UBID INC, 424B1, 1998-12-04

UBID INC
424B1, 1998-12-04
CATALOG & MAIL-ORDER HOUSES

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<PAGE>

Filed pursuant to Rule 424(b)(1)
Registration Number 333-58447

PROSPECTUS
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1,580,000 SHARES

[LOGO OF uBID APPEARS HERE]

COMMON STOCK

----------

All of the 1,580,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by uBid, Inc.
("uBid" or the "Company"). Prior to the Offering, there has been no public
market for the Common Stock. For a discussion relating to factors to be
considered in determining the initial public offering price, see
"Underwriting."

Shares of Common Stock may be reserved for sale at the initial public
offering price to the Company's employees, directors and other persons with
relationships with the Company. Such employees, directors and other persons may
purchase, in the aggregate, not more than 10% of the Common Stock offered
hereby. See "Underwriting."

The Company has been approved for listing of the Common Stock on the Nasdaq
National Market under the symbol "UBID," subject to official notice of
issuance.

The Company is currently a wholly-owned subsidiary of Creative Computers,
Inc. (the "Parent"). Upon completion of the Offering, the Parent will own
approximately 82.3% of the outstanding shares of Common Stock (80.1% if the
Underwriters exercise their over-allotment option in full). The Parent has
announced its intention, subject to satisfaction of certain conditions, to
divest its ownership interest in the Company in 1999 by means of a tax-free
distribution to its stockholders but in no event prior to 180 days after
consummation of the Offering. Only holders of the common stock of the Parent
will receive shares of Common Stock in the tax-free distribution. Such
distribution may adversely affect the market price of the Common Stock. See
"Risk Factors," "Separation from the Parent" and "Certain Transactions."

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.

----------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

<TABLE>
=================================================================================
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $15.00 $1.05 $13.95
- ---------------------------------------------------------------------------------
Total (3)........................ $23,700,000 $1,659,000 $22,041,000
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
(1) The Company and the Parent have agreed to indemnify the several
Underwriters against certain liabilities, including certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1 million.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 237,000 shares of Common Stock exercisable within 30 days after
the date hereof, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $27,255,000, $1,907,850 and $25,347,150,
respectively. See "Underwriting."

----------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made in New York, New York
on or about December 9, 1998.

----------------

MERRILL LYNCH & CO. WILLIAM BLAIR & COMPANY

----------------

The date of this Prospectus is December 3, 1998.
<PAGE>

INNOVATION IN eCOMMERCE

uBID is a live Internet
[uBID logo] auction house where
businesses and consumers
set the price on and
compete to win excess,
refurbished, and limited
merchandise through live-
action bidding. To keep
the excitement level high,
uBID (www.ubid.com) has
continuously-evolving
product offerings and
closes a multi-product
auction every day of the
week.

NUMEROUS VENDOR
RELATIONSHIPS

uBID entered the
electronic commerce
industry to be a leader in
the exciting frontier of
the online auction sales
format. uBID has developed
relationships with over
100 vendors and
manufacturers of computer,
consumer electronics and
home and leisure products,
from whom we acquire our
inventory.

POSITIVE CUSTOMER EXPERIENCE

uBID'S hallmark is making
sure customers get the
personalized care they
deserve. With a 100,000
square-foot advanced
shipping and configuration
facility, customers
receive their orders
[Color photo of uBID Website home quickly and accurately. If
page] a customer ever does have
www.uBID.com a concern, TOLL-FREE
customer support is
available from a
professional,
knowledgeable staff.

uBID/SM/ IS THE REGISTERED SERVICE MARK OF uBID, INC. THIS PROSPECTUS ALSO
INCLUDES REGISTERED SERVICE MARKS AND/OR TRADEMARKS OF OTHER ENTITIES.

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, all share and per
share data and information in this Prospectus (i) gives retroactive effect to
the 100,000-for-one split of the Common Stock effected in June 1998, (ii)
assumes a reverse split of approximately 0.73298-for-one of the Company's
Common Stock effected November 30, 1998 and (iii) assumes no exercise of the
Underwriters' over-allotment option. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk Factors."

THE COMPANY

uBid operates an online auction for excess merchandise, offering close-out
and refurbished products to consumers and small to medium-sized businesses. The
Company believes that its online auction represents an exciting sales format
for users that leverages the interactive nature of the Internet. The Company's
Internet auctions feature a rotating selection of brand name computer, consumer
electronics and home and leisure products which typically sell at significant
discounts to prices found at traditional retailers. uBid currently runs
auctions seven days a week, offering on the average over 1,000 total items in
each of its auctions. From its first auction in December 1997 through September
30, 1998, the Company auctioned over 138,000 merchandise units, registered over
120,000 users and recorded more than eight million visits to its Website. In
the month of September alone, the Company auctioned approximately 38,000
merchandise units, registered over 21,000 users and recorded approximately 1.9
million visits to its Website.

The Company's net revenues grew from $157,000 in the month of January 1998 to
$5.8 million in September 1998 and $24.1 million for the nine months ended
September 30, 1998. The Company had a net loss of approximately $3.0 million
and an accumulated deficit of approximately $3.3 million for the nine months
ended September 30, 1998 and as of September 30, 1998, respectively.

The Company operates in the rapidly growing Internet commerce industry.
Jupiter Communications estimates that U.S. retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to $37.5
billion in 2002. The single largest online retail category in the U.S. is
projected to be computers and consumer electronics, which is forecast to grow
from $836 million in 1997 to $10.5 billion by the year 2002. The personal
computer and consumer electronics markets are characterized by significant
quantities of excess merchandise due to extremely short product life cycles and
the prevalence of returned items through the consumer retail channel. Because
of the highly fragmented and relatively undeveloped liquidator channel, prices
received by vendors for excess goods tend to be highly variable. The Company
estimates that the value of such products exceeded $4 billion in 1997 in the
U.S. alone.

uBid's online auctions provide an ideal distribution channel for
unpredictable, odd-lot quantities of close-out and refurbished goods. The
frequency of the Company's auctions and its ability to continuously add new
items allow vendors to dispose of inventory quickly to minimize the risk of
price erosion. Online sales also allow vendors to liquidate excess merchandise
directly to a nationwide audience, without cannibalizing their primary
distribution channels. Furthermore, uBid offers customers a unique retail
experience--the opportunity to set their own prices on popular, brand name
products with the convenience of shopping 24 hours a day, seven days a week.
The element of gamesmanship, combined with an ever-changing merchandise mix,
entices customers to participate in the auction in hopes of "hitting the
jackpot" and winning a bargain.

The Company employs sophisticated merchandising techniques to manage the
auction process, which allows the Company to maximize revenues on products put
into auction. uBid's sophisticated auction management methodology capitalizes
on the Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product mix of
each auction and the ultimate price realized on each product.

3
<PAGE>

The Company has designed its online auctions to offer a superior customer
experience and to encourage repeat visits by customers and potential customers.
The Company believes it offers a consistently superior experience to its
customers through an entertaining and fast auction process, tight control of
the order process and a high level of customer support. Approximately 90% of
the products shipped from the Company's warehouse are shipped the next business
day after an auction closes. In addition, uBid has established multiple
channels for communicating with customers before and after the sale, including
telephone, e-mail and online support. The Company has also incorporated other
features to encourage repeat visits, including a personalized page with a
user's bidding history. Repeat customers accounted for approximately 68% of
customer orders for the three months ended September 30, 1998.

In the electronic commerce industry, a strong brand is critical to creating a
high level of vendor awareness and attracting customer traffic. Accordingly,
the Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional efforts.
Specifically, the Company intends to increase points of access by establishing
relationships with other online companies similar to its existing relationships
with America Online, Inc. ("AOL"), CNET, Inc. ("CNET") and Wired Digital, Inc.
("Wired Digital").

The Company obtains merchandise directly from computer, consumer electronics
and home and leisure products manufacturers and indirectly through other
vendors, such as retailers and distributors. Currently, this merchandise is
sourced from over 100 vendors. uBid's merchandise has included brands such as
AST, AT&T, Aiwa, Apple, Canon, Casio, Compaq, Dell, Gateway, Hewlett-Packard,
IBM, JVC, Lexmark, Micron, NEC, Panasonic, Seagate, Sony, Toshiba and Uniden.

The Company is currently a wholly-owned, indirect subsidiary of the Parent.
The Company is a Delaware corporation with its principal executive offices
located at 2525 Busse Road, Elk Grove Village, IL 60007, and its telephone
number at that address is (847) 860-5000. The Company maintains a Website at
www.ubid.com. The information contained in the Company's Website is not, and
shall not be deemed to be, a part of this Prospectus.

SEPARATION FROM THE PARENT

In June 1998, the Parent announced its intention to separate the Internet
auction business of the Company and the associated assets and liabilities of
such Internet auction business and operations from the Parent's other
businesses and operations (the "Separation"). The Parent also announced its
intention to consummate the Offering and to complete the Separation by the
distribution to the Parent's stockholders in no event prior to 180 days after
consummation of the Offering, subject to certain conditions and consents, of
all of the Parent's remaining interest in the Company (the "Distribution"). For
a period from the Offering Closing Date until three years from the date of the
Distribution, the Company will be subject to restrictions on its ability to
issue additional equity securities (but not debt securities), and these
restrictions may impede the ability of the Company to raise necessary capital
or to complete acquisitions using its equity securities. See "Risk Factors--Tax
Indemnification Obligation; Limitations on Issuances of Equity Securities
Following the Distribution" and "--Limited Ability to Issue Common Stock Prior
to Distribution" and "Separation from the Parent--Conditions to the
Distribution."

The Company and the Parent have entered into or will enter into, on or prior
to the consummation of the Offering, certain agreements providing for the
Separation and Distribution and governing various interim and ongoing
relationships between the companies after completion of the Offering and the
Distribution, including an agreement between the Company and the Parent
providing for the purchase by the Company of certain services from the Parent.
The Company has amounts due to the Parent for working capital and fixed asset
purchases (the "Payable"), which equaled approximately $3.7 million as of
September 30, 1998. See "Separation from the Parent" and "Certain
Transactions."

On the Offering Closing Date, the Parent will own approximately 82.3% of the
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). See "Description of Capital Stock."

4
<PAGE>

THE OFFERING

Common Stock to be offered
by the Company............. 1,580,000 shares

Common Stock to be
outstanding after the
Offering................... 8,909,883 shares (1)

Use of Proceeds............. The net proceeds to be received by the Company
from the Offering will be used for working
capital, including the Company's planned
advertising and brand development expenditures
and for development of the Company's
infrastructure in order to support growth. See
"Use of Proceeds."

Nasdaq National Market
Symbol for Common Stock.... UBID
- --------
(1) Excludes employee and director stock options of the Company to purchase an
aggregate of 869,690 shares of Common Stock of the Company outstanding as
of September 30, 1998 at a weighted average exercise price of $.71 per
share. All of the options granted are exercisable only in the event of an
initial public offering or a Sale or Merger (each as defined in the option
agreement). The terms of the options provide for vesting, generally over a
five-year period, except for options to purchase 36,649 shares of Common
Stock which will vest on the Offering Closing Date. However, assuming all
options are exercised, additional dilution to new stockholders would be
approximately $.11 per share. In addition, upon completion of the
Distribution, certain stock options exercisable for shares of common
stock, par value $.001 per share, of the Parent ("Parent Common Stock")
will be converted into stock options exercisable for shares of Parent
Common Stock and Common Stock. It is not possible to specify how many
shares of Common Stock will be subject to such stock options, as it is not
known how many stock options to purchase Parent Common Stock will remain
unexercised and outstanding by the record date for the Distribution.
However, based on the number of options to purchase Parent Common Stock
outstanding on September 30, 1998, options to purchase 854,893 shares of
Parent Common Stock would become options to purchase 854,893 shares of
Parent Common Stock and 612,017 shares of Common Stock at an estimated
weighted average exercise price of $4.57 per share, based on the market
price of Parent Common Stock at September 30, 1998 ($8.25) and the initial
public offering price of the Common Stock. As a result of the
Distribution, any options to purchase Parent Common Stock issued after the
Offering Closing Date will not be convertible into options to purchase
Common Stock.

RISK FACTORS

Purchasers of Common Stock in the Offering should carefully consider the risk
factors set forth under the caption "Risk Factors" and the other information
included in this Prospectus prior to making an investment decision. See "Risk
Factors."

5
<PAGE>

SUMMARY HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)

Set forth below is summary historical financial and operating data of the
Company for the periods indicated, which have been derived from the Company's
audited financial statements. The summary historical financial data set forth
below should be read in conjunction with the Company's financial statements and
notes thereto included elsewhere in this Prospectus and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
summary historical financial data set forth below is not necessarily indicative
of the results of operations or financial position which would have resulted
had the Offering and the Separation occurred at the beginning of each period
presented.

<TABLE>
<CAPTION>
INCEPTION THREE MONTHS THREE MONTHS THREE MONTHS NINE MONTHS
(APRIL 1, 1997) ENDED ENDED ENDED ENDED
TO DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998 1998 1998
---------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................ $ 9 $ 2,075 $ 6,751 $ 15,299 $ 24,125
Gross profit................ 1 184 496 1,253 1,933
Loss from operations........ (287) (864) (937) (1,020) (2,821)
Net loss.................... (313) (895) (993) (1,092) (2,980)
Basic and diluted net loss
per share (1).............. $ (0.04) $ (0.12) $ (0.14) $ (0.15) $ (0.41)
Shares used to compute basic
and diluted net loss per
share (1).................. 7,329,883 7,329,883 7,329,883 7,329,883 7,329,883
<CAPTION>
DECEMBER 31,
1997 SEPTEMBER 30, 1998
---------------- ----------------------------
ACTUAL ACTUAL AS ADJUSTED (2)
---------------- ------------ ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ -- $ -- $ 21,041
Working capital............. 31 (624) 20,417
Total assets................ 358 6,048 27,089
Advances from the Parent.... 670 3,709 3,709
Total stockholder's equity
(deficit).................. (312) (3,292) 17,749
</TABLE>
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(1) See Notes 1 and 7 of the notes to the financial statements for an
explanation of the number of shares used in computing the amount of basic
and diluted net loss per common share.

(2) Adjusted to reflect the sale of 1,580,000 shares of the Company's Common
Stock in the Offering and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."

