BUSINESS

General

BUY.COM is a leading multi-category Internet superstore based on our net revenues and the amount of traffic to our site. We offer a comprehensive selection of brand name computer hardware and peripherals, software, books, videos, DVDs, computer games, music, clearance products, consumer electronics and golf-related products at everyday low prices. Through our nine online specialty stores, we offer more than 850,000 SKUs in a convenient, easy-to-use shopping interface that features extensive product information and multi-media presentations. Our e-commerce portal, www.buy.com, links all of our nine specialty stores and is designed to enhance the customer's online shopping experience 24 hours a day, seven days a week. We use a business model that involves outsourcing the majority of our operating infrastructure including distribution and fulfillment, customer service and support, credit card processing and the hosting of our system infrastructure and database servers. This business model allows us to add new product categories easily and rapidly and eliminates significant capital investments and the costs and risks of carrying inventory. We intend to expand our product offerings by establishing strategic relationships with leading companies similar to our BUYTRAVEL.COM joint venture with United Air Lines, Inc.

Industry Background

Growth of the Internet and E-Commerce

The Internet has rapidly emerged as a significant interactive medium for worldwide communication, instant access to information and e-commerce. International Data Corporation estimates that the number of Internet users worldwide will increase from approximately 196 million at the end of 1999 to more than 502 million by the end of 2003. We believe this rapid growth is primarily attributable to the increasing number of personal computers in homes and offices, technological advancements that provide easier, faster and cheaper access to the Internet and the proliferation of products, content and services available on the Internet at competitive prices.

We believe increasing numbers of customers will engage in e-commerce as online retailers take advantage of the recent technological improvements associated with the Internet that allow the integration of one-click buying, intelligent product recommendations and near real-time customer service. International Data Corporation estimates that the number of customers making purchases on the Internet will grow from approximately 48 million in 1999 to approximately 183 million in 2003. In addition, International Data Corporation predicts the total value of goods and services purchased annually over the Internet will increase from approximately $111.4 billion in 1999 to approximately $1.3 trillion in 2003.

Limitations of Traditional and Catalog Retailers

The emergence of the Internet as an alternative shopping channel has highlighted the limitations associated with shopping at traditional and catalog retailers. Traditional retailers face inherent structural limitations that may inhibit their ability to capitalize on the growing worldwide market for their goods and services. The space available in a traditional retail store limits merchandising flexibility and constrains the number of SKUs that a traditional retailer can offer at any given time. Traditional retailers must make significant investments in inventory that may quickly become obsolete. These retailers also face challenges in hiring, training and maintaining knowledgeable sales staff and preventing losses due to theft by customers and employees. Personnel costs typically limit operating hours, reducing customer convenience. Furthermore, traditional retailers generally have difficulties gathering customer demographics and preferences, and their potential customer base is typically limited to those who live within a reasonable geographic distance from the retail locations.

While catalog retailers provide customers with the convenience of shopping from anywhere at anytime, the number of SKUs they can feature and the product information they can provide is limited due to catalog

mailing, printing and other related expenses. Since catalogs must be printed and mailed far in advance of sales, catalog retailers cannot readily change their product offerings or prices to adapt to an evolving market. Furthermore, the catalog shopping experience is, in general, neither interactive nor personalized, yet requires extensive personnel support to take and process orders.

The Online Retail Opportunity

In contrast to traditional retail channels, the Internet provides online retailers with the opportunity to offer a broad and evolving selection of merchandise to customers worldwide, while enabling customers to shop at their convenience without leaving their homes or offices. The Internet provides essentially unlimited shelf space without significant capital investments, allowing online retailers to build large global customer bases at an unprecedented pace and to potentially achieve superior economic returns over the long-term. The flexible structure of the Internet also enables online retailers to update product descriptions quickly and make new products immediately available for sale without incurring significant expenses. In addition, online retailers can easily obtain demographic and behavioral data about customers, increasing opportunities for targeted marketing.

Forrester Research estimates that the online sale of computer hardware is one of the largest domestic Internet retail opportunities for the consumer and small office/home office market. According to Forrester Research, annual online computer hardware sales are expected to grow from approximately $2.4 billion in 1999 to approximately $15.0 billion in 2003, representing approximately 14% of the entire computer hardware market in 2003. Media products such as software, books, videos and music also represent a fast growing segment of the online retail market. Forrester Research estimates that domestic annual online sales of these products will grow from approximately $3.0 billion in 1999 to more than $10.0 billion by 2003.

The Online Advertising and Merchandising Opportunity

The significant increase in online shopping has coincided with technological advances that provide advertisers with cost-effective means of targeting specific customer groups, interacting with and receiving feedback from customers and measuring effectiveness of the specific advertising campaigns. Online advertising also provides advertisers a unique opportunity to use a variety of advertisements and provide substantial product information. Because these methods generally are not economically available in traditional media, the Internet has rapidly emerged as a compelling vehicle for advertisers as Web sites have begun to aggregate a large number of visitors with attractive demographics. Accordingly, Forrester Research estimates that the amount of Internet advertising worldwide will grow from approximately $3.3 billion in 1999 to more than $24.1 billion by 2003.

Challenges Faced by Online Retailers

The Internet addresses many of the limitations faced by traditional and catalog retailers by providing unlimited shelf space, worldwide geographic reach for potential customers, customer convenience, significant flexibility with regard to vendor promotion and cross-merchandising opportunities, and on a comparable basis, extremely low costs. However, online retailing is new and evolving and presents a number of challenges, including:

. Limited Brand Awareness and Customer Loyalty. Online retailers must build their brand recognition to attract potential new customers, to develop customer trust and loyalty in the absence of face-to-face interaction and to maintain high levels of customer traffic to their Web sites. Creating a strong brand, however, can be difficult and expensive, and many online retailers have had limited success developing their brand name.

