12.4 million
for the quarter and nine month period ended September 30, 2001, respectively,
and $6.8 million and $21.6 million for the quarter and nine month period ended
September 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 $279,000
and $1.1 million for the quarter and nine month period ended September 30, 2001,
respectively, and $176,000 and $3.2 million for the quarter and nine month
period ended September 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 5.5%
and 6.2% of net revenues for the quarter and nine month period ended September
30, 2001, respectively, and 5.9% and 5.5% of net revenues for the quarter and
nine month period ended September 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
$541,000 and $2.6 million, or 0.7% and 0.9% of net revenues, for the quarter and
nine month period ended September 30, 2001, respectively, and $3.4 million and
$7.8 million, or 1.8% and 1.3% of net revenues, for the quarter and nine month
period ended September 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. In February 2001, we initiated a restructuring
plan to reduce costs and conserve our cash resources. Further, in August 2001,
we terminated approximately 50 other employees to further reduce our operating
expenses. Consistent with our plan, we have reduced our expenses in the areas of
marketing and advertising, product development and general and administrative.
We still believe, however, that we will continue to incur substantial operating
losses in the near term, and we may never achieve profitability.

         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 to
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

                                       14
<PAGE>

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. Upon
completion of the merger, we will be required to amortize deferred compensation
for all remaining employees who hold options or restricted stock awards.
Additionally, certain employees may be entitled to receive certain change in
control benefits upon the closing of the merger that will be recorded as a
compensation expense.

         In connection with the execution of the merger agreement, we also
entered into a credit agreement with a trust owned by Scott A. Blum, pursuant to
which we have access to a $4,000,000 line of credit and up to $5,000,000 to
establish standby letters of credit for the benefit of our distributor and
vendor partners. As of the date of this report, there were no amounts
outstanding under the credit agreement. We have also entered into a security
agreement with Blum's trust, pursuant to which we granted Blum's trust a
security interest in substantially all of our assets to secure payment and
performance of all 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.

         In addition, since August 30, 2001, Mr. Blum has agreed to guarantee
certain obligations of ours to our credit card processors. In connection with
these guarantees, we entered into reimbursement agreements and security
agreements with Mr. Blum, which agreements require that we repay any amounts he
pays under the guarantees and that such obligations are secured by security
agreements for substantially all of our assets. If we are unable to repay any of
these amounts paid by Mr. Blum on our behalf, Mr. Blum may foreclose on
substantially all of our assets. As of the date of this report, Mr. Blum has not
paid any amounts under these guarantees.

RESULTS OF OPERATIONS

Net revenues

         Net revenues were $75.5 million and $295.0 million for the quarter and
nine month period ended September 30, 2001, respectively, and $190.2 million and
$591.0 million for the quarter and nine month period ended September 30, 2000,
respectively, representing 60% and 50% decrease, respectively. We believe the
decrease in net revenues is primarily attributable to decreased product sales as
a result of price increases on many of our products, a reduction in our 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 continue to experience 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 $8.4 million and $33.9 million for the
quarter and nine month period ended September 30, 2001, respectively, and $12.7
million and $33.3 million for the quarter and nine month period ended September
30, 2000, respectively. Gross margins increased to 11.1% and 11.5% for the
quarter and nine month period ended September 30, 2001, respectively, as
compared to 6.7% and 5.6% for the quarter and nine month period ended September
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 $7.4 million and $29.1 million for the quarter and
nine month period ended September 30, 2001, respectively, and $21.2 million and
$67.8 million for the quarter and nine month period ended September 30, 2000,

                                       15
<PAGE>

respectively, representing a decrease of 65% and 57%, respectively. Sales and
marketing expenses as a percentage of net revenues decreased to 9.7% and 9.9%
the quarter and nine month period ended September 30, 2001, respectively, as
compared to 11.2% and 11.5% for the quarter and nine month period ended
September 30, 2000, respectively. 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.

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
$1.5 million and $7.5 million for the quarter and nine month period ended
September 30, 2001, respectively, and $7.1 million and $17.3 million for the
quarter and nine month period ended September 30, 2000, respectively,
representing a decrease of 78% and 57%, respectively. Product development
expenses as a percentage of net revenues decreased to 2.0% for the quarter ended
September 30, 2001, as compared to 3.7% for the quarter ended September 30,
2000. Product development expenses as a percentage of net revenues decreased to
2.5% for the nine month period ended September 30, 2001, as compared to 2.9% for
the nine month period ended September 30, 2000. The decrease, both as a
percentage of net revenues and 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 $6.9 million and
$27.5 million for the quarter and nine month period ended September 30, 2001,
respectively, and $11.7 million and $35.4 million for the quarter and nine month
period ended September 30, 2000, respectively, representing a decrease of 41%
and 22%, respectively. General and administrative expenses as a percentage of
net revenues increased to 9.2% and 9.3% for the quarter and nine month period
ended September 30, 2001, respectively, as compared to 6.2% and 6.0% for the
quarter and nine month period ended September 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 reduction and our reductions of other general
and corporate expenses.