6
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including the matters set forth in the following risk factors and
elsewhere in this Prospectus. See "--Forward-Looking Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

EXTREMELY LIMITED OPERATING HISTORY

The Company was incorporated in September 1997 and began conducting auctions
on the Internet in December 1997. Prior to the incorporation of the Company,
the Parent, beginning on April 1, 1997 ("Inception"), funded certain startup
and development activities. Accordingly, there is an extremely limited
operating history upon which to base an evaluation of the Company and its
business and prospects. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in new and rapidly evolving markets such as electronic commerce.
Such risks for the Company include: an evolving and unpredictable business
model; management of growth; the Company's ability to anticipate and adapt to
a developing market; acceptance by customers of the Company's Internet
auctions and excess merchandise sold at such auctions; dependence upon the
level of auction activity; development of equal or superior Internet auctions
by competitors; dependence on vendors for merchandise; dependence on the
Parent for certain services; and the ability to identify, attract, retain and
motivate qualified personnel. To address these risks, the Company must, among
other things, continue to expand its vendor channels and buyer resources,
increase traffic to its Website, maintain its customer base and attract
significant numbers of new customers, respond to competitive developments,
implement and execute successfully its business strategy and continue to
develop and upgrade its technologies and customer services. There can be no
assurance that the Company will be successful in addressing these risks. In
addition, the Company's limited operating history prevents the use of period-
to-period comparisons of its financial results. The financial information
included herein may not necessarily provide any indication as to expected or
possible results of operations, financial condition and cash flows of the
Company in the future or what the results of operations, financial condition
and cash flows would have been had the Company been a separate, independent
entity during the periods presented. See "--Dependence of the Company on the
Parent for Certain Services" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

FUTURE CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL CAPITAL; ABSENCE OF PARENT
FUNDING

The Company's working capital requirements and cash flow provided by
operating activities can vary from quarter to quarter, depending on revenues,
operating expenses, capital expenditures and other factors. The Company
requires substantial working capital to fund its business. Since Inception,
the Company has experienced negative cash flow from operations and expects to
continue to experience significant negative cash flow from operations for the
foreseeable future. The Company currently anticipates that the net proceeds of
the Offering, together with its existing capital resources, will be sufficient
to meet the Company's capital requirements through the next 12 months,
although there can be no assurance that the Company will not have additional
capital needs prior to the end of such period. Thereafter, the Company expects
that it will be required to raise additional funds. The Company is not
currently operated as an independent company. Prior to the Offering, the
Company's needs for working capital and general corporate purposes have been
satisfied pursuant to the Parent's corporate-wide cash management policies.
However, immediately after the Offering Closing Date, the Parent will not be
required to provide funds to finance the Company's operations nor does the
Parent currently anticipate providing such funds. If the Company is unable to
obtain financing in the amounts desired and on acceptable terms, or at all,
the Company may be required to reduce significantly the scope of its presently
anticipated advertising and other expenditures, which could have a material
adverse effect on the Company's

7
<PAGE>

growth prospects and the market price of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICITS; ANTICIPATED LOSSES AND
NEGATIVE CASH FLOW

Since its formation, the Company has expended significant resources on its
technology, Website development, advertising, hiring of personnel and startup
costs. As a result, the Company has incurred losses since Inception and
expects to continue to incur losses for the foreseeable future. The Company
had an accumulated deficit of approximately $3.3 million at September 30,
1998. The Company intends to expend significant financial and management
resources on brand development, marketing and advertising, Website
development, strategic relationships, and technology and operating
infrastructure. Primarily as a result of the significant increase in marketing
and promotional expenses, the Company expects to incur additional losses, and
such losses are expected to increase significantly from current levels.
Because the Company has relatively low gross margins, achieving profitability
given planned investment levels depends upon the Company's ability to generate
and sustain substantially increased levels of net revenue. In addition, the
Company historically has had relatively low operating margins and plans to
continue to increase its operating expenses significantly in order to increase
its customer base, increase the size of its staff, expand its marketing
efforts to enhance its brand image, increase its visibility on other
companies' high-traffic Websites, purchase larger volumes of merchandise to be
sold at auction, increase its software development efforts, and support its
growing infrastructure. Moreover, to the extent that increases in such
operating expenses precede or are not subsequently followed by increased
revenues, the Company's business, results of operations and financial
condition will be materially adversely affected. There can be no assurance
that the Company's revenues will increase or even continue at their current
level or that the Company will achieve or maintain profitability or generate
positive cash flow from operations in future periods. The Company has made and
expects in the future to continue to make significant investments in
infrastructure and personnel in advance of levels of revenue necessary to
offset such expenditures. As a result, these expenditures are based on the
Company's operating plans and estimates of future revenues. Sales and
operating results generally depend, among other things, on the volume and
timing of orders received, which are difficult to forecast. The Company may be
unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Beginning in October 1997, the Company granted stock options to attract and
retain key employees. These options were exercisable only in the event of a
successful initial public offering or sale of the Company. Accordingly, the
Company will record a non-cash charge to compensation in the quarter in which
the Offering is consummated, calculated based upon the initial public offering
price for the Common Stock. The Company expects to record a non-cash
compensation charge of approximately $13.3 million over the five-year vesting
period of such options. Based on those options that vest through November 16,
1998, the Company expects to record a compensation expense of approximately
$5.9 million in the fourth quarter of 1998. See Note 5 to the financial
statements.

UNPREDICTABILITY OF, AND FLUCTUATIONS IN, OPERATING RESULTS

The Company's operating results are unpredictable and are expected to
fluctuate in the future, due to a number of factors, many of which are outside
the Company's control. These factors include: (i) the Company's ability to
significantly increase its customer base, manage its inventory mix and the mix
of products offered at auction, meet certain pricing targets, liquidate its
inventory in a timely manner, maintain gross margins and maintain customer
satisfaction; (ii) the availability and pricing of merchandise from vendors;
(iii) product obsolescence and price erosion; (iv) consumer confidence in
encrypted transactions in the Internet environment; (v) the timing, cost and
availability of advertising on other entities' Websites; (vi) the amount and
timing of costs relating to expansion of the Company's operations; (vii) the
announcement or introduction of new types of merchandise, service offerings or
customer services by the Company or its competitors; (viii) technical
difficulties with respect to consumer use of the auction format on the
Company's Website; (ix) delays in shipments as a result of computer systems
failures, strikes or other problems with the Company's delivery service or
credit card processing providers; (x) the level of merchandise returns
experienced by the Company; and

8
<PAGE>

(xi) general economic conditions and economic conditions specific to the
Internet and electronic commerce. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain
service, marketing or supply decisions or acquisitions that could have a
material adverse effect on the Company's quarterly results of operations and
financial condition. The Company also expects that, in the future, it, like
other retailers, may experience seasonality in its business. Due to all of the
foregoing factors, in some future quarter the Company's operating results may
fall below the expectations of securities analysts and investors. In
such event, the trading price of the Company's Common Stock would likely be
materially adversely affected. See "--Extremely Limited Operating History" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

UNCERTAIN ACCEPTANCE OF THE uBID BRAND; EVOLVING AND UNPREDICTABLE BUSINESS
MODEL

The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet. Development and
awareness of the uBid brand will depend largely on the Company's success in
increasing its customer base. If vendors do not perceive the Company as an
effective marketing and sales channel for their merchandise, or consumers do
not perceive the Company as offering an entertaining and desirable way to
purchase merchandise, the Company will be unsuccessful in promoting and
maintaining its brand. Furthermore, in order to attract and retain customers
and to promote and maintain the uBid brand in response to competitive
pressures, the Company is finding it necessary to increase its marketing and
advertising budgets and otherwise to increase substantially its financial
commitment to creating and maintaining brand loyalty among vendors and
consumers. If the Company is unable to or incurs significant expenses in an
attempt to achieve or maintain a leading position in Internet commerce or to
promote and maintain its brand, the Company's business, results of operations
and financial condition will be materially adversely affected. See "Business--
Business Strategy" and "--Sales and Marketing."

The Company expects to expand the focus of its operations beyond the auction
and sale of close-out and refurbished computer, consumer electronics and home
and leisure products to the auction and sale of other excess merchandise. The
Company also intends to continue to develop its business model and to explore
other opportunities such as the use of the Company's Website as an advertising
medium for services and products of other companies, promoting new or
complementary products or sales formats and expanding the breadth and depth of
products and services offered on its Website. In addition, in the next three
months, the Company expects to begin offering credit to certain of its
business customers that have been pre-qualified as having appropriate credit
ratings. As its business model evolves, the Company risks diluting its brand,
confusing customers and decreasing interest from vendors. In addition, the
Company could be exposed to additional or new risks associated with these new
opportunities. If the Company is unable to address these risks, the Company's
business, results of operations and financial condition will be materially
adversely affected.

COMPETITION

The electronic commerce market is new, rapidly evolving and intensely
competitive, and the Company expects competition to intensify in the future.
The Company currently or potentially competes with a variety of other
companies depending on the type of merchandise and sales format offered to
customers. These competitors include: (i) various Internet auction houses such
as ONSALE, eBay, Yahoo! Auctions, First Auction (the auction site for Internet
Shopping Network, a wholly-owned subsidiary of Home Shopping Network Inc.),
Surplus Auction (a wholly-owned subsidiary of Egghead, Inc.), WebAuction (the
auction site for MicroWarehouse, Inc.) and Insight Auction (the auction site
for Insight Enterprises, Inc.); (ii) a number of indirect competitors that
specialize in electronic commerce or derive a substantial portion of their
revenue from electronic commerce, including Internet Shopping Network, AOL and
Cendant Corp.; (iii) a variety of other companies that offer merchandise
similar to that of the Company but through physical auctions and with which
the Company competes for sources of supply; (iv) personal computer
manufacturers that have their own direct distribution channels for their
excess inventory or refurbished products; and (v) companies with substantial
customer bases in the computer and peripherals catalog business, including CDW
Computer Centers, Inc., PC Connection, Inc. and the Parent, some of which
already sell online or may devote more resources to Internet commerce in the
future. In particular, ONSALE, Inc. began conducting auctions on the Internet
in May 1995 and has established

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<PAGE>

significant market share and brand name recognition for online auctions for
computer-related equipment. In addition, AOL has taken a minority equity
interest in Bid.com (formerly, Internet Liquidators International, Inc.), a
competitor of the Company, and announced that the two companies have formed a
strategic partnership under which revenue from Bid.com's auction platforms is
shared with AOL and AOL provides a direct link for Bid.com's members to reach
Bid.com's electronic commerce site on the Web. The Company has its own
relationship with AOL pursuant to which the Company advertises on AOL and
which provides AOL's members with a direct link to the Company's Website.

The Company believes that the principal competitive factors affecting its
market are the ability to attract customers at favorable customer acquisition
costs, operate the Website in an uninterrupted manner and with acceptable
speed, provide effective customer service and obtain merchandise at
satisfactory prices. There can be no assurance that the Company can maintain
its competitive position against current and potential competitors, especially
those with greater financial, marketing, customer support, technical and other
resources than the Company.

Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with vendors to obtain
exclusive or semi-exclusive sources of merchandise. Accordingly, it is
possible that new competitors or alliances among competitors and vendors may
emerge and rapidly acquire market share. In addition, manufacturers may elect
to liquidate their products directly. Increased competition is likely to
result in reduced operating margins, loss of market share and a diminished
brand franchise, any one of which could materially adversely affect the
Company's business, results of operations and financial condition. Many of the
Company's current and potential competitors have significantly greater
financial, marketing, customer support, technical and other resources than the
Company. As a result, such competitors may be able to secure merchandise from
vendors on more favorable terms than the Company, and they may be able to
respond more quickly to changes in customer preferences or to devote greater
resources to the development, promotion and sale of their merchandise than can
the Company. See "Business--Competition."

RELIANCE ON RELATIONSHIPS WITH ONLINE COMPANIES

The Company depends to some extent and is increasing its dependence on
relationships with other online companies. These relationships include, but
are not limited to, agreements for anchor tenancy, promotional placements,
sponsorships and banner advertisements. Generally, these agreements have terms
for up to a year, are not exclusive and do not provide for guaranteed renewal.
The risks included in this dependence include: (i) the possibility that a
competitor will purchase exclusive rights to attractive space on one or more
key sites; (ii) the uncertainty that significant spending on these
relationships will increase the Company's revenues substantially or at all;
(iii) the possibility that potential revenue increases resulting from such
spending will not occur within the time periods that the Company is expecting;
(iv) the possibility that space on other Websites or the same sites may
increase in price or cease to be available on reasonable terms or at all; (v)
the possibility that, if these relationships are successful, the Company may
not be able to obtain adequate amounts of merchandise to meet the increased
demand that is generated; (vi) the possibility that such online companies will
be unable to deliver a sufficient number of customer visits or impressions;
and (vii) the possibility that such online companies will compete with the
Company for limited online auction revenues. Any termination of the Company's
arrangements with other online companies could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Use of Proceeds" and "Business--Sales and Marketing."

RISKS OF A PURCHASED INVENTORY MODEL

The Company purchases a majority of its merchandise from vendors and thereby
assumes the inventory and price risks of these products to be sold at auction.
These risks are especially significant because much of the merchandise
currently auctioned by the Company (e.g., computer, consumer electronics and
home and leisure products) is characterized by rapid technological change,
obsolescence and price erosion. Since the Company relies heavily on purchased
inventory, its success will depend on its ability to liquidate its inventory
rapidly

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through its auctions, the ability of its buying staff to purchase inventory at
attractive prices relative to its resale value at auction, and its ability to
manage customer returns and the shrinkage resulting from theft, loss and
misrecording of inventory. Due to the inherently unpredictable nature of
auctions, it is impossible to determine with certainty whether an item will
sell for more than the price paid by the Company. Further, because minimum
opening bid prices for the merchandise listed on the Company's Website
generally are lower than the Company's acquisition costs for such merchandise,
there can be no assurance that the Company will achieve positive gross margins
on any given sale. If the Company is unable to liquidate its purchased
inventory rapidly, if the Company's buying staff fails to purchase inventory
at attractive prices relative to its resale value at auction, or if the
Company fails to predict with accuracy the resale prices for its purchased
merchandise, the Company may be forced to sell its inventory at a discount or
at a loss and the Company's business, results of operations and financial
condition would be materially adversely affected. See "Business--Products and
Merchandising" and "--Vendor Relationships."

RELIANCE ON MERCHANDISE VENDORS

The Company depends upon vendors to supply it with excess merchandise for
sale through the Company's Internet auctions, and the availability of such
merchandise can be unpredictable. Since Inception, the Company has sourced
merchandise from over 100 vendors. Merchandise acquired from 10 of these
vendors has represented approximately 57% of the Company's gross merchandise
sales since Inception. Merchandise acquired from one vendor, the Parent,
represented over 90% of the merchandise sold by the Company in the first two
months of operations, decreased to approximately 30% in March and April 1998,
and represented less than 15% since May 1998. None of these vendors is subject
to a long-term supply contract with the Company. There can be no assurance
that the Company's current vendors will continue to sell merchandise to the
Company or otherwise provide merchandise for sale in the Company's auctions or
that the Company will be able to establish new vendor relationships that
ensure merchandise will be available for auction on the Company's Website. A
limited number of these vendors process and ship merchandise directly to the
Company's customers. The Company has limited control over the shipping
procedures of such vendors, and shipments could be subject to delays outside
the control of the Company. Most merchandise sold by the Company carries a
warranty supplied either by the manufacturer or the vendor. In addition,
although the Company is not obligated to accept merchandise returns, the
Company could be compelled to accept returns from customers for which the
Company did not receive reimbursements from its vendors or manufacturers if
such warranties are not honored. If the Company is unable to develop and
maintain satisfactory relationships with vendors on acceptable commercial
terms, if the Company is unable to obtain sufficient quantities of
merchandise, if the quality of service provided by such vendors falls below a
satisfactory standard or if the Company's level of returns exceeds its
expectations, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Products and
Merchandising," "--Vendor Relationships" and "--Customer Support and Service."