. Significant Price Competition. Online pricing engines enable customers to easily determine the lowest price for a particular product. Because online shoppers can quickly access pricing information with little effort, online retailers must be able to offer competitive prices to continue to draw traffic to their Web sites.

. Limited Product Offerings and Customer Convenience. Many online retailers focus on a single product category, which may frustrate customers who must visit a variety of online stores and pay multiple shipping fees to accommodate all of their online shopping needs. Among those online retailers who provide multiple product offerings, many have sites that are difficult to navigate, do not use sophisticated search capabilities and do not allow customers to purchase products using a single check-out process.

. Inability to Rapidly Increase Operations and Infrastructure. Many online retailers choose to handle most aspects of the online retail channel internally, including maintaining a large inventory of products, shipping and processing orders, and providing customer service. This requires significant time, capital investment and operating overhead that constrain the online retailers' ability to increase sales or expand into new product categories. Unexpected increases in sales can also strain the retailer's infrastructure, resulting in delayed or improper shipments, slow response time and dissatisfied customers.

. Limited Content and Customer Service. Due to the increasing number of Web sites, online retailers must provide compelling content and other attractive features to differentiate their sites. Many first time online shoppers may experience concern over the absence of the face-to-face communication associated with e-commerce transactions. We believe a successful online retailer must provide immediate customer support, timely shipments, frequent status updates and knowledgeable advice.

Competition among online retailers has increased as a result of the attractive commercial medium provided by the Internet and the relatively low barriers to enter this market. Therefore, we believe the success of online retailers will depend on their ability to develop brand awareness, offer competitive prices on a broad selection of products, and provide compelling content and superior customer service.

The BUY.COM Solution

BUY.COM is a leading multi-category Internet superstore offering a broad selection of brand name products to consumers and small businesses at everyday low prices. Through word of mouth and aggressive online and traditional media advertising, we are perceived as a low price leader and believe we have one of the most widely recognized e-commerce brands. Our easy-to-use Web site provides a rich shopping experience with extensive content and product information, backed by our commitment to superior customer service. Our key operating advantages include the following:

. Leading Multi-Category Internet Superstore. We operate nine integrated online specialty stores that feature a broad range of brand name products and approximately 850,000 SKUs. Our sophisticated search engine allows customers to locate products by name or category, and our site facilitates easy navigation among our stores. Our customers can make purchases from any of our online stores using a single shopping basket, simplifying the check-out process. We believe the broad product offerings at our Internet superstore, combined with our convenient shopping experience, enables customers to save time by addressing many of their shopping needs at one site. We believe this one-stop shopping convenience also encourages repeat purchases from our Web site. During September 1999, approximately 48% of our orders and over 55% of our booked revenues have come from repeat customers. In addition, Media Metrix estimates that the number of unique visitors to our Web site in November 1999 was approximately 4.7 million, which represents an increase of 129% over the 2.1 million estimated unique visitors in October 1999. The rapid growth of our business has enabled us to become one of the top five e-commerce providers, according to a number of industry studies.

. Highly Flexible Business Model. We use a business model that includes outsourcing the majority of our operating infrastructure to leading national distribution and fulfillment firms and other service providers with established expertise. This business model allows us to make adjustments quickly within existing product lines and to add new product categories easily and rapidly without significant capital investments or the costs or risks of carrying inventory. By aligning with leading distributors in each of our product categories, we have access to their significant inventories and distribution capabilities.

. Low Operating Costs. We minimize our infrastructure and operating expenses by taking advantage of the cost efficiencies achieved by our distribution and fulfillment providers. By keeping our costs low, we are able to focus our efforts and resources on developing our brand name and enhancing our customers' overall shopping experience. We believe our low operating overhead will enable us to continue to offer most products at prices below those of other leading online retailers.

. Superior Customer Experience. To build customer loyalty, we provide compelling content and extensive product information backed by superior customer service throughout the shopping experience. We are committed to customer satisfaction and regularly upgrade our services to ensure total customer care. Our user-friendly Web site provides a seamless shopping experience across all of our specialty stores and provides expanded content, including video and sound clips, detailed product information, professional and customer product reviews, and access to the first chapter of many of the books offered on our site. Our customer service representatives provide telephone and e-mail support 24 hours a day, seven days a week. Shoppers can also engage in e-mail interactions with our customer service representatives while online to enhance communication regarding order status, service, returns and product information.

. Attractive Advertising Vehicle. We believe that our Web site, given the significant number of visitors, attracts advertisers seeking a large target audience of likely purchasers who spend relatively large amounts of money online. During December 1999, our average order size was more than $134 and our average daily product sales were over $2.7 million. Advertisers can place many different types of advertisements on our site, including supplemental product information that reaches customers at the point of purchase. Furthermore, we provide advertisers with demographic information and traffic feedback to enable them to evaluate the effectiveness of an advertising campaign.

We also believe our business model, the strength of the BUY.COM brand name and our rich shopping experience provide us with significant competitive advantages and offer a compelling value proposition to both customers and advertisers that will enable us to apply our business model to a broad range of products and services.

Strategy

Our objective is to become the leading e-commerce destination offering a broad selection of brand name products and services to consumers and small businesses at everyday low prices. To achieve this objective, the key elements of our strategy include the following:

. Build the BUY.COM Brand. We believe BUY.COM is one of the most widely recognized e-commerce brands. We intend to further increase customer loyalty and brand recognition by offering multiple comprehensive product lines at everyday low prices backed by superior customer service. In addition to our aggressive pricing strategy, we plan to continue to promote our brand through a variety of marketing and promotional campaigns, including television, print, radio, direct mail and outdoor advertisements, as well as strategically placed online advertisements and promotional campaigns.