Restructuring charge

         During the first quarter 2001, we initiated a restructuring of our
business and implemented a new operating plan. We 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 we does not believe that any further
benefits will be derived from our sponsorship agreement with the PGA Tour.
During the third quarter, we initiated a further reduction in our workforce
resulting in an additional severance and benefit charge of $630,000. We also
wrote-off excess property and equipment of $363,000 and accrued for contract and
lease cancellation fees of $1.5 million in connection with our decision to
relocate our corporate offices. We have made certain assumptions in our accrual
of additional contract and lease cancellation fees with regard to the timing and
amount that we may receive for a sublease of our previous corporate offices. As
of September 30, 2001, the restructuring accrual is $2.3 million, which
primarily relates to our contractual and lease obligations. We also reversed
approximately $914,000 of our restructuring charge, of which $400,000 related to
a reimbursement from the PGA Tour due to a shortfall in the number of required
tournament events.

                                       16
<PAGE>

Merger related expenses

         We incurred merger related expenses of $1.5 million during the third
quarter 2001. These expenses are primarily attributable to legal and accounting
costs, as well as fees paid to our financial advisor in connection with our
proposed merger with SB Acquisition, Inc.

Other income (expense)

         Total other income was $215,000 and $1.4 million for the quarter and
nine month period ended September 30, 2001, respectively, and $2.0 million and
$4.9 million for the quarter and nine month period ended September 30, 2000,
respectively. The decrease was largely due to the decrease in interest income
during the quarter and nine month period ended September 30, 2001 as a result of
lower cash balances in our accounts.

Equity in income (losses) of joint ventures, net

         Equity in income (losses) of joint ventures, net, was $0.0 and $5.3
million for the quarter and nine month period ended September 30, 2001,
respectively, and negative $5.2 million and negative $14.8 million for the
quarter and nine month period ended September 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 nine month period ended September 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 nine month period ended September 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 September 30, 2001, our principal sources of liquidity consisted
of $5.4 million of cash and cash equivalents compared to $29.7 million of cash
and cash equivalents, $27.0 million of restricted cash and $10.8 million of
marketable securities at December 31, 2000.

         Net cash used in operating activities was $60.8 million and $76.0
million for the nine month period ended September 30, 2001 and 2000,
respectively. Net operating cash flows for the nine month period ended September
30, 2001 were primarily attributable to the net losses of $61.2 million
partially offset by non-cash charges of $22.9 million related to depreciation
and amortization, equity in income (losses) of joint ventures, and a non-cash
restructuring charge, as well as $22.5 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 other
non-current assets and a decrease in deferred revenues, offset by a decrease in
accounts receivable, a decrease in prepaid expenses and other current assets,
and an increase in other liabilities and accrued expenses relating to our
restructuring accrual. Net operating cash flows for the nine month period ended
September 30, 2000 were primarily attributable to the net losses, an increase in
accounts receivable, and a decrease in accounts payable, other liabilities and
accrued expenses, partially offset by non-cash depreciation and amortization, an
increase in deferred revenues and a decrease in prepaid expenses and other
current assets

         Net cash provided by investing activities was $36.7 million for the
nine month period ended September 30, 2001 and primarily consists of a decrease
in restricted cash, 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 nine month period ended
September 30, 2000 was $45.4 million and primarily consisted of an increase of
restricted cash, purchases of marketable securities, 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 and the cash
received in connection with an acquisition.

                                       17
<PAGE>

         Net cash used in financing activities was $161,000 for the nine-month
period ended September 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 $174.5 million for the nine months
ended September 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 September 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 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 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 to
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. Also, in connection with the completion of the merger, the vesting
of all outstanding stock options and other stock awards will accelerate and such
stock options and stock awards will become exercisable. Accordingly, holders who
exercise their stock options or other stock awards and pay the exercise or
purchase price therefore prior to completion of the merger will receive shares
of our common stock and will be entitled to receive the merger consideration. If
the merger is completed, all stock options or other stock awards will be
cancelled upon completion of the merger. Deferred compensation will be recorded
in connection with this acceleration and other change in control benefits will
be recorded under existing employee agreements.

         In connection with the execution of the merger agreement, we also
entered into a credit agreement with a trust controlled by Mr. Blum, pursuant to
which we have access to a $4.0 million line of credit and up to an additional
$5.0 million to establish standby letters of credit for the benefit of our
distributor and vendor partners. As of the date of this report, no amounts were
outstanding under the credit agreement. We also entered into a security
agreement in connection with the credit agreement, pursuant to which we granted
the lender 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 lender may foreclose on our assets.