RELIANCE ON OTHER THIRD PARTIES

In addition to its merchandise vendors, the Company's operations depend on a
number of third parties for Internet/telecom access, delivery services, credit
card processing and software services. The Company has limited control over
these third parties and no long-term relationships with any of them. For
example, the Company does not own a gateway onto the Internet, but instead,
through the Parent, relies on an Internet service provider, Pacific Bell, to
connect the Company's Website to the Internet. From time to time, the Company
has experienced temporary interruptions in its Website connection and also its
telecommunications access. Continuous or prolonged interruptions in the
Company's Website connection or in its telecommunications access, or slow
Internet transmissions, would have a material adverse effect on the Company's
business, results of operations and financial condition. The Company uses UPS
and Federal Express as its delivery services for substantially all of its
products. Should either or both be unable to deliver the Company's products
for a sustained time period as a result of a strike or other reason, the
Company's business, results of operations and financial condition would be
adversely affected. Under an agreement with the Parent, Paymentech processes a
majority of the Company's credit card transactions. If, due to computer
systems failures or other problems related to these

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<PAGE>

third-party service providers, the Company experiences any delays in shipment,
its business, results of operations and financial condition would be adversely
affected. The Company's internally-developed auction software depends on
operating system, database and server software that was developed and produced
by and licensed from third parties. The Company has from time to time
discovered errors and defects in the software from these third parties and, in
part, relies, on these third parties to correct these errors and defects in a
timely manner. If the Company is unable to develop and maintain satisfactory
relationships with such third parties on acceptable commercial terms, or the
quality of products and services provided by such third parties falls below a
satisfactory standard, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Business--
Order Fulfillment," "--Technology" and "--Systems Operations."

RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY-DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS

A key element of the Company's strategy is to generate a high volume of
traffic to, and use of, its Website. The Company's revenues depend entirely on
the number of customers who use its Website to purchase merchandise.
Accordingly, the satisfactory performance, reliability and availability of the
Company's Website, transaction-processing systems, network infrastructure and
delivery and shipping systems are critical to the Company's operating results,
as well as to its reputation and its ability to attract and retain customers
and maintain adequate customer service levels.

The Company periodically has experienced minor systems interruptions,
including Internet disruptions, which it believes may continue to occur from
time to time. Any systems interruptions, including Internet disruptions, that
result in the unavailability of the Company's Website or reduced order
fulfillment performance would reduce the volume of goods sold, which could
have a material adverse effect on the Company's business, results of
operations and financial condition. The Company is continually enhancing and
expanding its transaction-processing systems, network infrastructure, delivery
and shipping systems and other technologies to accommodate a substantial
increase in the volume of traffic on the Company's Website. There can be no
assurance that the Company will be successful in these efforts or that the
Company will be able to accurately project the rate or timing of increases, if
any, in the use of its Website or timely expand and upgrade its systems and
infrastructure to accommodate such increases. There can be no assurance that
the Company's or its suppliers' network will be able to timely achieve or
maintain a sufficiently high capacity of data transmission, especially if the
customer usage of the Company's Website increases. The Company's failure to
achieve or maintain high capacity data transmission could significantly reduce
consumer demand for its services and have a material adverse effect on its
business, results of operations and financial condition. See "Business--
Technology" and "--Systems Operations."

MANAGEMENT OF POTENTIAL GROWTH; NEW MANAGEMENT TEAM

The Company has rapidly and significantly expanded its operations and
anticipates that significant expansion of its operations will continue to be
required in order to address potential market opportunities. This rapid growth
has placed, and is expected to continue to place, a significant strain on the
Company's management, operational and financial resources. The Company
expanded from two employees at Inception to 49 employees and 49 full-time
equivalent contract personnel related to the Company's distribution center and
call center at September 30, 1998, and its sales increased from approximately
50 units per week at the beginning of the first quarter of 1998 to over 6,500
units per week at September 30, 1998. The Company's new employees include a
number of key managerial and technical employees who have not yet been fully
integrated into the Company's management team, and the Company expects to add
additional key personnel in the near future. Increases in the number of
employees and the volume of merchandise sales have placed significant demands
on the Company's management, which as of September 30, 1998 included only five
executive officers. In order to manage the expected growth of its operations,
the Company will be required to expand existing operations, particularly with
respect to customer service and merchandising, to improve existing and
implement new operational, financial and inventory systems, procedures and
controls. The Company also will be required to expand its accounting staff.
Further, the Company's management will be required to maintain relationships
with various merchandise

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<PAGE>

vendors, freight companies, warehouse operators, other Websites and services,
Internet service providers and other third parties and to maintain control
over the strategic direction of the Company in a rapidly changing environment.
Historically, the Company has been dependent upon the Parent for various
services, including administration (accounting, human resources, legal),
Internet/telecom and joint marketing. See "--Dependence of the Company on the
Parent for Certain Services." There can be no assurance that the Company's
current personnel, systems, procedures and controls will be adequate to
support the Company's future operations, that management will be able to
identify, hire, train, retain, motivate and manage required personnel or that
management will be able to manage and exploit existing and potential market
opportunities successfully. If the Company is unable to manage growth
effectively, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Employees" and
"Management."

RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE; DEPENDENCE ON THE INTERNET

The Internet and electronic commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence
of new industry standards and practices that could render the Company's
existing Website and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license or acquire leading
technologies, enhance its existing services, and respond to technological
advances and emerging industry standards and practices on a timely and cost-
effective basis. The development of Website and other proprietary technology
entails significant technical and business risks. There can be no assurance
that the Company will be successful in using new technologies effectively or
adapting its Website and proprietary technology to emerging industry
standards. If the Company is unable, for technical, legal, financial or other
reasons, to adapt in a timely manner to changing market conditions or customer
requirements, or if the Company's Website does not achieve market acceptance,
the Company's business, results of operations and financial condition would be
materially adversely affected. The success of the Company's services will
depend in large part upon the development of an infrastructure for providing
Internet access and services. The Internet could lose its viability due to
delays in the development or adoption of new standards and protocols intended
to handle increased levels of Internet activity or due to increased
governmental regulation. There can be no assurance that the infrastructure or
complementary services necessary to make the Internet a viable commercial
marketplace will be developed or that, if they are developed, the Internet
will become a viable marketing and sales channel for excess merchandise such
as that offered by the Company. The recent growth in the use of the Internet
has caused frequent periods of performance degradation, requiring the upgrade
of routers and switches, telecommunications links and other components forming
the infrastructure of the Internet service providers and other organizations
with links to the Internet. Any perceived degradation in the performance of
the Internet as a whole could undermine the benefits of the Company's
services. The Company's ability to increase the speed with which it provides
services to customers and to increase the scope of such services ultimately is
limited by and reliant upon the speed and reliability of the networks operated
by third parties. Consequently, the emergence and growth of the market for the
Company's services is dependent on improvements being made to the entire
Internet infrastructure to alleviate overloading and congestion. If the
infrastructure or complementary services necessary to make the Internet a
viable commercial marketplace are not developed or if the Internet does not
become a viable commercial marketplace, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Industry Background," "--Technology" and "--Systems Operations."

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, laws
applicable to auction companies and auctioneers, and laws or regulations
directly applicable to access to or commerce on the Internet. However, due to
the increasing popularity and use of the Internet, it is possible that a
number of laws and regulations may be adopted with respect to the Internet,
covering issues such as user privacy, pricing, and characteristics and quality
of products and services. Furthermore, the growth and development of the
market for Internet commerce may prompt calls for more

13
<PAGE>

stringent consumer protection laws that may impose additional burdens on those
companies conducting business over the Internet. The adoption of any
additional laws or regulations may decrease the growth of the Internet, which,
in turn, could decrease the demand for the Company's Internet auctions and
increase the Company's cost of doing business or otherwise have an adverse
effect on the Company's business, results of operations and financial
condition. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, auction
regulation, sales tax, libel and personal privacy is uncertain and may take
years to resolve. In addition, as the Company's service is available over the
Internet in multiple states, and as the Company sells to numerous consumers
resident in such states, such jurisdictions may claim that the Company is
required to qualify to do business as a foreign corporation in each such
state. The Company is qualified to do business in only three states, and
failure by the Company to qualify as a foreign corporation in a jurisdiction
where it is required to do so could subject the Company to taxes and penalties
for the failure to qualify. Any such new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business, could have a material adverse
effect on the Company's business, results of operations and financial
condition.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

The Company's future performance depends to a significant degree upon the
continued contributions of members of Company's senior management and other
key personnel, particularly its CEO and President, Gregory K. Jones; Vice
President-Information Systems, George Lu; Vice President-Merchandising,
Timothy Takesue; and Vice President and Chief Financial Officer, Thomas E.
Werner. The loss of any of these individuals could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, as a result of the Separation, the Company will need
to employ additional personnel for certain functions that were previously
performed by employees of the Parent. The Company has a long-term employment
agreement with only one of its key personnel, Gregory K. Jones, and maintains
no key person life insurance. In order to meet expected growth and to operate
independently of the Parent, the Company believes that its future success will
depend upon its ability to identify, attract, hire, train, motivate and retain
other highly-skilled managerial, merchandising, engineering, marketing and
customer service personnel. Competition for such personnel is intense. There
can be no assurance that the Company will be successful in attracting,
assimilating or retaining the necessary personnel, and the failure to do so
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Employees" and
"Management."

RISK OF SYSTEM FAILURE; SINGLE SITE

The Company's success is largely dependent upon its communications hardware
and computer hardware, substantially all of which are located at a leased
facility in Torrance, California. The Company's systems are vulnerable to
damage from earthquake, fire, flood, power loss, telecommunication failure,
break-in and similar events. The Company has redundant systems but not
duplicate geographic locations. The Company plans to add a fully redundant
site outside of California within the next 12 months. There can be no
assurance that the second site will be established or that it can be
established without interruption in the Company's systems. A substantial
interruption in these systems would have a material adverse effect on the
Company's business, results of operations and financial condition. To date,
the Company has experienced variable interruptions to its service as a result
of loss of power and telecommunications connections. The property and business
interruption insurance covering the Company may not be adequate to compensate
the Company for all losses that may occur. Despite the implementation of
network security measures and firewall security by the Company, its servers
are also vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of the Company's
systems and similar disruptive problems. Computer viruses, break-ins or other
problems caused by third parties could lead to interruptions, delays, loss of
data or cessation in service to users of the Company's services and products.
The occurrence of any of these risks could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Business--Technology," "--Systems Operations," "--Insurance Coverage" and "--
Facilities."

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<PAGE>

INTERNET COMMERCE SECURITY RISKS; RISK OF CREDIT CARD FRAUD

A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed by the
Parent from third parties to provide the security and authentication necessary
to effect secure transmission of confidential information. This technology
will be made available to the Company after the Offering under the
Internet/Telecommunications Agreement (as defined) with the Parent. There can
be no assurance that advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments will not result in a
compromise or breach of the algorithms used by the Company to protect customer
transaction data. If any such compromise of the Company's security were to
occur, it could have a material adverse effect on the Company's business,
results of operations and financial condition. A party who is able to
circumvent the Company's security measures could misappropriate proprietary
information or cause interruptions in the Company's operations. The Company
may be required to expend significant capital and other resources to protect
against the threat of such security breaches or to alleviate problems caused
by such breaches. Concerns over the security of Internet transactions and the
privacy of users may also inhibit the growth of the Internet generally, and
the Web in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers, security breaches could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that the Company's security measures will prevent security breaches or that
failure to prevent such security breaches will not have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Technology" and "--Systems Operations."

PROTECTION OF INTELLECTUAL PROPERTY

The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of trademark, copyright and trade secret laws, as well as
confidentiality agreements and non-compete agreements executed by each manager
and technical measures to establish and protect its proprietary rights. The
uBid/SM/ service mark is registered in the United States. There can be no
assurance that the Company will be able to secure significant protection for
its service marks or trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "uBid" or
other service marks or trademarks of the Company, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "uBid" adequately
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's proprietary software is
protected by copyright laws. The source code for the Company's proprietary
software also is protected under applicable trade secret laws.

All patent, copyright and other proprietary rights with respect to the
Company's auction processing and auction management applications and certain
general purpose libraries are co-owned by the Company and the third-party
developers of such applications and libraries pursuant to various agreements
among such third-party developers and the Parent which the Parent has assigned
to the Company. As co-owners of such software and libraries, the two co-
developers and the Company have the right to grant licenses covering such
software and libraries without the consent or notification of the other co-
owners. In addition, the two co-developers have previously granted a license
covering such software and libraries to the Parent (which is included in the
rights being assigned to the Company under an Assignment and License Agreement
with the Parent) and another third party. Such licensees have the right to
use, distribute, re-license and otherwise modify the licensed source codes
without royalties or further payment to any of the other co-developers or
licensees.

As part of its confidentiality procedures, the Company generally enters into
agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its

15
<PAGE>

technology or that agreements entered into for that purpose will be
enforceable. Notwithstanding the precautions taken by the Company, it might be
possible for a third party to copy or otherwise obtain and use the Company's
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of the Company's
technology is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted. The laws of other countries may afford the
Company little or no effective protection of its intellectual property.

The Company may in the future receive notices from third parties claiming
infringement by the Company's software or other aspects of the Company's
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and diversion of resources, including the attention of management, and
require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the future, the Company may also need to file lawsuits to enforce the
Company's intellectual property rights, to protect the Company's trade
secrets, or to determine the validity and scope of the proprietary rights of
others. Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

The Company also relies on a variety of technology that it licenses from
third parties. There can be no assurance that these third-party technology
licenses will continue to be available to the Company on commercially
reasonable terms. The loss of or inability of the Company to maintain or
obtain upgrades to any of these technology licenses could result in delays in
completing its proprietary software enhancements and new developments until
equivalent technology could be identified, licensed or developed and
integrated. Any such delays would materially adversely affect the Company's
business, results of operations and financial condition. See "Business--
Intellectual Property and Other Proprietary Rights."