. Pursue Additional E-Commerce Opportunities. We intend to expand our product offerings to include the most popular product categories on the Internet, encouraging one-stop shopping for multiple products and repeat purchases. We plan to use our strong market position in online computer hardware sales to increase sales in other product categories. We also plan to continue to pursue and expand relationships with leading distributors in each of our existing product categories and in new product categories, to establish joint ventures and strategic relationships with major manufacturers and service providers, and to enter into referral arrangements with other e-commerce companies.

. Improve Profitability and Achieve Higher Return on Capital. The cost efficiencies and economies of scale of our distribution and fulfillment providers enable us to operate with significantly lower operating expenses than many of our competitors. As our brand strengthens and we add additional products and services, we believe we will be able to capture even greater efficiencies while improving gross margins

on existing products. We will continue to modify our pricing strategy to maintain a group of aggressively priced, high volume items, as well as promoting associated higher margin products and emphasizing advertising revenues. Because our business model enables the addition of higher margin products and services without significant capital investment in distribution infrastructure and inventory, we expect to be able to achieve higher returns on invested capital.

. Continue to Improve the Customer Shopping Experience. Offering superior customer service and continually improving our communications with customers are among our top priorities. We intend to continuously update our Web site to increase its speed and functionality and to provide greater product information in a more user friendly, intuitive format. We plan to provide increased training for our customer service representatives and to continue to invest in technology that will improve our customer service and provide a more enjoyable shopping experience.

. Expand Advertising and Merchandising Opportunities for Advertisers. We plan to aggressively pursue high margin advertising revenues by providing advertisers with opportunities to reach our large and attractive customer base. We currently offer a variety of options for advertisers, ranging from banner advertisements to tailored advertising and merchandising programs that target specific audiences. In addition, we can provide advertisers with detailed demographic information that enables them to measure and improve the effectiveness of their advertisements. We plan to continue to develop innovative programs for advertisers and expand our sales force to aggressively market these programs.

. Expand and Improve Relationships with Distribution and Fulfillment Providers to be a Low Cost Supplier. We plan to continue to work with our distribution and fulfillment providers to obtain more timely and accurate product information, shipping and fulfillment. As our sales increase, we believe we will be able to achieve more favorable terms and pricing from our providers. We also intend to pursue new relationships with leading distributors and service providers as we expand into other categories.

. Expand Internationally. The Internet offers a unique opportunity for retailers to quickly reach the international market. We believe our business model will enable us to pursue this large market without significant investment by aligning ourselves with established international distributors. We intend to expand our presence in the international marketplace by initially targeting countries with high Internet usage and distribution networks complementary to our business model. We recently launched BUY.COM Canada and entered into a binding letter of intent with SOFTBANK America, Inc. and several of its affiliates and a News Corporation affiliate to form international joint ventures in the United Kingdom, Australia, New Zealand and India. We expect to begin operations in the United Kingdom in the first quarter of 2000. In addition, we have binding letters of intent to form international joint ventures with several SOFTBANK affiliates in other international territories.

The BUY.COM Online Shopping Experience

Our Web site is a multi-category Internet superstore offering a broad range of products. We have included compelling content in each of our online stores to allow customers to enjoy their visit to our Web site and make more informed purchase decisions. We believe that shopping at www.buy.com offers attractive benefits to customers, including convenience, ease of use, a broad selection, in-depth product information and content, and everyday low prices. The following highlights the key features of our online shopping experience:

. Browsing. We have created a seamless interface between each of our nine online specialty stores that provides consistent functionality, look and feel. By clicking on the tabs at the top of every Web page, customers can move between stores quickly and easily. At the home page for each store, customers can view promotions and featured products or use a keyword search to locate a specific product. Our Web site also allows customers to conduct sophisticated searches based on pre-selected criteria designated in each store. We have organized our product offerings into a simple set of categories and subcategories within each store, each using the "BUY[product name]" format to promote a uniform shopping experience and to make it easier for the customer to link directly to a particular store. This simple structure also allows customers to click on the designated category or subcategory to go to the desired location immediately.

. Accessing Information. One of the key advantages of online shopping is the ability to access a broad range of information quickly and easily. On our Web site, customers can find detailed product information and specifications, as well as other value added features, including product pictures, video and music clips, book previews, professional and customer product reviews, supplemental information from the manufacturers, gift ideas and specialty shops. We believe this extensive information enables the customer to make a more educated purchase decision and enhances the overall shopping experience.

. Selecting a Product and Checking Out. Customers can purchase products from each of our online stores using the same virtual shopping basket that is accessible from any product page on our Web site. Similar to a traditional retail store, customers can add and subtract products from their shopping basket as they browse, prior to making a final purchase decision. To execute orders, customers click on the "checkout" button. New customers are prompted to create an account and supply shipping and payment information. Repeat customers, through their personally created username and password, can access their account to view order status, view their history of previous orders or update their personal information. We store our customers' account information on our secure network, including multiple shipping addresses and billing options, which eliminates the need for repeat customers to complete their order information during future transactions. We charge our customer's credit card only after we have shipped the product. We also provide updated product information for each of our online stores to indicate product availability and the approximate amount of time until a particular product will be shipped. When purchased products are in stock, we generally ship orders received before 4:00 p.m. Eastern Time at the BUYCOMP.COM and BUYSOFT.COM stores on the same day as the order is placed. We generally ship orders for other in-stock products within 24 hours of our receipt of the order.