         Further, since August 30, 2001, Mr. Blum has agreed to guarantee
certain obligations of ours to our credit card processors. In connection with
these guarantees, we entered into reimbursement agreements and security
agreements with Mr. Blum, which agreements require that we pay Mr. Blum any
amounts that he pays under such guarantees and that such obligations are secured
by security interests in substantially all of our assets. If we are unable to
repay any of these amounts paid by Mr. Blum on our behalf, Mr. Blum may
foreclose on substantially all of our assets. As of the date of this report, Mr.
Blum has not paid any amounts under these guarantees.

                                       18
<PAGE>

         We anticipate that we will spend approximately $2.5 million in expenses
and other costs related to the proposed merger transaction. This amount includes
financial advisory fees, legal and accounting fees, paying agent fees and
expenses, printing and mailing fees, solicitation fees, SEC filing fees, and
change of control severance benefits relating to existing employee agreements
that may become due upon the closing of the merger.

         Our consolidated results have been prepared on the basis that we will
continue as a going concern. However, if the merger is not successfully
completed, the interim financing agreement would terminate and any amounts owed
would become immediately due and we would not have sufficient working capital to
continue our operations as a going concern. If we are unable to secure
replacement financing or an alternative sale or merger transaction, we would be
forced to discontinue our operations and liquidate the business.

                                       19
<PAGE>

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.

Our new operating plan may not cause us to achieve profitability and our
business would fail if we are unable to obtain additional financing

         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 this 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. If our 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 would not be able to fund our operations and our
business would 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 or credit card
processors could seek to further limit our credit terms or otherwise reduce or
discontinue 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. Also, 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.

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<PAGE>

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. The closing of the merger is conditioned
upon the approval of our stockholders and other closing conditions. If our
shareholders 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 owned by Scott A.
Blum, pursuant to which we have access to a $4,000,000 line of credit and up to
$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 all 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.

         In addition, since August 30, 2001, Mr. Blum has agreed to guarantee
certain obligations of ours to our credit card processors. In connection with
these guarantees, we entered into reimbursement agreements and security
agreements with Mr. Blum, which agreements require that we repay any amounts he
pays under the guarantees and that such obligations are secured by security
agreements for substantially all of our assets. If we are unable to repay any of
these amounts paid by Mr. Blum on our behalf, Mr. Blum 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 shares 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.

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 $97.0 million and $61.2 million for the nine month periods ended
September 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;

                                       21
<PAGE>

     -   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 three 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.

         Besides the financing commitments 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 would not be able to
fund our operations, and our business will fail.

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 September 30, 2001. In addition, as a result of a voting trust
agreement with our largest stockholder, approximately 44% of our stock
outstanding as of September 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 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 decision to merge with

                                       22
<PAGE>

SB Acquisition, Inc. As a part of the merger with SB Acquisition, Inc., 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 and Scott Blum and their
affiliates, vote in favor of the merger. If SOFTBANK and its affiliates are not
contractually obligated to vote in favor of the merger, then SOFTBANK and its
affiliates could effectively control the decision to merge, or not, with SB
Acquisition, Inc.

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

         Our success depends, in part, upon our ability to successfully
transition our new management team and to retain our existing management.
Further, our business is largely dependent on the personal efforts and abilities
of other members of our senior management, as well as other key personnel. In
January and February 2001, we terminated the employment of approximately 104
employees, and in August 2001, we terminated approximately 50 other employees,
and 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 104 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. 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.

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 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

                                       23
<PAGE>

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, and Global
Trade, Inc. and DBL Distributing, Inc. for consumer electronics products. 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 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.

                                       24
<PAGE>

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.

         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

                                       25
<PAGE>

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;

       -  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

                                       26
<PAGE>

          products over the Internet or by us; or

         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. 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 our specialty stores;

       -  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;

                                       27
<PAGE>

       -  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;

       -  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

                                       28
<PAGE>

       -  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;

       -  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

                                       29
<PAGE>

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 the us in the U.S. District Court for the Southern District of New York
alleging, among other things, that our 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.

         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 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,

                                       30
<PAGE>

DVDs and other entertainment products, consumer electronics 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;

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

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

     - the failure to complete our merger with SB Acquisition, Inc.;

     - changes in our business model and operating strategies;

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

                                       31
<PAGE>

     - 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 September 30, 2001, the high and low sales prices for our common
stock fluctuated between $27.50 and $0.08. 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. If we were sued in a securities
class action, it 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 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. These sales also might make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None.