RISKS ASSOCIATED WITH GLOBAL EXPANSION

Although the Company currently may not sell merchandise to customers outside
the United States due to contractual restrictions involving the Parent, it
intends to do so in the future. The Company does not currently have any
overseas fulfillment or distribution facility or arrangement or any Website
content localized for foreign markets, and there can be no assurance that the
Company will be able to establish a global presence. In addition, there are
certain risks inherent in doing business on a global level, such as regulatory
requirements, export restrictions, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, difficulties in
protecting intellectual property rights, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in
currency exchange rates and potentially adverse tax consequences, which could
adversely impact the success of the Company's global operations. In addition,
the export of certain software from the United States is subject to export
restrictions as a result of the encryption technology in such software and may
give rise to liability to the extent the Company violates such restrictions.
There can be no assurance that the Company will be able to successfully
market, sell and distribute its products in foreign markets or that one or
more of such factors will not have a material adverse effect on the Company's
future global operations, and consequently, on the Company's business, results
of operations and financial condition.

RISKS ASSOCIATED WITH ACQUISITIONS

The Company may choose to expand its market presence through acquisitions of
complementary businesses. Although no such acquisitions are currently being
negotiated, any future acquisitions would expose the Company to increased
risks, including risks associated with the assimilation of new operations,
sites and personnel, the diversion of resources from the Company's existing
businesses, sites and technologies, the inability to generate revenues from
new sites or content sufficient to offset associated acquisition costs, the
maintenance of uniform standards, controls, procedures and policies and the
impairment of relationships with employees and customers as a result of any
integration of new management personnel. Acquisitions may also result in
additional expenses associated with amortization of acquired intangible assets
or potential businesses. There can be no assurance that

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<PAGE>

the Company would be successful in overcoming these risks or any other
problems encountered in connection with such acquisitions, and its inability
to overcome such risks could have a material adverse effect on the Company's
business, results of operations and financial condition.

RISK OF NONCOMPLETION OF A TAX-FREE DISTRIBUTION

The Parent has announced that, subject to certain conditions, following the
Offering, the Parent intends to distribute to its stockholders in 1999 all of
the Common Stock owned by the Parent. See "Separation from the Parent--
Conditions to the Distribution" and "Certain Transactions--Separation and
Distribution Agreement." The Company has received an opinion letter from
PricewaterhouseCoopers LLP (the "PwC Opinion") to the effect that the
Distribution will qualify as a tax-free distribution for federal income tax
purposes under Section 355 of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Distribution is conditional upon obtaining such an
opinion letter in form and substance satisfactory to the Parent and
confirmation of such opinion at the time of Distribution. The Parent may also
decide, in its sole discretion, to seek a private letter ruling from the
Internal Revenue Service ("IRS") in form and substance satisfactory to the
Parent (the "Letter Ruling") consistent with the conclusions reached in the
PwC Opinion. In that case, the Distribution would also be conditioned upon
receipt of the Letter Ruling. The Parent intends to take all necessary steps
to complete such a tax-free distribution after obtaining the PwC Opinion and
the Letter Ruling, as applicable, but in no event will the Distribution occur
prior to 180 days after consummation of the Offering. If the Parent decides to
apply for the Letter Ruling, the Parent does not plan to distribute its shares
of Common Stock to the Parent's stockholders without such a favorable Letter
Ruling. Due to recent changes in the tax law and other factors, there is no
assurance that the Parent will receive the Letter Ruling, or that it will
receive it within the time frame contemplated, and, consequently, there is no
assurance that the Distribution will occur or will occur within the time frame
contemplated. The Distribution also is subject to the condition that no events
or developments occur following the Offering Closing Date that, in the sole
judgment of the Board of Directors of the Parent (the "Parent Board"), would
or could result in the Distribution having a material adverse effect on the
Parent or the Parent's stockholders. In addition, as a condition to the
Distribution, the Parent will be required to obtain certain consents from
third parties. There can be no assurance that any of the foregoing conditions,
or any other conditions to the Distribution, will be satisfied, or that the
Distribution will occur in the time frame contemplated or at all. The failure
of the Distribution to occur could materially adversely affect the Company and
the market price of the Common Stock. See "Separation from the Parent--
Background of the Separation and Distribution," "Certain Transactions--Tax
Indemnification and Allocation Agreement" and "U.S. Federal Income Tax
Consequences of the Distribution."

CONTROL OF THE COMPANY; RELATIONSHIP WITH THE PARENT

Prior to the Offering Closing Date, the Company has been a wholly-owned,
indirect subsidiary of the Parent. On the Offering Closing Date, the Parent
will own approximately 82.3% of the outstanding shares of Common Stock (80.1%
if the Underwriters exercise their over-allotment option in full). As a
result, until the Distribution, the Parent generally will be able to control
all matters requiring approval of the stockholders of the Company, including
the election of all of the Company's directors. The Company's Board of
Directors (the "Board") currently consists of three members, one of whom
serves concurrently as a member of the Parent's Board. The Parent intends to
maintain ownership of at least 80% of the voting power of the Common Stock
until the Distribution can be completed. There can be no assurance that the
Parent will complete the Distribution of the Common Stock held by it to the
Parent's stockholders. If the Distribution is not effected, the Parent could
maintain a controlling interest in the Company indefinitely, which may
materially adversely affect the Company and the market price of the Common
Stock. In addition, for so long as the Parent maintains a significant interest
in the Company, the market price of the Common Stock may be adversely affected
by events relating to the Parent which are unrelated to the Company. It is the
intention of the Parent to complete the Distribution promptly but in no event
prior to 180 days after consummation of the Offering. See "Separation from
the Parent."

17
<PAGE>

Each member of a consolidated group for federal income tax purposes is
jointly and severally liable for the federal income tax liability of each
other member of the consolidated group. For benefit plan purposes, the Company
will be part of the Parent's consolidated group, which includes the Parent and
its other subsidiaries. Under the Employee Retirement Income Security Act of
1974, as amended, and federal income tax law, each member of the consolidated
group is jointly and severally liable for funding and termination liabilities
of tax qualified defined benefit retirement plans as well as certain plan
taxes. Accordingly, during the period in which the Company is included in the
Parent's consolidated group, the Company could be liable under such provisions
in the event such liability or tax is incurred, and not discharged, by any
other member of the Parent's consolidated group. See "Certain Transactions--
Tax Indemnification and Allocation Agreement."

DEPENDENCE OF THE COMPANY ON THE PARENT FOR CERTAIN SERVICES

The Company historically has been dependent upon the Parent for various
services, including administration (accounting, human resources, legal),
Internet/telecom and joint marketing. Prior to the Offering Closing Date, the
Company and the Parent intend to enter into an agreement under which the
Parent will continue to provide these services to the Company in exchange for
fees payable by the Company to the Parent, for an initial term expiring one
year following the Offering Closing Date. After the initial term of such
agreement, the Company will need to either extend the term of such agreement,
engage others to perform such services or perform such services internally. No
assurance can be given that the Parent will continue to provide the Company
with such services after the initial term of the agreement, or that the cost
of such services will not be significantly higher if the Company purchases
such services from unaffiliated providers or employs staff to handle such
functions internally. See "Certain Transactions--Services Agreement."

INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATIONS; POSSIBLE
COMPETITION FROM THE PARENT; INDEMNIFICATION OBLIGATIONS

Prior to the Offering Closing Date, the Parent and the Company intend to
enter into certain intercompany agreements, including agreements pursuant to
which the Parent will provide various services, such as administration
(accounting, human resources, legal), Internet/telecom and joint marketing,
that are material to the conduct of the Company's business. Because the
Company is a wholly-owned, indirect subsidiary of the Parent, none of these
agreements will result from arm's-length negotiations and, therefore, there is
no assurance that the terms and conditions of such agreements will be no less
favorable to the Company as could be obtained by the Company from unaffiliated
third parties. See "Certain Transactions." The Company's proposed intercompany
agreements will provide that the Parent, for a period of nine months after the
date of the Distribution ("Distribution Date"), will not compete in the online
Internet auction business in substantially the same manner or format as
currently conducted by the Company. After that period, the Parent will not be
prohibited from competing directly or indirectly with the Company, including
by way of acquiring other companies or businesses, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company has agreed to indemnify, defend and hold
harmless the Parent and each of the Parent's directors, officers and employees
from and against all liabilities relating to, arising out of or resulting
from: (i) the failure of the Company or any other person to pay, perform or
otherwise promptly discharge any liabilities of the Company in accordance with
their respective terms; (ii) any breach by the Company of any of the
intercompany agreements entered into by the parties in connection with the
Separation and Distribution; and (iii) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, with respect to all information contained
in this Prospectus or the Registration Statement of which it forms a part. See
"--No Duty to Communicate Corporate Opportunities" and "Certain Transactions--
Releases and Indemnification."

TAX INDEMNIFICATION OBLIGATION; LIMITATIONS ON ISSUANCES OF EQUITY SECURITIES
FOLLOWING THE DISTRIBUTION

18
<PAGE>

that distributes shares of a subsidiary in a spin-off that is otherwise tax-
free will incur U.S. federal income tax liability if 50% or more, by vote or
value, of the capital stock of either the company making the distribution or
the subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. To ensure that
issuances of equity securities by the Company will not cause the Distribution
to be taxable to the Parent, the Tax Indemnification and Allocation Agreement
contains certain restrictions on issuances of equity securities of the Company
and its repurchase of equity securities until three years following the
Distribution Date (the "Restriction Period"). Until the second anniversary of
the Distribution Date, the Company cannot issue Common Stock and other equity
securities (including the shares sold in the Offering) that would cause the
number of shares of Common Stock to be distributed by the Parent in the
Distribution to constitute less than 60% of the outstanding shares of Common
Stock unless the Company first obtains either the consent of the Parent or a
favorable IRS letter ruling that the issuance will not affect the tax-free
status of the Distribution. After this period until the end of the third year
from the Distribution Date, the Company cannot issue additional shares of
Common Stock and other equity securities that, when combined with equity
securities sold in and after the Offering, would cause the number of shares of
Common Stock to be distributed by the Parent in the Distribution to constitute
less than 55% of the outstanding shares of Common Stock unless the Company
first obtains the consent of the Parent or a favorable IRS letter or opinion
of tax counsel that the issuance would not affect the tax-free status of the
Distribution. These restrictions on the issuance of equity securities may
impede the ability of the Company to raise necessary capital or to complete
acquisitions, if any, using equity securities. The foregoing prohibitions do
not apply to issuances of debt securities of the Company that are not
convertible into Common Stock or other equity securities. The same
requirements for an IRS ruling, consent of the Parent or an opinion of counsel
are applicable to any proposed repurchases of Common Stock during the
Restriction Period. In the event that the Company is required to indemnify and
reimburse the Parent for any tax liability incurred by the Parent arising out
of the Distribution, such indemnification and reimbursement would have a
material adverse effect on the business, results of operations and financial
condition of the Company. See "--Limited Ability to Issue Common Stock Prior
to Distribution," "Certain Transactions--Tax Indemnification and Allocation
Agreement" and "U.S. Federal Income Tax Consequences of the Distribution."

CONFLICTS OF INTEREST WITH THE PARENT

After the Offering Closing Date, none of the executive officers of the
Parent will be executive officers of the Company. One member of the Board will
be a member of the Parent's Board. In addition, certain executive officers,
directors and employees of the Company hold shares of Parent Common Stock and
options to acquire shares of Parent Common Stock. In particular, Mr. Frank F.
Khulusi, a director of the Company, is the Chairman of the Board of the Parent
and beneficially owns approximately 1.8 million shares of Parent Common Stock
constituting approximately 17.7% of the issued and outstanding Parent Common
Stock. Accordingly, such individuals may have conflicts of interest with
respect to certain decisions relative to business opportunities and similar
matters that may arise in the ordinary course of the business of the Parent or
the Company, including with respect to relationships between the Parent and
the Company under intercompany agreements and whether to complete the
Distribution. See "Certain Transactions." The Company and the Parent intend to
resolve such conflicts on a case-by-case basis. In that regard, certain of the
conflicts, if any, could be resolved in a manner adverse to the Company and
its stockholders, which would have a material adverse effect on the business,
results of operations and financial condition of the Company.

NO DUTY TO COMMUNICATE CORPORATE OPPORTUNITIES

From and after the Offering Closing Date, neither the Company nor the Parent
will have any duty to communicate or offer any corporate opportunities to the
other and may pursue or acquire any such opportunities for itself or direct
such opportunities to any other person. There can be no assurance that the
Parent's failure to communicate any corporate opportunity to the Company, the
Parent's pursuit of such opportunity for itself or the Parent's communication
of such corporate opportunity to a third party will not have a material
adverse affect on the Company's business, results of operations or financial
condition.

19
<PAGE>

LIMITED ABILITY TO ISSUE COMMON STOCK PRIOR TO DISTRIBUTION

In order for the Distribution to be tax-free to the Parent and the Parent's
stockholders, among various other requirements, the Parent must distribute to
the Parent's stockholders on the Distribution Date (a) stock of the Company
possessing at least 80% of the total combined voting power of all classes of
voting stock of the Company and (b) 80% of the total number of shares of each
class of non-voting stock of the Company (the "Required Distribution
Percentage"). If the Parent were not able to distribute to its stockholders
shares of stock of the Company constituting the Required Distribution
Percentage, the Distribution would not be tax-free and would not occur.
Accordingly, the Company will agree in the Separation and Distribution
Agreement (as defined below) not to issue additional shares of Common Stock,
or any other class of stock including preferred stock, without the consent of
the Parent if such issuance would, or could, dilute or otherwise reduce the
Parent's ownership of Common Stock, or any other such class of stock, below
the Required Distribution Percentage or otherwise prevent the Distribution
from receiving tax-free status. The Separation and Distribution Agreement will
terminate if the Distribution does not occur on or prior to December 31, 1999,
unless extended by the Parent and the Company. Prior to the Distribution Date,
these restrictions may impede the ability of the Company to issue equity
securities, including Common Stock, to raise necessary equity capital or to
complete acquisitions using equity securities, including Common Stock, as
acquisition currency, or to attract qualified persons to become employees,
officers and directors of the Company. See "Certain Transactions--Separation
and Distribution Agreement."

SHARES ELIGIBLE FOR FUTURE SALE

Subject to applicable law and to the contractual restriction with the
Underwriters described below, the Parent may sell any and all of the shares of
Common Stock it owns after completion of the Offering. The Separation and
Distribution Agreement will provide that the Parent, and certain holders of
more than 5% of Parent Common Stock, will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale shares of Common Stock held by them. See "Certain Transactions--
Separation and Distribution Agreement." In addition, the Parent may make
additional investments in the Company prior to the consummation of the
Offering. The planned Distribution would involve the distribution of an
aggregate of approximately 7.3 million shares of Common Stock to the
stockholders of the Parent in 1999 (assuming that no shares of Common Stock
are disposed of or acquired by the Parent between the Offering Closing Date
and the Distribution Date). See "Description of Capital Stock." Except for
shares held by affiliates of the Company, all of the shares of Common Stock to
be distributed to the Parent's stockholders in the Distribution will be
eligible for immediate resale in the public market. The Company is unable to
predict whether substantial amounts of Common Stock will be sold in the open
market in anticipation of, or following, the Distribution. Any sales of
substantial amounts of Common Stock in the public market, or the perception
that such sales might occur, whether as a result of the Distribution or
otherwise, could materially adversely affect the market price of the Common
Stock. The Company has agreed, for a period of 180 days after the date of this
Prospectus, and Messrs. Frank and Sam Khulusi have agreed, until 180 days
after the Distribution, not to offer or sell any shares of Common Stock,
subject to certain exceptions (including the Distribution), without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") on behalf of the Underwriters. See "Shares Eligible for
Future Sale."

ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

Certain provisions of Delaware law and the Company's Certificate of
Incorporation and Bylaws, each as amended on November 30, 1998 (the
"Certificate of Incorporation" and the "Bylaws," respectively), may have the
effect of delaying, deterring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved
by the Company's Board of Directors. Such provisions also may render the
removal of directors and management more difficult. Such provisions could
limit the price that certain investors might be willing to pay in the future
for shares of the Company's Common Stock. These provisions of Delaware law and
the Company's Certificate of Incorporation and Bylaws may also have the effect
of discouraging or preventing certain types of transactions involving an
actual or threatened change of control of the Company (including unsolicited
takeover attempts), even though such a transaction may offer the Company's
stockholders the opportunity to sell their stock at a price above the
prevailing market price. In addition, the

20
<PAGE>

Company's Board of Directors has the authority to issue up to five million
shares of undesignated preferred stock (the "Undesignated Preferred Stock")
and to determine the price, rights, preferences and privileges of those shares
without any further vote or actions by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Undesignated Preferred Stock that may be
issued in the future. The issuance of such shares of Undesignated Preferred
Stock, while potentially providing desirable flexibility in connection with
possible acquisitions and serving other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or may
discourage a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company. In addition, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law (the "DGCL"), which will prohibit the Company from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder unless the business combination is approved in a
prescribed manner. The application of Section 203 of the DGCL also could have
the effect of delaying or preventing a change of control of the Company. In
addition, the Company's Certificate of Incorporation will be amended prior to
the Offering Closing Date to provide that the Board of Directors will be
divided into three classes of directors serving staggered terms. The
classification provision could have the effect of discouraging a third party
from making a tender offer or otherwise attempting to gain control of the
Company. See "Description of Capital Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of shares of Common Stock in the Offering will incur immediate
and substantial dilution of $13.01 per share in the net tangible book value of
their purchased shares of Common Stock. See "Dilution." Investors may also
experience additional dilution as a result of shares of Common Stock being
issued in future business acquisitions and as a result of the issuance and
exercise of employee stock options or warrants. See "Shares Eligible for
Future Sale."

NO DIVIDENDS

Following the Offering Closing Date, the Company intends to retain all
earnings for the foreseeable future for use in the operation and expansion of
its business. Consequently, the Company does not anticipate paying any cash
dividends on its Common Stock to its stockholders for the foreseeable future.
In addition, it is probable that any debt financing agreements to be entered
into by the Company will contain restrictions on the Company's ability to
declare dividends. See "Dividend Policy."

ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for listing on the Nasdaq National
Market (subject to official notice of issuance), there can be no assurance
that an active trading market for the Common Stock will develop or be
sustained following the Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The initial public
offering price will be determined by negotiation among the Company and the
Underwriters based upon several factors and may not be indicative of future
market prices. The price at which the Common Stock will trade will depend upon
a number of factors, including, but not limited to, the Company's historical
and anticipated operating results, announcements by the Company or its
competitors, developments with respect to proprietary rights, changes in
financial estimates by securities analysts, adoption of new accounting
standards affecting the retail industry, conditions and trends in the
electronic commerce industry and general market and economic conditions, some
of which factors are beyond the Company's control. In addition, the stock
market has from time to time experienced extreme price and volume
fluctuations. These broad market fluctuations may adversely affect the market
price of the Common Stock. See "Underwriting."

YEAR 2000 RISK

21
<PAGE>

programmed to accept a two-digit code in date code fields. To correctly
identify the year 2000, a four-digit date code field will be required to be
what is commonly termed "year 2000 compliant."

The Company may realize exposure and risk if the systems for which it is
dependent upon to conduct day-to-day operations are not year 2000 compliant.
The potential areas of exposure include electronic data exchange systems
operated by third parties with whom the Company transacts business, certain
products purchased from third parties for resale, and computers, software,
telephone systems and other equipment used internally. To minimize the
potential adverse affects of the year 2000 problem, the Company has
established an internal project team comprised of all functional disciplines.
This project team has begun a three-phase process of identifying internal
systems (both information technology and non-information technology systems)
that are not year 2000 compliant, determining their significance in the
effective operation of the Company, and developing plans to resolve the issues
where necessary. The Company has been communicating with the suppliers and
others with whom it does business to coordinate year 2000 readiness. The
responses received by the Company to date have indicated that steps are
currently being undertaken to address this concern. However, if such third
parties are not able to make all systems year 2000 compliant, there could be a
material adverse impact on the Company.

Initial review of the Company's principal transaction processing software
through which nearly all of the Company's business is transacted has
determined it to be year 2000 compliant and, as such, the Company does not
anticipate any material adverse operational issues to arise. The Company plans
to complete the year 2000 compliance assessment by the end of the first
quarter 1999 and implement corrective solutions before the end of the third
quarter 1999. Although the Company historically has shared certain costs with
the Parent in connection with its year 2000 compliance project, management
currently estimates the costs attributable to the Company with respect to this
project to date total less than $10,000. Based on current estimates,
management expects that the Company's future costs in connection with its year
2000 compliance project will not exceed $300,000; however, future anticipated
costs are difficult to estimate with any certainty and may differ materially
from those currently projected based on the results of phase one of the
Company's year 2000 project. The anticipated costs associated with the
Company's year 2000 compliance program do not include time and costs that may
be incurred as a result of any potential failure of third parties to become
year 2000 compliant or costs to implement the Company's future contingency
plans. The Company has not yet determined a contingency plan in the event that
any non-compliant critical systems are not remedied by January 1, 2000, nor
has it formulated a timetable to create such contingency plan. Upon completion
of this project, if systems material to the Company's operation have not been
made year 2000 compliant, or if third parties fail to make their systems year
2000 compliant in a timely manner, the year 2000 issue could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

FORWARD-LOOKING STATEMENTS

The statements contained in this Prospectus that are not historical fact are
"forward-looking statements" which can be identified by the use of forward-
looking terminology such as "believes," "expects," "may," "will," "should" or
"anticipates," or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management cautions the reader that these forward-looking
statements, including the discussions of the Company's growth and operating
strategies and expectations concerning market position, future operations,
margins, revenue, profitability, liquidity and capital resources and other
matters contained in this Prospectus regarding matters that are not historical
facts, are only predictions. No assurance can be given that the future results
indicated, whether expressed or implied, will be achieved. While sometimes
presented with numerical specificity, these forward-looking statements are
based upon a variety of assumptions relating to the business of the Company,
which, although considered reasonable by the Company, may not be realized.
Because of the number and range of the assumptions underlying the Company's
projections and forward-looking statements, many of which are subject to
significant uncertainties and contingencies that are beyond the reasonable
control of the Company, some of the assumptions inevitably will not
materialize and unanticipated events and circumstances may occur

22
<PAGE>

subsequent to the date of this Prospectus. The forward-looking statements
contained herein are based on current expectations, and the Company assumes no
obligation to update this information. Therefore, the actual experience of the
Company and results achieved during the period covered by any particular
projections or forward-looking statements may differ substantially from those
projected. Consequently, the inclusion of projections and other forward-
looking statements should not be regarded as a representation by the Company
or any other person that these estimates and projections will be realized, and
actual results may vary materially. There can be no assurance that any of
these expectations will be realized or that any of the forward-looking
statements contained herein will prove to be accurate.

SEPARATION FROM THE PARENT

BACKGROUND OF THE SEPARATION AND DISTRIBUTION

The Parent has announced that, subject to certain conditions, the Parent
intends to consummate the Offering, to separate the Company, which owns and
operates the Parent's online auction business, from the Parent's other
operations and businesses and to distribute to its stockholders all of the
Common Stock owned by the Parent in no event prior to 180 days after
consummation of the Offering. See "Risk Factors--Risk of Noncompletion of a
Tax-Free Distribution." The Separation will establish the Company as a stand-
alone entity with objectives separate from those of the Parent. The Company
intends to focus its resources and management emphasis on the operations and
markets it views as critical to its long-term success as a stand-alone entity.
The Company and the Parent intend to enter into a Separation and Distribution
Agreement (the "Separation and Distribution Agreement") and certain other
agreements providing for the Offering, the Separation, the Distribution and
the provision by the Parent of certain interim services to the Company, and
addressing employee benefit arrangements, and tax and other matters. See
"Certain Transactions." On the Offering Closing Date, the Parent will own
approximately 82.3% of the outstanding Common Stock (80.1% if the Underwriters
exercise their over-allotment option in full).

Several business purposes underlie the proposed Distribution. The Company
desires to access the capital markets, and the Company and the Parent believe
that the raising of funds through consummation of the Offering provides the
most effective source of capital for the Company and is part of the initial
capitalization of the Company as a stand-alone entity. The Parent and the
Company believe that the Offering and the Distribution will provide each
entity with the most prudent capital structures to realize their respective
growth strategies as separate, stand-alone entities, based on the Company's
and the Parent's prospective capitalization and financing requirements,
acquisition strategies, working capital requirements, projected cash flows
from operations and desired credit ratings, respectively.

In addition to raising capital for the Company, the Company and the Parent
believe that the Distribution will enhance the Company's ability to implement
its growth and operating strategies. The Company believes that its future
growth would be enhanced if its management were compensated on a separate
basis from the Parent. The consummation of the Offering will better position
the Company to retain key employees by allowing such employees to participate
in the corporate growth of the Company as a stand-alone, publicly-traded
entity through stock options and other targeted incentives tied to the
performance of the Company. Similarly, the Parent believes that its future
growth would be enhanced if management of its remaining business segments were
more focused on such segments without also being responsible for the online
auction segment. Finally, upon completion of the Distribution, holders of
Parent Common Stock as of the record date for the Distribution will be
entitled to receive a dividend of Common Stock without the payment of further
consideration, although the Parent expects the market value of shares of
Parent Common Stock to diminish upon effecting the Distribution to reflect the
value (per share of Parent Common Stock) of the shares of Common Stock
distributed by the Parent.

The consummation of the Distribution will also remove current restrictions
on the Company's growth as a result of certain contractual restrictions of the
Parent that are applicable to the Parent and its subsidiaries. For example,
certain of the Parent's contractual relationships with manufacturers prevent
the Parent and its

23
<PAGE>

subsidiaries, including the Company, from selling such manufacturers'
computers and computer-related products at discounted prices, which has
prevented the Company from obtaining such products on a close-out or
refurbished basis and selling them in the Company's auctions. In addition,
under the Parent's contractual relationships with certain of its vendors,
neither the Parent nor its subsidiaries, including the Company, can sell the
vendor's products outside the U.S. As a result of the Distribution, the
Company would no longer be subject to these restrictions.

The Company believes that its capitalization after consummation of the
Offering will be sufficient to satisfy its future working capital, capital
expenditures and other obligations for at least the next 12 months. See "Risk
Factors--Future Capital Requirements; Need for Additional Capital; Absence of
Parent Funding."

CONDITIONS TO THE DISTRIBUTION

The Company has received the PwC Opinion to the effect that the Distribution
will qualify as a tax-free distribution for federal income tax purposes under
Section 355 of the Code, and will not result in recognition of any gain or
loss for federal income tax purposes to the Parent, the Company, or the
Parent's or the Company's respective stockholders. The Parent also may apply
for a Letter Ruling.

In accordance with the Separation and Distribution Agreement, completion of
the Distribution will be subject to the satisfaction, or waiver by the Parent
Board, of the following conditions: (i) the PwC Opinion shall have been
obtained, in form and substance satisfactory to the Parent, and be confirmed
at the time of Distribution; (ii) if the Parent decides to seek a Letter
Ruling, the Letter Ruling shall have been obtained and remain effective
consistent with the conclusions reached in the PwC Opinion, and such ruling
shall be in form and substance satisfactory to the Parent, in its sole
discretion; (iii) any material Governmental Approvals and Consents (as such
terms are defined in the Separation and Distribution Agreement) necessary to
consummate the Distribution shall have been obtained and shall be in full
force and effect; (iv) no order, injunction or decree issued by any court or
agency of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Distribution shall be in effect, and no
other event outside the control of the Parent shall have occurred or failed to
occur that prevents the consummation of the Distribution; and (v) no other
events or developments shall have occurred subsequent to the closing of the
Offering that, in the judgment of the Parent Board, would result in the
Distribution having a material adverse effect on the Parent or on the
stockholders of the Parent. The Parent Board will have the sole discretion to
determine the Distribution Date at any time commencing after the Offering
Closing Date but in no event prior to 180 days after consummation of the
Offering. The Parent has agreed to consummate the Distribution, subject to the
satisfaction of the conditions set forth above. The Parent may terminate the
obligation to consummate the Distribution if the Distribution has not occurred
by December 31, 1999, unless extended by the Parent and the Company. In
addition, the Separation and Distribution Agreement may be amended or
terminated at any time prior to the Distribution Date by the mutual consent of
the Company and the Parent. See "Risk Factors--Risk of Noncompletion of a Tax-
Free Distribution" and "Certain Transactions."

24
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the Offering, after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company, are estimated to be $21.0 million ($24.3 million if the
Underwriters exercise their over-allotment option in full). The Company
intends to use approximately $15 million of such proceeds for its advertising
and brand development expenditures and for development of the Company's
infrastructure in order to support growth. The balance of the proceeds will be
used for general corporate purposes, including working capital. The Company
may apply an undetermined portion of the net proceeds toward the acquisition
of complementary businesses. The Company currently has no agreements or
understandings with respect to any such acquisition. Pending application, the
net proceeds will be invested in short-term, investment-grade, interest-
bearing obligations.

DIVIDEND POLICY

After the Offering Closing Date, the Company does not intend to pay cash
dividends on the Common Stock for the foreseeable future because it intends to
retain all earnings for use in the operation and expansion of the Company's
business. Furthermore, the Company's ability to declare or pay dividends may
be limited in the future by the terms of any then-existing credit facilities
which may contain covenants which restrict the payment of cash dividends.