. Monitoring Order Status. To provide the highest level of customer service, we attempt to maintain communication with our customers throughout the purchase and fulfillment process. We confirm each order via an automatic e-mail within minutes of the order placement, and we notify our customers via e-mail with the shipper's tracking number when their product has been shipped. We send additional e-mail communications to our customers regarding the status of their orders and to follow up after the order has been received by the customer.

. Obtaining Assistance. Customers can access online assistance on our site by clicking on either the "Customer Service" button or the "Help" button on each page in our specialty stores. Our online e-mail feature also enables customers to ask a customer service representative questions while online via a chat format. In addition, customers can call our prominently displayed toll-free phone number found throughout our Web site to reach our customer service representatives 24 hours a day, seven days a week.

Our Online Specialty Stores

We have selected our nine online specialty stores based upon product lines that have large market potential, that are well suited for e-commerce, and that are in industries that allow us to establish a relationship with a dominant distributor. Our current online specialty stores include the following:

. BUYCOMP.COM. This store offers over 29,000 computer products, including computers, printers, monitors, modems and peripherals from manufacturers such as Compaq, Hewlett-Packard, IBM, Viewsonic and 3COM. Customers may obtain detailed product descriptions, product pictures and reviews, as well as rebates and other promotional information. This store also offers extended warranties and permits customers to link from the store directly to the manufacturers' technical support pages. In addition, this store features vendor specific sub-stores that allow customers to browse products within the manufacturer's designated storefront.

. BUYSOFT.COM. This store offers over 9,000 computer software titles from leading manufacturers, including Microsoft, Symantec, Corel and Adobe. Similar to our BUYCOMP.COM store, we feature manufacturer's sub-stores, and our customers may link from this store directly to manufacturers' technical support pages. In addition, customers may obtain information on weekly specials, rebates and promotions, as well as reviews for top selling software products.

. BUYBOOKS.COM. This store offers over 490,000 hardback, paperback and audio book titles. Customers may browse a variety of categories, including subject matter, New York Times bestsellers and new releases. Customers may also conduct targeted searches for their favorite authors or titles. Our site enables customers to read the first chapter of many books, to submit their own book reviews and to read professional reviews and reviews submitted by other customers. We also offer customers the opportunity to preorder upcoming releases.

. BUYVIDEOS.COM. This store offers over 55,000 DVD and VHS titles from multiple categories, including comedy, action, drama, documentary and foreign films. The BUYVIDEOS.COM store includes video clips on many titles, preorder capabilities and a limited selection of video hardware. Customers may also focus their search on DVD titles within the DVD Only subcategory, accessible by a direct link from the home page.

. BUYGAMES.COM. This store offers over 1,700 games for the Nintendo64, PlayStation, Sega Saturn, Dreamcast and Game Boy systems. This store offers PC and Mac games, strategy guides and gaming hardware. We provide detailed product descriptions, screen shots, video clips, professional and customer reviews, codes and game hints, as well as recommendations for related games.

. BUYMUSIC.COM. This store offers over 260,000 music titles in both CD and cassette formats. Customers may order titles from various categories including pop/rock, alternative, electronica, heavy metal, rhythm and blues/soul, classical, jazz, country, rap/hip hop, folk, new age and soundtracks. This store offers detailed product descriptions, music clips, full song listings, recommended albums and customer reviews. The store also includes upcoming releases and new artist features.

. BUYCLEARANCE.COM. This store offers brand name close-out inventory from some of the most popular manufacturers, including Compaq, Toshiba, Hewlett-Packard, Philips, NEC and Canon. Our inventory consists mainly of home electronics and computer hardware. We obtain this merchandise at substantial discounts through liquidations, overages and promotions. We also work with our vendors to ensure that this store's product selection serves to complement our other online stores.

. BUYELECTRONICS.COM. This store was launched in November 1999 and offers brand name consumer electronic products, including cameras, DVD players, telephones and televisions. This store offers detailed product descriptions and customer reviews. In addition, customers may browse by product category, reviewing other top selling products or by reviewing new products offered for sale.

. BUYGOLF.COM. This store was integrated into our Web site in January 2000 and offers brand name golf equipment and other golf-related products and accessories, including golf clubs, bags, balls, shoes, clothes and memorabilia. Customers may browse by product vendor and product category and may view various tournament statistics.

We plan to expand our product offerings within existing product categories and to add new product categories from time to time to increase the overall shopping convenience for our customers.

Strategic Relationship with United Air Lines, Inc.

In July 1999, we formed a joint venture with United Air Lines, Inc. to create an online travel service that will offer a full range of airline tickets, automobile rentals and hotel reservations as well as other travel related services through the "BUYTRAVEL.COM" Web site. BUYTRAVEL.COM will be operated through a newly-formed limited liability company, in which we have a 50% ownership interest. In connection with the formation of BUYTRAVEL.COM, we entered into a Marketing and Services Agreement with United. Under this agreement, we will provide a storefront on our Web site, marketing and advertising sales support by our personnel, systems and technology support by our development personnel, and credit card processing services through our third party vendors. Under the agreement, United will provide availability to all of its fares, including all excess inventory or E-fares. United will also coordinate third party relationships with selected ticketing and infrastructure vendors. In addition, each of us has agreed to provide specified marketing and

advertising support over the initial three years of the agreement. As consideration for United's commitment to this venture, we issued to United a warrant to purchase 1,250,000 shares of our common stock at an exercise price of $16.00 per share. The BUYTRAVEL.COM operating agreement requires both parties to approve various matters related to corporate governance including approval of the annual budget and business plan, material expenditures, the sale or purchase of material assets, the admission of new members, the dissolution of the company, electing or removing the Chief Executive Officer of the company and changing the number of directors of the company. In the event we are unable to agree with United on one of these matters after the initial three years of this agreement, United has the right to require us to purchase its interest in BUYTRAVEL.COM at a price equal to the fair market value of its interest at the time of our purchase. We intend to launch the BUYTRAVEL.COM service during the first quarter of 2000.