                                       32
<PAGE>

                         PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         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 February 2002.

         On July 11, 2001, a class action complaint, titled Joel Abrams
v.BUY.COM, was filed against us, in addition to certain of our of 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 Berkowtiz v. BUY.COM
(filed July 16, 2001), Rutherford Dawson v. BUY.COM (filed August 1, 2001), Haas
v. BUY.COM (filed August 15, 2001), Goodman Espstein v. BUY.COM (filed August
10, 2001), Leo and Josie Castillo v. BUY.COM (filed August 15, 2001) and
Mohammad Jawed Akhtar v. BUY.COM (filed August 17, 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 believe that other similar cases may have been filed against us that
are not yet known. As of the date of this report, 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.

         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 September 30, 2001, we had
used all 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

                                       33
<PAGE>

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

         2.1      Agreement and Plan of Merger dated as of August 10, 2001 by
                  and between SB Acquisition, Inc., SB Merger Sub, Inc. and
                  Buy.Com Inc. (1)

         4.1      Voting Agreement dated August 10, 2001 by and between Buy.Com
                  Inc. and Softbank America, Inc. and its affiliates (1)

         10.1     Bridge Financing Credit Agreement dated August 10, 2001 by and
                  between Buy.Com Inc. and the Scott A. Blum Separate Property
                  Trust u/d/t 8/2/95 (1)

         10.2     Security Agreement dated August 10, 2001 by and between
                  Buy.Com Inc. and the Scott A. Blum Separate Property Trust
                  u/d/t 8/2/95 (1)

         10.3     Escrow Agreement dated August 10, 2001 by and between SB
                  Acquisition Inc., Buy.Com Inc. and First American Trust (2)

         10.4     Reimbursement Agreement dated as of August 30, 2001 by and
                  between Scott A. Blum and Buy.Com Inc. (2)

         10.5     Security Agreement dated as of August 30, 2001 by and between
                  Scott A. Blum and Buy.Com Inc. (2)

         (1)      Incorporated by reference to the Company's Current Report on
                  Form 8-K, filed August 29, 2001.

         (2)      Incorporated by reference to the Company's Schedule 13E-3,
                  filed on August 31, 2001

B.       Reports on Form 8-K

         1.       Current Report on Form 8-K, filed August 29, 2001 describing
the Agreement and Plan of Merger with SB Acquisition, Inc., SB Merger Sub, Inc.
and Scott A. Blum, the Voting Agreement with SoftBank America, Inc. and its
affiliates, and the Bridge Financing Credit Agreement with the Scott A. Blum
Separate Property Trust.

                                       34
<PAGE>

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)


                                          /s/ Robert R. Price
                                   By:__________________________________________
                                          Robert R. Price
                                          President and Chief Financial Officer
                                          (principal financial and accounting
                                          officer)

Dated:  November 14, 2001

                                       35
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
         Exhibit Number                              Description
<S>      <C>
A.       Exhibits

         2.1      Agreement and Plan of Merger dated as of August 10, 2001 by
                  and between SB Acquisition, Inc., SB Merger Sub, Inc. and
                  Buy.Com Inc. (1)

         4.1      Voting Agreement dated August 10, 2001 by and between Buy.Com
                  Inc. and Softbank America, Inc. and its affiliates (1)

         10.1     Bridge Financing Credit Agreement dated August 10, 2001 by and
                  between Buy.Com Inc. and the Scott A. Blum Separate Property
                  Trust u/d/t 8/2/95 (1)

         10.2     Security Agreement dated August 10, 2001 by and between
                  Buy.Com Inc. and the Scott A. Blum Separate Property Trust
                  u/d/t 8/2/95 (1)

         10.3     Escrow Agreement dated August 10, 2001 by and between SB
                  Acquisition Inc., Buy.Com Inc. and First American Trust (2)

         10.4     Reimbursement Agreement dated as of August 30, 2001 by and
                  between Scott A. Blum and Buy.Com Inc. (2)

         10.5     Security Agreement dated as of August 30, 2001 by and between
                  Scott A. Blum and Buy.Com Inc. (2)

         (1)      Incorporated by reference to the Company's Current Report on
                  Form 8-K, filed August 29, 2001.

         (2)      Incorporated by reference to the Company's Schedule 13E-3,
                  filed on August 31, 2001

B.       Reports on Form 8-K

         1.       Current Report on Form 8-K, filed August 29, 2001 describing
the Agreement and Plan of Merger with SB Acquisition, Inc., SB Merger Sub, Inc.
and Scott A. Blum, the Voting Agreement with SoftBank America, Inc. and its
affiliates, and the Bridge Financing Credit Agreement with the Scott A. Blum
Separate Property Trust.
</TABLE>

                                       36