25
<PAGE>

CAPITALIZATION

The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1998 and (ii) capitalization as adjusted to give effect to
the application of the estimated net proceeds to the Company from the
Offering. See "Use of Proceeds" and "Description of Capital Stock." This table
should be read in conjunction with the financial statements and notes thereto
appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-----------------
AS
ACTUAL ADJUSTED
------- --------
(IN THOUSANDS)
<S> <C> <C>
Advances from the Parent.................................... $ 3,709 $ 3,709
Stockholders' equity (deficit) (1):
Preferred Stock, $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding.............. -- --
Common Stock, $.001 par value; 20,000,000 shares
authorized; 7,329,883 shares issued and outstanding,
actual; 8,909,883 shares issued and outstanding, as
adjusted................................................. 1 9
Additional paid-in capital................................ -- 21,033
Accumulated deficit....................................... (3,293) (3,293)
------- -------
Total stockholders' equity (deficit).................... (3,292) 17,749
------- -------
Total capitalization.................................... $ 417 $21,458
======= =======
</TABLE>
- --------
(1) Excludes employee and director stock options of the Company to purchase an
aggregate of 869,690 shares of Common Stock of the Company outstanding as
of September 30, 1998 at a weighted average exercise price of $.71 per
share. All of the options granted are exercisable only in the event of an
initial public offering or a Sale or Merger (as defined in the option
agreement). The terms of the options provide for vesting, generally over a
five-year period, except for options to purchase 36,649 shares of Common
Stock which will vest on the Closing Date. However, assuming all options
are exercised, additional dilution to new stockholders would be
approximately $.11 per share. See "Management--Stock Options" and "Certain
Transactions--Tax Indemnification and Allocation Agreement." In addition,
upon completion of the Distribution, certain stock options exercisable for
shares of Parent Common Stock will be converted into stock options
exercisable for shares of Parent Common Stock and Common Stock. It is not
possible to specify how many shares of Common Stock will be subject to
such stock options, as it is not known how many stock options to purchase
Parent Common Stock will remain unexercised and outstanding by the record
date for the Distribution. However, based on the number of options to
purchase Parent Common Stock outstanding on September 30, 1998, options to
purchase 854,893 shares of Parent Common Stock would become options to
purchase 854,893 shares of Parent Common Stock and 612,017 shares of
Common Stock at an estimated weighted average exercise price of $4.57 per
share, based on the market price of Parent Common Stock at September 30,
1998 ($8.25) and the initial public offering price of the Common Stock. If
these options are exercised, further dilution to new investors will occur.
As a result of the Distribution, any options to purchase Parent Common
Stock issued after the Offering Closing Date will not be convertible into
options to purchase Common Stock. The Company may also issue additional
shares of Common Stock to effect future business acquisitions or upon
exercise of future stock option grants or equity awards, which could also
result in additional dilution to then-existing stockholders. See "Risk
Factors--Limited Ability to Issue Common Stock Prior to Distribution,"
"Management--Stock Options" and "Certain Transactions--Separation and
Distribution Agreement."

26
<PAGE>

DILUTION

The net tangible book value (deficit) of the Company's Common Stock as of
September 30, 1998 was ($3.3 million), or ($.45) net per share of Common
Stock. Net tangible book (deficit) value per share represents the amount of
the Company's total tangible assets less its total liabilities, divided by the
total number of shares of Common Stock outstanding.

After giving effect to the Offering and the receipt of approximately $21.0
million of net proceeds from the Offering, the pro forma net tangible book
value of the Common Stock as of September 30, 1998 would have been
approximately $17.7 million, or $1.99 per share. This amount represents an
immediate increase in net tangible book value of $2.44 per share to the
existing stockholder and an immediate dilution in net tangible book value of
$13.01 per share to purchasers of Common Stock in the Offering, as illustrated
in the following table:

<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $15.00
Net tangible book value (deficit) per share as of September
30, 1998.................................................... $(.45)
Increase per share attributable to new investors............. 2.44
-----
Pro forma net tangible book value per share after the Offering. 1.99
------
Net tangible book value dilution per share to new investors.... $13.01
======
</TABLE>

The following table summarizes on a pro forma basis as of September 30,
1998, the differences between the existing stockholder and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share
paid before deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholder
(1).................... 7,329,883 82.3% $ 1,000 -- % $.0001
New investors........... 1,580,000 17.7 23,700,000 100.0 $15.00
--------- ----- ----------- -----
Total................. 8,909,883 100.0% $23,701,000 100.0%
========= ===== =========== =====
</TABLE>
- -------
(1) If the Underwriters' over-allotment option is exercised in full, sales by
the Company in the Offering will reduce the number of shares of Common
Stock held by the existing stockholder to approximately 80.1% of the total
shares of Common Stock outstanding after the Offering and will increase
the number of shares held by new investors to 1,817,000, or approximately
19.9% of the total shares of Common Stock outstanding after the Offering.
See "Underwriting."

The foregoing table excludes employee and director stock options of the
Company to purchase an aggregate of 869,690 shares of Common Stock of the
Company outstanding as of September 30, 1998 at a weighted average exercise
price of $.71 per share. All of the options granted are exercisable only in
the event of an initial public offering or a Sale or Merger (each as defined
in the option agreement). The terms of the options provide for vesting,
generally over a five-year period, except for options to purchase 36,649
shares of Common Stock which will vest on the Offering Closing Date. However,
assuming all options are exercised, additional dilution to new stockholders
would be approximately $.11 per share. In addition, upon completion of the
Distribution, certain stock options exercisable for shares of Parent Common
Stock will be converted into stock options exercisable for shares of Parent
Common Stock and Common Stock. It is not possible to specify how many shares
of Common Stock will be subject to such stock options, as it is not known how
many stock options to purchase Parent Common Stock will remain unexercised and
outstanding by the record date for the Distribution. However, based on the
number of options to purchase Parent Common Stock outstanding on September 30,
1998, options to purchase 854,893 shares of Parent Common Stock would become
options to purchase 854,893 shares of Parent Common Stock and 612,017 shares
of Common Stock at an estimated weighted average exercise price of $4.57 per
share, based on the market price of Parent Common Stock at September 30, 1998
($8.25) and the initial public offering price of the Common Stock. If these
options are exercised, further dilution to new investors will occur. As a
result of the Distribution, any options to purchase Parent

27
<PAGE>

Common Stock issued after the Offering Closing Date will not be convertible
into options to purchase Common Stock. The Company may also issue additional
shares of Common Stock to effect future business acquisitions or upon exercise
of future stock option grants or equity awards, which could also result in
additional dilution to then-existing stockholders. See "Risk Factors--Limited
Ability to Issue Common Stock Prior to Distribution," "Management--Stock
Options" and "Certain Transactions--Separation and Distribution Agreement."

28
<PAGE>

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE DATA)

The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in the Prospectus. The statement of operations data for the
period from Inception through December 31, 1997 and for the nine months ended
September 30, 1998 and the balance sheet data as of December 31, 1997 and
September 30, 1998 are derived from financial statements of the Company that
have been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this Prospectus. The data for the interim periods is not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.

<TABLE>
<CAPTION>
INCEPTION
(APRIL 1, 1997) TO NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------ ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $ 9 $ 24,125
Cost of revenues...................... 8 22,192
--------- ---------
Gross profit.......................... 1 1,933
Operating expenses:
Sales and marketing................. 10 1,353
Technology and development.......... 66 694
General and administrative.......... 212 2,707
--------- ---------
Total operating expenses............ 288 4,754
--------- ---------
Loss from operations.................. (287) (2,821)
Interest expense...................... 26 159
--------- ---------
Loss before income taxes.............. (313) (2,980)
Provision for income taxes............ -- --
--------- ---------
Net loss.............................. $ (313) $ (2,980)
========= =========
Basic and diluted net loss per share
(1).................................. $ (0.04) $ (0.41)
========= =========
Shares used to compute basic and
diluted net loss per share (1)....... 7,329,883 7,329,883
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................... $ -- $ --
Working capital................................. 31 (624)
Total assets.................................... 358 6,048
Advances from the Parent........................ 670 3,709
Total stockholder's deficit..................... (312) (3,292)
</TABLE>
- --------
(1) See Notes 1 and 7 of notes to the financial statements for an explanation
of the number of shares used in computing the amount of basic and diluted
net loss per common share. Additionally, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview" and
Note 5 of notes to the financial statements for an explanation of the
compensation expense the Company will be required to incur in connection
with certain employee and director stock options granted prior to the
Offering, including a non-cash charge which the Company expects to incur
in the fourth quarter of 1998.

The historical results of operations of the Company reflect an allocation of
a portion of the Parent's corporate general and administrative costs.
Following the Offering Closing Date, various corporate services will be
provided by the Parent to the Company based upon fees payable by the Company
to the Parent under a services agreement to be entered into between the
Company and the Parent. No pro forma adjustment has been made to reflect such
fees in lieu of the corporate general and administrative cost allocation, as
the difference would not be material. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."

29
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial
statements and notes thereto of the Company, a wholly-owned subsidiary of the
Parent. The historical financial information included in this Prospectus does
not necessarily reflect what the Company's financial condition and results of
operations would have been had the Company been operated as an independent
entity during the periods presented.

OVERVIEW

uBid is engaged in the retail sale of excess merchandise, including close-
out and refurbished products, utilizing an interactive online auction. The
Company currently specializes in selling brand name computer, consumer
electronics and home and leisure products over the World Wide Web to consumers
and small and medium-sized businesses. The Company was incorporated in
September 1997. Prior to the incorporation of the Company, the Parent,
beginning on April 1, 1997, funded certain startup and development activities.
During 1997, the Company's operating activities related primarily to
recruiting personnel, developing the computer infrastructure necessary to
conduct live auctions on the Internet, building an operating infrastructure
and establishing vendor relationships. From its first auction in December 1997
through September 30, 1998, the Company auctioned over 138,000 merchandise
units, registered over 120,000 users and recorded more than eight million
visits to its Website. In the month of September alone, the Company auctioned
approximately 38,000 merchandise units, registered over 21,000 users and
recorded approximately 1.9 million visits to its Website. The Company's net
loss of $2,980,000 for the first nine months of 1998 was principally due to
investments in infrastructure as the Company commenced sales operations. The
Company expects to continue to experience losses for the foreseeable future as
it continues to make significant investments in building its customer base and
operating infrastructure.

Prior to the Offering Closing Date, the Company has been a wholly-owned
subsidiary of the Parent. The Company was set up as a subsidiary with the
intention to function independently from the Parent. To date, the Company has
received services provided by the Parent, including administrative
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing. In consideration for these
services, the Parent has charged the Company its costs related to these
services. Management believes that the amounts charged to the Company have
been no less favorable to the Company than costs the Company would have
incurred to obtain such services on its own or from unaffiliated third
parties. It is estimated that the Company will need to spend approximately
$1,250,000 in capital expenditures to establish itself as an independent
company. These expenditures will include warehouse and distribution equipment,
hardware and software for computer systems and furniture and fixtures. The
Company expects to fund its purchase of such capital equipment with working
capital (including the proceeds from the Offering).

Due to its dependence on the Parent for funding and certain services, the
Company's ability to grow has been constrained by the allocation of resources
made by the Parent. The Company's growth has also been constrained by its
inability to sell and ship products internationally due to contractual
restraints on the Parent and because it has been precluded from selling
certain lines of merchandise as a result of agreements to which the Parent is
subject.

The Company either purchases the merchandise outright ("purchased
inventory") or acquires the rights to sell the merchandise under consignment-
type relationships with vendors on a revenue sharing basis ("revenue
sharing"). In the case where the Company purchases the merchandise outright,
the Company bears both inventory and credit risk. When merchandise is acquired
on a revenue sharing basis, title to the inventory passes to the Company only
after the sale, the Company invoices the customer and bears the credit and
return risks. Under both types of transactions (purchased inventory or revenue
sharing), the Company recognizes the full sales amount as revenue upon
verification of the credit card transaction authorization and shipment of the
merchandise. In instances where the credit card authorization has been
received but the merchandise has not been shipped, the Company defers revenue
recognition until the merchandise is shipped. In the next three months, the
Company expects to begin offering credit to certain of its business customers
that have been pre-qualified as having appropriate credit ratings, and
accordingly, the Company will be required to manage the associated risks of
accounts receivable expansion and collection.

30
<PAGE>

The Company has an extremely limited operating history upon which to base an
evaluation of the Company and its business and prospects. The Company's
business and prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as electronic commerce. Although the Company has experienced significant
growth in revenue in the first nine months of operations, there can be no
assurance that the Company's revenue will continue at its current level or
rate of growth. The Company's revenue depends substantially upon the level of
auction activity on its Website. In addition, the Company has relatively low
gross margins and plans to increase its operating expenses significantly by
increasing the size of its staff, expanding its marketing efforts, purchasing
larger volumes of merchandise to be sold at auction and building a larger
infrastructure to support planned growth. To the extent that increases in
operating expenses precede or are not subsequently followed by increased
revenue, the Company's business, results of operations and financial condition
will be materially adversely affected. See "Risk Factors--Extremely Limited
Operating History."

Beginning in October 1997, the Company granted stock options to attract and
retain key employees. These options were exercisable only in the event of a
successful initial public offering or sale of the Company. Accordingly, the
Company will record a non-cash charge to compensation in the quarter in which
the Offering is consummated. The Company expects to record a non-cash
compensation charge of approximately $13.3 million over the five-year vesting
period of such options. Based on those options that vest through November 16,
1998, the Company expects to record a compensation expense of approximately
$5.9 million in the fourth quarter of 1998. See Note 5 to the financial
statements and "Risk Factors--History of Operating Losses; Accumulated
Deficits; Anticipated Losses and Negative Cash Flow."

RESULTS OF OPERATIONS

Net Revenues. Net revenues are comprised of gross merchandise sales plus
shipping income net of returns. The Company held its first auction the last
week of December 1997. For the nine months ended September 30, 1998, net
revenues were $24,125,000. Net revenues grew from $157,000 in the month of
January 1998 to $5,819,000 in September 1998. Growth in net revenues was due
to significant growth in the Company's customer base, an expanded selection of
merchandise offered and an increase in the number of auctions per week. The
Company intends to increase traffic to its Website, further allowing it to
broaden its customer base, increase the number of auctions per week and expand
the selection and number of items offered.

Gross Profits. Gross profits are comprised of net revenues minus the cost of
merchandise, shipping and shipping-related expenses, net of returns. Gross
profits for the nine months ended September 30, 1998 were $1,933,000. Gross
profits increased in the first nine months primarily due to the increase in
revenues. As a percent of net revenues, the Company's gross margin was 8.0%
for the first nine months of 1998. Gross margin is affected by the Company's
ability to cost-effectively source merchandise and attract sufficient traffic
to the Company's Website to achieve a favorable balance between the number of
bidders and the amount of merchandise auctioned. Merchandise acquired from the
Parent represented over 90% of the merchandise sold in the first two months of
operations, decreased to approximately 30% in March and April 1998, and
represented less than 15% since May 1998.