Acquisition of BuyGolf.com

On October 25, 1999, we acquired BuyGolf.com, Inc. for an aggregate purchase price of $23.5 million in a stock-for-stock transaction in which the current stockholders of BuyGolf.com received shares of our common stock as consideration for their shares. Our acquisition of BuyGolf.com enables us to offer a variety of golf equipment and other golf-related products and accessories, including golf clubs, bags, balls, shoes, clothes and memorabilia. As a result of the acquisition, we acquired a four year supply and distribution agreement with Las Vegas Golf & Tennis, Inc. through which they are the primary source for the golf equipment and accessories that we sell. The acquisition was accounted for as a purchase transaction and the operating results of BuyGolf.com are included in our consolidated financial statements from the date of the acquisition.

In October 1999, we also entered into a five year sponsorship agreement with the PGA TOUR in which we will become the exclusive title sponsor of the professional tour previously known as the Nike Tour. Our sponsorship of the BUY.COM Tour provides for television coverage of various BUY.COM Tour events, prominent featuring in the PGA TOUR's controlled media, including "Inside the PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA TOUR's Web site and other sponsorship and media opportunities. We will also be authorized to merchandise and sell products in our online store that are branded with the "Official World Golf Championships" logos and designs. In connection with this sponsorship and subject to the PGA TOUR's existing contractual relationships, we also have a non-exclusive right to sell branded PGA TOUR merchandise on our Web site. In addition, the PGA TOUR has agreed that we will be the only online store authorized to sell branded BUY.COM Tour merchandise. In consideration for this sponsorship agreement, we issued the PGA TOUR 1,125,000 shares of our common stock and agreed to pay $8.5 million upon the completion of this offering and to provide a $17.0 million letter of credit as security for payment of the sponsorship fee. The letter of credit will be secured by a cash account and will terminate in June 2001, but will be subject to renewal periods. We believe this sponsorship provides an attractive marketing vehicle that enables us to target a customer demographic that is consistent with the customer demographics of our other online stores.

International Operations

In September 1999, we entered into a letter of intent with SOFTBANK America, Inc. and several of its affiliates and a News Corporation affiliate to form international joint ventures in the United Kingdom, Australia, New Zealand and India. In addition, we have a binding letter of intent with SOFTBANK America and its affiliates and Vivendi to form an international joint venture in continental Europe, and a joint venture with SOFTBANK America and its affiliates in Japan. We intend to have a 51% interest in each of these joint ventures and, under the terms of the letter of intent, have committed approximately $2.7 million in connection with the formation of the joint venture in continental Europe, approximately $2.0 million for the formation of the joint venture in the United Kingdom and approximately $3.0 million for the formation of the joint venture in Japan. We are not required to make any further capital contributions to these joint ventures. Each of the joint ventures will hire its own management and other personnel and will establish relationships with local distributors for product categories suited for the particular territory. Each joint venture Web site is expected to have the same look and feel as the BUY.COM Web site. We intend to license, on a royalty free basis, our e-commerce technology and the right to use the BUY.COM name to each of these joint venture entities to use

in their respective territories. These letters of intent may be terminated by either party if definitive agreements have not been executed by March 2000 for the joint ventures in the United Kingdom and continental Europe and by June 2000 for the joint venture in Japan.

We began selling some of our products in Canada in December 1999. BUY.COM Canada currently includes computer and software specialty stores and is managed and supported through our existing United States operations.

Distribution Network

We believe that the ability to maintain a primarily outsourced operating infrastructure is key to an efficient and profitable e-commerce model. As part of this strategy, we have entered into relationships with leading distributors in each of our product segments, including Ingram Micro for computer hardware and software, Ingram Entertainment for videos, DVDs, and video games, Ingram Book for books, Valley Media for music, Nashville Computer Liquidators for our clearance products and Las Vegas Golf & Tennis for our golf-related products. These distributors carry a vast inventory of products located in warehouses throughout the country from which products are picked, packed and shipped directly to our customers or our national fulfillment provider. Through this system, we have been highly effective at leveraging the inventory management and fulfillment capabilities of each of our providers to deliver products cost- effectively to our customers nationwide. For example, in September 1999, the average time for Ingram Micro to ship an in-stock product to a customer was less than one day. Our key distributors include the following:

. Ingram Micro. In March 1999, we entered into an agreement with Ingram Micro through which they have agreed to provide, process and distribute the computer hardware and software products that we sell. Ingram Micro is one of the leading wholesalers of brand name computer hardware and software products, with net sales in excess of $22.0 billion for 1998. As part of our commitment with Ingram Micro, we have agreed to exclusively purchase all of our requirements for computer hardware and software from them to the extent that a particular product is available at the time an order is placed. We believe we receive favorable pricing for the products we purchase based on our commitment to meet an annual product sales target of $350.0 million. Also as part of this agreement, Ingram has agreed to help us secure a minimum dollar amount of marketing related vendor advertising based on a specified percentage of our net purchases from Ingram in a twelve month period. This marketing arrangement is contingent upon our achieving and maintaining $500.0 million in annual product purchases. This agreement expires in March 2000, but is subject to automatic one year renewal periods. The agreement may be terminated by either party for any reason upon 120 days prior written notice. We are currently in negotiations with Ingram Micro to renew our agreement with them.