Operating Expenses. The Company's operating expenses have increased
significantly since the Company's Inception. This trend is expected to
continue as the Company continues to expand its operations to increase its
customer base, enhance its brand name and increase its market share, all of
which will require significant increases in marketing and advertising,
additional personnel, enhancements to its Website and further development of
its infrastructure. To date, the Parent has provided administrative
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing services to the Company. The
cost of these services represented 72% and 30% of the Company's total
operating expenses from Inception to December 31, 1997 and for the first nine
months of 1998, respectively. It is expected that these costs will continue to
decline as a percent of total operating expenses and in absolute dollars after
the Offering.

31
<PAGE>

Sales and Marketing. Sales and marketing expenses consist primarily of
advertising and promotional expenditures, as well as payroll and related
expenses for sales and marketing personnel. Sales and marketing expenses were
$10,000 and $1,353,000 from Inception to December 31, 1997 and for the first
nine months of 1998, respectively. Sales and marketing expenses as a percent
of net revenues were 5.6% for the first nine months of 1998. These expenses
have increased significantly each month of operations due to increasing
advertising expenditures and personnel additions. The Company expects sales
and marketing expenses to increase significantly in absolute dollars as it
endeavors to increase its customer base. The Company has established
relationships with a number of online companies, such as AOL, CNET and Wired
Digital, to increase its access to online customers and build brand
recognition.

Technology and Development. Technology and development expenses consist
primarily of payroll and related expenses for systems personnel who develop
the Company's Website and related systems as well as charges from the Parent
relating to hosting of the Company's Website and Internet/telecom operations.
Technology and development expenses were $66,000 and $694,000 from Inception
to December 31, 1997 and for the first nine months of 1998. Technology and
development costs as a percent of net revenues were 2.9% for the first nine
months of 1998. In addition to the expenses in 1997, the Company capitalized
$267,000 relating to the development of the core software for the Website.
These costs will be amortized over three years. The increase in technology and
development expenses during 1998 was primarily attributable to increased
staffing and associated costs relating to enhancing the features and
functionality of the Company's Website and related systems. The Company
accounts for software development costs in accordance with SOP 98-1.
Accordingly, internal and external costs incurred to develop internal-use
computer software are expensed during the preliminary project stage and
capitalized during the application development stage and amortized over
three years. The Parent has been responsible for hosting the Company's Website
and for Internet/telecom operations. The Parent has charged the Company rates
that are no less favorable than that which could be obtained from a third
party.

General and Administrative. General and administrative expenses consist
primarily of credit card processing, payroll and related expenses, warehousing
and distribution, merchandising, customer service, accounting and
administration, executive and other general corporate expenses. General and
administrative expenses were $212,000 and $2,707,000 for the period from
Inception to December 31, 1997 and for the first nine months of 1998,
respectively. General and administrative expenses as a percent of net revenues
were 11.2% for the first nine months of 1998. The Parent supplied general and
administrative services for warehousing and distribution (through June 1998),
credit card processing, accounting and benefits administration. Although the
Parent will continue to supply certain general and administrative services to
the Company pursuant to the Separation and Distribution Agreement, the current
warehousing and distribution services conducted by the Parent were assumed by
the Company in July 1998 pursuant to a sublease agreement between the Company
and the Parent. The Parent charged the Company rates that were no less
favorable than what a third party would have charged. General and
administrative expenses have increased during 1998 primarily due to hiring
additional personnel and related costs to support increased sales such as
credit card processing and distribution costs. The Company expects general and
administrative expenses to increase in absolute dollars in the future as the
Company expands its operations.

Income Taxes. The Company records its income tax provision on a separate
return basis. The Company had a net loss since Inception in 1997 and expects
to incur losses for the forseeable future. No benefit for income taxes was
provided in 1997 or 1998 due to the uncertainty of realization of these
benefits in future years.

Net Loss. Based on the foregoing information, the Company had a net loss of
$313,000 and $2,980,000 for the period from Inception to December 31, 1997 and
for the nine months ended September 30, 1998, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since Inception, the Company has financed its operations with advances from
the Parent and cash flow from operations. Net cash used in operating
activities were $340,000 and $2,224,000 for the period from Inception to

32
<PAGE>

December 31, 1997 and for the first nine months of 1998, respectively. For
1997, the net cash used in operating activities was primarily attributable to
the net loss of $313,000. For the first nine months of 1998, the net cash used
in operating activities was primarily due to the net loss of $2,980,000, an
increase in accounts receivable of $490,000, a net increase in inventory of
$4,496,000 partially offset by an increase in accounts payable of $4,760,000
and various accrued expenses of $871,000.

Cash flows used in investing activities were $331,000 and $75,000 for 1997
and the first nine months of 1998, respectively, for the capitalization of
software development. Total net cash used by the Company, which was advanced
by the Parent, was $670,000 and $3,038,000 for 1997 and the first nine months
of 1998, respectively.

The Company anticipates that it will have negative cash flows for the
foreseeable future. The Parent plans to advance the Company cash for its
operations until the consummation of the Offering. These advances bear
interest at the prime interest rate, which was 8.5% from Inception through
December 31, 1997 and the first nine months of 1998. Interest expense was
$26,000 and $159,000 for 1997 and the first nine months of 1998, respectively.
Net proceeds from the Offering will be used for working capital needs to
include advertising and brand development for growth, as well as development
of the Company's infrastructure. It is estimated that the Company will need to
spend approximately $1,250,000 in capital expenditures to establish itself as
an independent company. These expenditures will include warehouse and
distribution equipment, hardware and software for computer systems and
furniture and fixtures. The Company expects to fund its purchase of such
capital equipment with working capital (including the proceeds from the
Offering).

The Company believes that the net proceeds from the Offering and cash flow
from operations will satisfy the Company's working capital and capital
expenditure requirements for at least the next 12 months, although the Company
may seek to raise additional capital during that period. There can be no
assurance the Company will not require additional funds prior to the
expiration of such 12 month period. Even if such additional funds are not
required, the Company may seek additional equity or debt financing. There can
be no assurance that such financing will be available on acceptable terms, if
at all, or that such financing will not be dilutive to the Company's
stockholders.

YEAR 2000 SYSTEMS COSTS

Computer systems, software packages, and microprocessor dependent equipment
may cease to function or generate erroneous data when the year 2000 arrives.
The problem affects those systems or products that are programmed to accept a
two-digit code in date code fields. To correctly identify the year 2000, a
four-digit date code field will be required to be what is commonly termed
"year 2000 compliant."

33
<PAGE>

compliance assessment by the end of the first quarter 1999 and implement
corrective solutions before the end of the third quarter 1999. Although the
Company historically has shared certain costs with the Parent in connection
with its year 2000 compliance project, management currently estimates the
costs attributable to the Company with respect to this project to date total
less than $10,000. Based on current estimates, management expects that the
Company's future costs in connection with its year 2000 compliance project
will not exceed $300,000; however, future anticipated costs are difficult to
estimate with any certainty and may differ materially from those currently
projected based on the results of phase one of the Company's year 2000
project. The anticipated costs associated with the Company's year 2000
compliance program do not include time and costs that may be incurred as a
result of any potential failure of third parties to become year 2000 compliant
or costs to implement the Company's future contingency plans. The Company has
not yet determined a contingency plan in the event that any non-compliant
critical systems are not remedied by January 1, 2000, nor has it formulated a
timetable to create such contingency plan. Upon completion of this project, if
systems material to the Company's operations have not been made year 2000
compliant, or if third parties fail to make their systems year 2000 compliant
in a timely manner, the year 2000 issue could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

34
<PAGE>

BUSINESS

THE COMPANY

uBid operates an online auction for excess merchandise, offering close-out
and refurbished products to consumers and small to medium-sized businesses.
The Company believes that its online auction represents an exciting sales
format for users that leverages the interactive nature of the Internet. The
Company's Internet auctions feature a rotating selection of brand name
computer, consumer electronics and home and leisure products which typically
sell at significant discounts to prices found at traditional retailers. uBid
currently runs auctions seven days a week, offering on the average over 1,000
total items in each of its auctions. From its first auction in December 1997
through September 30, 1998, the Company auctioned over 138,000 merchandise
units, registered over 120,000 users and recorded more than eight million
visits to its Website. In the month of September alone, the Company auctioned
approximately 38,000 merchandise units, registered over 21,000 users and
recorded approximately 1.9 million visits to its Website.

The Company operates in the rapidly growing Internet commerce industry.
Jupiter Communications estimates that U.S. retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to
$37.5 billion in 2002. The single largest online retail category in the U.S.
is projected to be computers and consumer electronics, which is forecast to
grow from $836 million in 1997 to $10.5 billion by the year 2002. The personal
computer and consumer electronics markets are characterized by significant
quantities of excess merchandise due to extremely short product life cycles
and the prevalence of returned items through the consumer retail channel.
Because of the highly fragmented and relatively undeveloped liquidator
channel, prices received by vendors for excess goods tend to be highly
variable. The Company estimates that the value of such products exceeded $4
billion in 1997 in the U.S. alone.

The Company has designed its online auctions to offer a superior customer
experience and to encourage repeat visits by customers and potential
customers. The Company believes it offers a consistently superior experience
to its customers through an entertaining and fast auction process, tight
control of the order process and a high level of customer support.
Approximately 90% of the products shipped from the Company's warehouse are
shipped the next business day after an auction closes. In addition, uBid has
established multiple channels for communicating with customers before and
after the sale, including telephone, e-mail and online support. The Company
has also incorporated other features to encourage repeat visits, including a
personalized page with a user's bidding history. Repeat customers accounted
for approximately 68% of customer orders for the three months ended September
30, 1998.

35
<PAGE>

increase points of access by establishing relationships with other online
companies similar to its existing relationships with AOL, CNET and Wired
Digital.

The Company obtains merchandise directly from computer, consumer electronics
and home and leisure products manufacturers and indirectly through other
vendors, such as retailers, distributors and Fortune 1000 companies.
Currently, this merchandise is sourced from over 100 vendors. uBid's
merchandise has included brands such as AST, AT&T, Aiwa, Apple, Canon, Casio,
Compaq, Dell, Gateway, Hewlett-Packard, IBM, JVC, Lexmark, Micron, NEC,
Panasonic, Seagate, Sony, Toshiba and Uniden.

INDUSTRY BACKGROUND

Growth of the Internet and the Web

The Internet and the Web are experiencing dramatic growth in terms of the
number of Web users. International Data Corporation ("IDC") estimates that at
the end of 1997 there were over 38 million Web users in the United States and
that by the end of 2002 the number of Web users in the United States will
increase to over 135 million. In addition, Web users are spending an
increasing amount of time on the Web, and a 1997 report issued by the U.S.
Department of Commerce contains an estimate that the overall traffic on the
Internet is doubling every 100 days. The growth in the number of Web users and
the amount of time users spend on the Web is being driven by the increasing
importance of the Internet as a communications medium and an information
resource and a sales and distribution channel.

Growth of Online Commerce

The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers and businesses with a broad selection, increased pricing
power and unparalleled convenience. As a result, a growing number of parties
are transacting business on the Web, including trading securities, buying
consumer goods, paying bills and purchasing airline tickets. In addition, IDC
estimates that the percentage of U.S. Internet users buying goods and services
on the Internet is projected to grow from approximately 33% in December 1997
to 48% in December 2002. Additionally, Jupiter Communications estimates that
U.S. retail consumer purchases of goods and services over the Internet will
increase from $2.6 billion in 1997 to $37.5 billion in 2002. The single
largest online retail category is projected to be computers and consumer
electronics, which is forecast to grow from $836 million in 1997 to $10.5
billion by the year 2002 in the U.S. alone.

Market for Excess Computer Products and Consumer Electronics

Each year, vendors of computer products and consumer electronics, including
manufacturers, distributors, resellers and retailers, dispose of significant
volumes of excess merchandise, including close-out and refurbished
merchandise. Close-out merchandise includes overstocked or slow-moving new
products that have or will shortly become previous generation, typically due
to a change in selling seasons or the introduction of next generation software
or hardware. Refurbished products include products returned by the consumer to
the retailer or manufacturer. Refurbished products typically require a nominal
amount of service, such as minor repairs, cleaning and repackaging, and
installation of current versions of leading software prior to being sold as
refurbished goods.

The disposal of excess goods represents a substantial burden on many
vendors. Excess goods are currently sold through auction houses, catalogs,
company stores or "outlets," resellers and specialized retailers, as well as
large superstores and mass merchants that are not committed to the resale of
these goods and generally sell them as a supplementary product line or "loss
leader." Prices received by vendors for excess goods tend to be highly
variable and subject to negotiation based on quantity, age and condition of
the merchandise. In addition, since vendors lack control over product
placement these sales channels may compete with the vendor's more profitable,
primary sales channels.

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The personal computer and consumer electronics markets are characterized by
significant quantities of close-out and refurbished merchandise due to
extremely short product life cycles and the prevalence of returned items
through the consumer retail channel. The U.S. end market for computer hardware
and peripherals is estimated by IDC to grow from approximately $86.3 billion
in 1997 to approximately $112.7 billion in 2001. According to IDC, in the
United States, the total market for personal computers alone was estimated to
be greater than $70 billion in 1997. The Company estimates that the portion of
this market that became close-out and refurbished goods exceeded $4 billion in
1997 in the U.S. alone. The Company believes that vendors will look favorably
upon a distribution channel that enables them to dispose of significant
quantities of merchandise quickly and at the best prices possible, without
affecting their traditional sales channels.

THE uBID SOLUTION

The Company believes that its online marketplace represents an exciting
sales format for users that leverages the interactive nature of the Internet.
The Company's Internet auctions provide vendors with an efficient and
economical channel for disposing of excess merchandise and provide consumers
and small and medium-sized businesses with a convenient method for obtaining
such products at substantial savings.

VENDOR BENEFITS. The Company's online auctions provide manufacturers with an
ideal distribution channel for unpredictable, odd-lot quantities of close-out
and refurbished goods. The frequency of the Company's auctions and its ability
to continuously add new items allow vendors to dispose of inventory quickly to
minimize the risk of price erosion. In addition, online sales allow vendors to
liquidate excess merchandise directly to a nationwide audience, without
cannibalizing their primary distribution channels.

CUSTOMER BENEFITS. uBid offers customers a unique retail experience--the
opportunity to set their own prices on popular, brand name products with the
convenience of shopping 24 hours a day, seven days a week. With an average of
over 1,000 total items available in each auction, the Company's broad
selection of goods also sells at significant discounts to prices found at
traditional retailers. The element of gamesmanship, combined with an ever-
changing merchandise mix, entices customers to participate in the auction in
hopes of "hitting the jackpot" and winning a bargain.