. Ingram Entertainment, Inc. In December 1998, we entered into an agreement with Ingram Entertainment through which they have agreed to supply us with the entertainment products for our online stores, including videos, video games, DVDs, audio books and other multimedia products and accessories. We believe we receive favorable pricing from Ingram Entertainment based on the quantity of products that we purchase. Ingram Entertainment is a leading distributor of videos, video games, DVD hardware and software and audio books, with net sales of over $1.0 billion in 1998. This agreement expires in December 2001, but they may terminate our contract if we become past due on our account or otherwise violate our credit terms with them. In August 1999, we amended this supply agreement to provide for co-op advertising dollars on some purchases and include a guarantee that Ingram Entertainment will ship orders on the same day received if the order is received before 2:00
p.m. Eastern time, and next day shipment for orders placed after 2:00
p.m. This amendment also requires earlier fulfillment and shipment on orders for overnight or second day delivery service.

In October 1999, we entered into a binding term sheet with Ingram Entertainment to purchase from a third party supplier, on our behalf, the consumer electronic products that we sell in our electronics store. Ingram Entertainment may terminate this agreement for any reason upon 90 days prior written notice.

. Valley Media, Inc. In February 1999, we entered into an agreement with iFill, a division of Valley Media, Inc., through which we will exclusively purchase all of our pre-recorded music products from Valley Media. Valley Media is a full line distributor of music and video entertainment products, with net sales in excess of

$780.0 million for 1998. Valley Media is solely responsible for the order fulfillment and distribution of these pre-recorded music products. Valley Media has agreed to ship priority orders that have been received by 10:00
a.m. Pacific Time on the same day, and orders received after 10:00 a.m. will be shipped the following business day; standard priority orders received by 1:00 p.m. Pacific Time are shipped on the next business day and those orders received after 1:00 p.m. will not be shipped until the second business day after the order is received. In addition, Valley Media has agreed to sell their products to us at a discount, provided that we purchase a designated minimum volume of products from them under this agreement. In the event we do not meet these volume levels, we will be required to pay an additional fee for the products that we purchase from them. This agreement expires in February 2001, but is subject to automatic one year renewal periods. This agreement may also be terminated if Valley Media discontinues sales to online vendors, or if we terminate online sales of pre-recorded music products.

. Ingram Book Company. We have entered into agreements with Ingram Book Company and Ingram Fulfillment Services Inc., through which these companies have agreed to supply and distribute the books that we sell. Ingram Book Company is a leading wholesale distributor of books and stocks approximately 450,000 titles. These agreements expire in September 2003 and there are no provisions providing for the automatic renewal of these agreements. We issued a warrant to Harpeth Holdings Inc., an affiliate of the Ingram Book Company, to purchase 625,000 shares of our common stock at $9.07 per share in consideration for these agreements.

. Nashville Computer Liquidators L.P. In April 1999, we entered into an agreement with Nashville Computer Liquidators L.P., a subsidiary of Ingram Entertainment Inc., through which Nashville Computer Liquidators has agreed to supply and distribute the liquidation products that we sell, including computers, consumer electronics and entertainment items. As part of this agreement, Nashville Computer Liquidators has agreed to process and deliver all of our orders from our online clearance store. They have also agreed that all orders received by 12:00 p.m. Central Time will be shipped on the same business day. Orders received after 12:00
p.m. Central Time will be shipped on the following business day. In addition, as part of our commitment, we have agreed to purchase all of our liquidation products from them exclusively. This agreement expires in April 2001, but is subject to automatic one year renewal periods. Nashville Computer Liquidators may also terminate this agreement unilaterally if we become more than 15 days past due or otherwise violate our credit terms with them.

. Las Vegas Golf & Tennis, Inc. In May 1999, we entered into an agreement with Las Vegas Golf & Tennis through which they have agreed to be our primary source of the golf equipment, accessories and the other golf- related merchandise that we sell. As our primary source, Las Vegas Golf & Tennis is our first contact and supplier of these golf products, subject to their availability. This agreement expires in May 2000, although either party may terminate the agreement for any reason upon 60 days prior written notice. In September 1999, we amended this agreement, to be effective in April 2000, to modify our payment structure. The amended agreement expires in March 2003, but is subject to automatic two year renewal periods. BuyGolf.com issued 540,000 shares of its common stock to Las Vegas Golf & Tennis in May 1999 in consideration for these agreements. These shares were exchanged for 175,500 shares of our common stock upon the completion of our acquisition of BuyGolf.com.

By using a secure electronic connection with each of our providers, orders placed by our customers are transmitted directly to the appropriate distributor. These orders are automatically fed into the distributor's system where they are processed and sent to a warehouse to be picked, packed and shipped. Orders are often processed and ready for shipment within minutes from the time a customer places an order at our Web site. In the event the products on a customer order are not located in the same warehouse, our system will cascade the order across several warehouses beginning with the one nearest to the customers' shipping address. By accessing distributor warehouses throughout the country, we have become more efficient in minimizing shipping costs as well as quickly delivering products to the customer.

The integrated electronic connection with each of our distribution providers also provides us with data on inventory quantities, inventory location, shipping status, shipper tracking numbers and the estimated time of arrival for back-ordered products. Our Web site also provides a direct link from a customer's order information to both Federal Express and United Parcel Service to provide up-to-the-minute information on delivery status.

Advertising Revenue

Advertising revenue is a key component of our business model. The large volume of product sales on our site, together with our ability to attract proven online buyers, provides a high quality audience for our advertisers. According to a BUY.COM sponsored survey, our customers are primarily between 18 and 35 years old, and 80% of our customers visit our stores at least once a week. Additionally, according to this survey, 76% of our customers are college educated and 33% have annual household incomes in excess of $75,000. Furthermore, the structure of our Web site encourages impulse purchasing of products in various categories by shoppers who have come to the site to purchase a specific item. We believe our ability to deliver a high quality audience of proven online consumers creates a variety of opportunities for advertisers.

We provide a range of advertising opportunities to reach Internet buyers. We presently derive advertising revenue from vendor co-op advertising and media advertising. Vendor co-op advertising is an industry standard practice that involves vendors who advertise their products for sale in our online stores in direct proportion to the amount of products sold in our stores. The primary objective of vendor co-op advertising is to drive product sales on our Web site. Vendors measure results in terms of the size, growth, breadth and depth of their product sales. We sell co-op advertising to the sales and/or channel groups within our vendors' organizations, often with the cooperation and support of our distributors. Currently, we derive most of our co-op advertising from our technology and entertainment vendors. However, as we expand into new product categories, we anticipate additional co-op advertising opportunities in these new markets.

We derive advertising media revenue from click-through advertisements that direct the customer to the advertiser's Web site. We sell media advertising to the marketing groups within our advertisers' organization, as well as the advertising agencies that represent them. Media advertisers include both vendors who sell products on our site, as well as other advertisers, such as eBay and Visa, that want to reach our attractive audience.

Our direct sales organization consists of individuals focused solely on selling advertising on our network of Web sites. From time to time, we also engage third party advertising sales representatives to assist us in selling our Web advertisements. We currently maintain sales offices in San Francisco and Southern California. Our sales organization is dedicated to maintaining close relationships with advertisers, advertising agencies and the sales and marketing organizations of our distribution providers. We work with our advertisers to build advertising programs that are tailored to their marketing and merchandising goals. We are also pursuing an increasing number of opportunities to combine both media and co-op advertising to create synergy for our vendors.

Merchandising Strategies

We believe that our strong brand name and the breadth and depth of our product selection in our online stores enable us to pursue unique merchandising and pricing strategies. Because our stores are not restricted by physical capacity limitations, we have a significant amount of flexibility with regard to the presentation and organization of our product categories and the product selection within each of those categories.

To date, our merchandising and pricing efforts have focused on offering popular products with high brand awareness at low prices to drive traffic to our site. As customer loyalty and recognition of our brand name has increased, we have begun to augment this strategy by implementing the following:

. cross-marketing higher margin products and services to our customers once they are in our online stores. By operating nine integrated online specialty stores featuring a broad range of brand name products, we can often present the customer with other higher margin products, including accessories and other products that are complementary to the customer's initial purchase as well as popular point-of-purchase impulse buys;

. offering vendors the ability to create specialized promotional "stores within a store." We believe this will provide us greater flexibility in promoting higher margin products while capturing additional co-op advertising revenues available from our manufacturers; and

. raising prices on selected products. Since June 1999, we have raised prices on selected products to refine our pricing strategy and increase our gross margins. For some of these products the increase in price did

not result in any decline in sales volumes. However, for other products sales volumes declined. By analyzing the results of these selective price increases and customer buying pattern data, we believe we can identify products that are characterized by lower degrees of price sensitivity, which will provide the opportunity to raise margins through targeted price increases that do not diminish overall sales volumes.

Within each online store, we organize our products into particular categories. For example, our online bookstore is divided into multiple subject areas, including fiction, non-fiction and romance, and our online computer store includes various product categories, such as computers, notebooks, scanners and modems. The intuitive nature of our stores is also enhanced by other product presentations and organization within each of our stores. For example, several of our online stores contain a top 25 list of products for sale, identify selected "great buys" and highlight a combination of other featured offers, including new releases and coming attractions. Products can also be located by manufacturer or product name.

Marketing and Promotions

We have taken a disciplined and selective approach in our marketing strategy to develop and strengthen the BUY.COM brand. We attempt to maximize the return from promotional expenditures by choosing advertising media based on the cost relative to the likely audience and ability to generate increased traffic for our Web site.

Online Advertising. We place advertisements on various high profile and high traffic portal Web sites, including AOL, Excite@Home and Yahoo!, as well as Web sites targeted at a more focused audience, including About.com, CNET/Shopper.com, Computer Shopper, MP3.com, Tech Shopper and women.com. Our advertisements on these sites are typically focused on building brand awareness or are product-specific permanent placements that encourage visitors to click through directly to our Web site. In addition, we periodically submit product data files to search engine Web sites in order to appear within these sites when visitors conduct product searches. These product listings link directly to our site and have been an effective means of generating sales.

Traditional Advertising. We advertise in specific major markets and nationwide in a variety of media focused on our identified demographic of customers. In an effort to effectively establish the BUY.COM brand in the marketplace and position ourselves as a leading e-commerce superstore, we are currently participating in a nationwide media campaign that includes business, computer trade, general interest and niche publications, including Fortune, Men's Journal and PC Magazine; newspapers such as the New York Times and The Wall Street Journal; national television networks such as ABC, CBS and NBC; national television programs such as ESPN SportsCenter and NBC Dateline; radio spots with CBS News and Sportstalk; as well as outdoor billboards located in high traffic areas. We use a variety of advertising campaigns to target specific demographic customers, including product specific campaigns, branding and comedy.

Direct Mail. We engage in targeted direct mail campaigns to various segments of our database. Each month we identify and target a particular customer demographic for specific promotions designed to increase customer traffic and sales. In addition to special promotions, the direct mail campaigns promote our commitment to customer service and include either savings coupons or a unique gift to reward customers for their support.

Sweepstakes and Giveaways. We have from time to time successfully hosted sweepstakes that have generated a substantial number of registrants. We register the entrants, with their approval, in our corporate database for future marketing opportunities. We plan to continue to offer customers various sweepstakes opportunities and product giveaways to increase traffic to our Web site and encourage return visits.

PGA TOUR Sponsorship. We recently entered into a five year sponsorship agreement with the PGA TOUR in which we will become the exclusive title sponsor of the professional tour previously known as the Nike Tour. Our sponsorship of the BUY.COM Tour provides for television coverage of various BUY.COM Tour events, prominent featuring in the PGA TOUR's controlled media, including "Inside the PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA TOUR's Web site and other sponsorship and media opportunities. We believe this sponsorship provides an attractive marketing vehicle that enables us to target a customer demographic that is consistent with the customer demographics of our other online stores.

Customer Service and Support

We are committed to providing superior customer service and plan to continue to make technological and systems advancements to enhance the overall shopping experience. We believe customer support throughout the shopping experience is a key element in providing a convenient shopping forum for our customers and establishing customer loyalty. As a result, we have made customer service a focal point of our operations. Customer service representatives are available for support 24 hours a day, seven days a week. In addition to offering customer support on existing orders, service representatives are available to assist shoppers in placing orders online. We believe this educational process builds customer loyalty and creates comfort and familiarity with the shopping experience.

To maintain our business model strategy and enhance our ability to scale our operations quickly, we have outsourced our first level customer support to ClientLogic, a provider of customer service support to such technology organizations as Dell, E*Trade, Microsoft and others. This strategy also has enabled us to minimize capital expenditures, while ensuring that we are staffed to meet the service needs of our customers. We currently maintain call centers in Albuquerque, New Mexico and Buffalo, New York where ClientLogic has staffed over 350 dedicated BUY.COM customer service representatives who are trained and managed on-site by BUY.COM management personnel. In addition to our outsourced customer support, we maintain a limited in-house staff of high level customer service representatives to address more complex customer inquiries. We have entered into a four year contract with ClientLogic. This contract may be terminated by either party for any reason upon 30 days written notice. However, if we terminate the contract without cause, we are obligated to pay a termination fee.

Customers can interact with our representatives by telephone, email or "chat" responses while the customer is online. Our contract with ClientLogic requires that at least 80% of all telephone calls be answered within 90 seconds and e-mail requests be answered in less than 12 hours. We also strive to keep customers informed concerning the status of their orders. We automatically send e-mails confirming receipt of an order, as well as follow-up e-mails to notify the customer of the product shipment, package tracking information, any back ordering and to confirm the customers' receipt of a product.

In addition to our telephone and e-mail support, we have built an extensive self-help environment within our Web site. This tool allows customers to receive all information regarding their current orders and past order history. Within the Web site customers may track shipped orders with Federal Express and United Parcel Service, check the status of orders being processed, and access links to our technology partners' Web sites for technical support. By providing this support through the Web site, we realize significant cost savings while providing the customer more efficient and timely information and service.

Technology and Systems

We have implemented a combination of proprietary technologies and commercially available licensed technologies. Our current strategy is to license available technology whenever possible rather than seek internally- developed solutions and to focus our internal development efforts on creating and enhancing our specialized, proprietary software.

Our Web site's front-end is built on industry standard technologies, including IBM NetFinity and other servers. The business logic of the site is contained in a variety of proprietary programs. These programs handle user interface, ordering and customer communications and operate on redundant IBM NetFinity and other servers. We expect to add additional servers and capacity as needed in the long-term. Our system includes redundant hardware on mission critical components, which we believe can survive the failure of several entire servers with relatively little downtime. We also believe we can quickly and easily expand capacity without significant additional development. We have historically run our key systems below capacity to support rapid growth.

Consistent with our operating strategy, in June 1998 we entered into an agreement to outsource the hosting of our Web servers to an Internet data center specialist, Exodus Communications, which maintains an extensive national network. Exodus provides redundant Internet connections to multiple Internet access points, a secure physical environment, climate control and redundant power. In addition, Exodus provides us with 24 hour a day, seven day a week system monitoring and escalation. Exodus currently hosts our Web operations in their

Irvine, California data center, and we believe Exodus has adequate available floor space to support our growth in this facility. In addition, we expect to be able to support a distributed, redundant site by placing some of our servers in Exodus' other locations across the country. Our one year agreement with Exodus provides for automatic one year renewal periods, but allows either party to terminate the agreement for any reason upon 30 days' prior written notice.

Order Processing Applications. We use a set of computer software applications for processing each customer order. These applications charge customer credit cards, print order information, transmit order information electronically to our distributors and deposit transaction information into our accounting system. All credit card numbers and financial and credit information are secured using the Internet security protocol Secure Socket Layer, Version 3, an encryption standard, and we maintain credit card numbers behind appropriate fire walls.

Marketing Applications. We have developed a set of computer software applications for sending automated broadcast e-mails to customers on a frequent basis. This software extracts e-mail addresses from our mailing lists, sends e- mails to the designated recipients and automatically services requests from customers to remove them from the mailing list.

Ad Reporting. We have developed an application that allows for the tracking and reporting of customer response to the Web advertisements we place throughout the Internet. The reports include click-throughs to the advertisements and orders and sales from those responses on a daily basis. These reports allow for comparison of similar site's performance, placements within a single site and the creative/graphic performance of the ads.