BUSINESS STRATEGY

The Company's objective is to become the Internet auction site of choice for
vendors and consumers. The Company intends to achieve this objective by
pursuing the following key strategies:

. INCREASE BRAND AWARENESS. The Company operates in a market in which a
strong brand is critical to differentiating itself and attracting a high
level of vendor awareness and customer traffic. Accordingly, the
Company's strategy is to aggressively increase its visibility and brand
recognition through a variety of marketing and promotional techniques.
Specifically, the Company intends to increase points of access by
forming relationships with, and advertising on, leading Websites, such
as the Company's existing arrangements with AOL, CNET and Wired Digital.
Premier positioning on these sites not only drives traffic, but also
gives uBid credibility to users and vendors who are unfamiliar with the
Company. The Company also reinforces the uBid brand in users' minds by
employing consistent branding from the design of its Website to use of
distinctive uBid packaging.

. PROMOTE REPEAT VISITS. The Company has designed its Website to encourage
repeat visits by customers and potential customers, since each return
visit represents another selling opportunity for uBid. The Company
believes that its auction format and Website encourage bidders to return
on a frequent basis to determine the status of their bids relative to
others and ultimately to find out if they've won their bids for
merchandise. The regular rotation of merchandise also encourages
customers to revisit the site frequently. In addition, the Company
believes that its "My Page" feature, which allows a customer to track
his or her complete bidding history and quickly update customer
information, increases user loyalty. Repeat customers accounted for
approximately 68% of customer orders for the three months ended
September 30, 1998.

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. OFFER A SUPERIOR CUSTOMER EXPERIENCE. The Company believes it offers a
consistently superior experience to its customers through an
entertaining and fast auction process, tight control of the order
process and a high level of customer support. Every order is tracked at
each step in the process, from order placement to shipment. As a result
of uBid's strict inventory and shipping standards, approximately 90% of
products shipped from the Company's warehouse are shipped the next
business day after an auction closes, compared to competitors who take
up to three weeks to ship products from a variety of third-party sites
across the country.

Because the Company believes that customer support is an essential
component of the shopping experience and leads to increased customer
loyalty, uBid has established multiple channels for communicating with
its customers before and after the sale, including telephone, e-mail and
online support. In addition, the Company's automated systems continually
monitor and measure its customer service response times to ensure user
satisfaction.

. CONTINUE TO EMPLOY SOPHISTICATED MERCHANDISING TECHNIQUES. The Company's
sophisticated auction management methodology capitalizes on the
Company's direct marketing and merchandising expertise to help predict
the level of customer traffic to the Website, the appropriate product
mix of each auction and the ultimate price realized on each product. The
auction management model allows the Company to forecast the number of
visitors that will be derived from the Company's marketing and
advertising efforts and to maximize the flow of these visitors to the
site. Additionally, the model allows the Company to capture detailed
information concerning where, when, how and to whom product is sold and
shipped, helping the Company to predict customer preferences going
forward. The auction merchandising model allows the Company to maximize
revenues on products put into auction, by using a sophisticated
statistical software package to project the price at which each product
will ultimately be sold to consumers based on current traffic and
demand, and by determining what price to purchase products from over 100
vendors, the product mix, the number of products the Company should
auction on a given day to enable it to maximize its margins, and the
appropriate "add-on" and straight-sale merchandising opportunities.

. DEVELOP NEW REVENUE OPPORTUNITIES. The Company believes that significant
opportunities exist to develop new revenue opportunities by expanding
its lines of merchandise. Specifically, the Company expects to expand
its product mix by partnering with market leaders in various categories
that are well suited for the Company's online auction format. Although
the Company has focused primarily on the sale of computer products in an
effort to target and attract the "early adopters," as the Internet grows
and develops, the Company believes a broad array of categories of
merchandise can be sold effectively through its online auction format,
including any overstock products, limited source products and commodity-
type products for which pricing is highly competitive. In particular,
the Company has recently begun selling home and leisure products, such
as eyewear, breadmakers and cooktop appliances.

. INCREASE REVENUE SHARING ARRANGEMENTS WITH VENDORS. In order to reduce
the level of principal risk when the Company purchases products from
vendors for resale, the Company has entered into a number of revenue
sharing arrangements with vendors to split the sales proceeds on an
agreed-upon percentage basis. The Company believes these revenue sharing
arrangements provide margin upside for the vendors while also
guaranteeing gross margin percentage for the Company. As of
September 30, 1998, the Company had entered into 28 of these revenue
sharing agreements with vendors and expects to increase the number over
time.

THE uBID AUCTION

The Company has designed its attractive, fast, and easy-to-use Website to
provide a compelling shopping experience for the user through an interactive
auction format. Customers enter the auction at the uBid home page, which
displays a list of product categories and sub-categories and showcases the
auction's "best deals." Within

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a specific sub-category, uBid auctions a number of identical items at the same
time. The minimum opening bid for each item is generally $7. The product page
for each item features a concise product description, full-color image, and
detailed technical specifications. In addition, a table lists the quantity
available, the bid range, the minimum incremental bid, the current winning
bidders and the amount of their bids and the time of auction close.

To participate in the auction, a first-time bidder must complete the simple
electronic registration form found on the Website. The bidder is then given an
identification number and chooses a password. Once registered, the customer
can bid and buy at will in the same or future auctions. After a customer bids
on a product, the corresponding bidder list is instantly updated to reflect
the bid and the customer's new position in the list of bidders. At the
customer's option, he or she may elect to receive an e-mail when outbid or to
use agent bidding to automatically increase the bid to a predetermined maximum
dollar amount. These functions increase the likelihood that the user will
place an additional bid.

When the auction closes, the highest bidders win the available inventory at
their actual bid prices. Each winning bidder may pay a price that is different
from the prices paid by other winning bidders. When bidders' prices are equal,
bids for larger quantities and with earlier initial bid times prevail. Using
its proprietary software, uBid automatically determines the winning bidders
and sends an e-mail message to confirm their purchases the same day. After
being screened by the Company's anti-fraud software, the customer's credit
card is charged and the merchandise is shipped.

PRODUCTS AND MERCHANDISING

The Company offers on the average over 1,000 total items in each of its
auctions. Currently, the merchandise consists primarily of computers and
consumer electronics and has included brands such as AST, AT&T, Aiwa, Apple,
Canon, Casio, Compaq, Dell, Gateway, Hewlett-Packard, IBM, JVC, Lexmark,
Micron, NEC, Panasonic, Seagate, Sony, Toshiba and Uniden. For the quarter
ended September 30, 1998, the product mix based on revenues consisted of
approximately 52% new merchandise and 48% refurbished products. Regardless of
the source of the merchandise, most merchandise sold by the Company is
warranted by the manufacturer or refurbisher. The customer may purchase an
extended warranty provided by a third party, Independent Dealer Services,
Inc., in those states where such third-party warranties are permitted by law.
The Company believes that this extended warranty combined with the Company's
emphasis on customer service provide it with an advantage over its
competitors, which generally rely solely on the warranties provided by the
vendor.

The Company currently offers merchandise in the following categories:

Computer Products: Desktops, portable computers, computer accessories,
disk drives, modems, monitors/video equipment, components, printers,
scanners, digital cameras, software and home office products.

Consumer Electronics: Home theater equipment, home audio equipment,
speakers, televisions, camcorders, VCRs, DVD players, portable audio
players and automobile audio equipment.

Home and Leisure: Kitchen appliances, vacuum cleaners, personal care
devices, jewelry and sunglasses.

VENDOR RELATIONSHIPS

The Company obtains merchandise directly from computer and electronics
manufacturers and indirectly through other vendors, such as retailers,
distributors and Fortune 1000 companies. Currently, this merchandise is
sourced from over 100 vendors. The Company believes that it has substantial
access to additional sources of excess merchandise and is in a position to
leverage its existing relationships and add new vendors to increase the
breadth and number of products offered. Since merchandise availability can be
unpredictable, a strong base of vendor relationships is important to the
Company's success. See "Risk Factors--Reliance on Merchandise Vendors." As a
result, the Company's buying staff maintains ongoing contact with its vendors
to learn when new merchandise becomes available. The percentage of the
Company's revenues attributable to sales of products

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sourced from the Parent has declined from over 90% in the first two months of
operations to approximately 30% in March and April 1998 to less than 15% since
May 1998.

The Company directly purchases most of its products and holds them for
resale. By purchasing merchandise, the Company assumes the full inventory and
price risk involved in selling such merchandise. The Company believes its
ability to sell its inventory quickly through its auctions justifies the cost
of and risk involved in carrying inventory. The Company attempts to minimize
its exposure to inventory and price risk through its auction management model
that employs a sophisticated statistical software package to project the price
at which each product will ultimately be sold to consumers based on current
traffic and demand, and by determining at which price to purchase products
from vendors. In the event the Company is left with excess inventory, the
Company seeks to immediately dispose of such inventory through its auction
site. To date, the Company's exposure to excess inventory has not been
material.

REVENUE SHARING. The Company also has entered into revenue sharing
arrangements with several vendors to split the sales proceeds on an agreed-
upon percentage basis. The Company believes these revenue sharing arrangements
are attractive to vendors because it allows the vendor to potentially realize
more revenue than in the case where the Company purchases the merchandise for
a fixed price. The Company's avoidance of any inventory risk, unlimited margin
upside for the vendors and guaranteed gross margin percentage for the Company
make revenue sharing agreements an attractive arrangement to both the Company
and vendors. As of September 30, 1998, the Company had entered into 28 of
these revenue sharing agreements with vendors, and such agreements represented
less than 5% of the Company's revenue for the quarter ended September 30,
1998. The Company believes that the percentage of its revenues represented by
revenue sharing arrangements will continue to increase over the next 12
months.

SALES AND MARKETING

The Company sells to consumers and small and medium-sized businesses. To
achieve its objective of becoming the Internet auction site of choice for
vendors and consumers, the Company has developed a marketing strategy in order
to strengthen its brand name and increase customer traffic to its Website.
This marketing strategy consists of establishing relationships with leading
online companies, as well as employing a mix of media and promotional
activities to achieve these goals.

RELATIONSHIPS WITH LEADING ONLINE COMPANIES. uBid has established
relationships with a number of Internet service and content providers to
increase its access to online customers and to build brand recognition. The
Company intends to complement its existing relationships and establish a
leading brand name by pursuing additional agreements. See "Risk Factors--
Reliance on Relationships with Online Companies." Representative relationships
include:

. AOL. This relationship provides access to AOL's members through a premier
button (a fixed icon displaying the uBid logo, visible on the computer
screen without using the scroll button, which provides a direct link to
the Company's Website) in the Office Products Department of AOL's
Shopping Channel. Additionally, uBid's promotional banners (rectangular
graphic advertisements) rotate throughout the AOL Shopping Channel.

. CNET. uBid has an anchor position (i.e., a non-rotating, fixed
advertisement) on the home page of Computers.com, CNET's computer channel
designed to provide consumers with pertinent news and advice in
purchasing computer hardware and software.

. WIRED DIGITAL. uBid is a featured sponsor on the Computer Hardware
Channel of Wired's HotBot Shopping Directory. The Company receives
premier positioning within the Computer Hardware Channel along with a
link to its Website on the Directory home page under the Computer
Hardware listing. uBid also has promotional links within each of the
Auctions, Computer Software and Small Business Needs Channels, along with
banner ads circulating throughout the entire HotBot Shopping Directory.

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INTERNET ADVERTISING. The Company has taken a disciplined and selective
approach in its advertising strategy that primarily considers the costs of
customer acquisition. The Company attempts 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
the Company's Website. The Company places advertisements on various high-
profile and high-traffic conduit Websites, including AOL, CNET, Excite, Yahoo!
and others, as well as Websites that are targeted at a more focused audience.
These advertisements usually take the form of banner ads that encourage
readers to click through directly to the Company's Website. In addition, the
Company and the Parent have reciprocal links on their Websites.

CUSTOMER ELECTRONIC MAIL BROADCASTS. The Company actively markets to its own
base of customers through e-mail broadcasts. All bidders in the Company's
auctions are automatically added to the Company's electronic mailing list,
which numbered over 120,000 registrants through September 30, 1998. The
Company currently sends more than 850,000 e-mail messages each month
announcing new items available at each auction, special products available,
site changes and new features. The Company has a strict policy of sending only
solicited e-mail, and a customer can remove his or her name from the Company's
mailing list at any time.

ORDER FULFILLMENT

The Company obtains products from its vendor network shortly before the
products are put into auction. Although most products are held in inventory at
the Company's distribution facility, in the case of refurbished products, the
products may be held at the refurbisher's facility and shipped directly to the
customer. However, the refurbisher is required to use uBid labeling and
packaging standards and transmit shipment information to the Company to
provide a uniform customer experience.

The product fulfillment process, from receipt of products through shipment,
is largely automated, enabling the Company to capture real-time data on
inventory receiving, shipping and stock levels. Approximately 90% of the
products shipped from the Company's warehouse are shipped the next business
day after an auction closes, and the Company's tight shipping controls have
historically kept shipping errors at negligible levels. The Company believes
that the speed and accuracy of its order fulfillment process reinforces and
enhances its customers' total purchase experience.

Pursuant to the Company's exclusive agreement with the Parent, the Company
has contracted its distribution functions to the Parent utilizing the Parent's
fully developed distribution infrastructure which, in 1997, was responsible
for the distribution of over one million orders of computer-related products.
In July 1998, the Company entered into a sublease currently covering 100,000
square feet of the Parent's 325,000 square foot distribution center in
Memphis, Tennessee. The sublease also provides for the Company's continued use
of the Parent's sophisticated inventory control and shipping systems during
the term of the sublease. This distribution arrangement enables uBid to
provide distribution services which the Company believes far exceed that of
the competition, who generally rely upon contract warehouses for the bulk of
their fulfillment and logistics requirements.

CUSTOMER SUPPORT AND SERVICE

The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases is
dependent, in part, on the strength of its customer support and service
operations and staff. In contrast to most of the Company's competitors, uBid
has established multiple channels for communicating with its customers before
and after the sale, including phone, e-mail and online support. The Company
currently employs a staff of customer support and service personnel who are
responsible for handling customer inquiries, tracking shipments and
investigating problems with merchandise. While merchandise sold by the Company
is sold on an "as is" basis, products may be covered by manufacturers'
warranties or third party warranties purchased by the customer. The Company,
though not obligated to do so, may in specific instances accept merchandise
returns if a product is defective or does not conform to the specifications of
the item sold at auction, and attempts to work with its customers to resolve
complaints about merchandise. In addition, the Company has automated certain
of its customer service functions, including

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providing users of the Website with online access to information such as
product shipping status. The Company is committed to continue enhancing its
customer support and service operations, through a variety of measures
including improved customer reporting systems. See "Risk Factors--Reliance on
Merchandise Vendors" and "--Management of Potential Growth; New Management
Team."

TECHNOLOGY

The Company has implemented a broad array of customer support, transaction-
processing and fulfillment systems using a combination of both proprietary and
commercially available, licensed technologies. These systems are scalable and
secure and are designed to make both the customer experience and the
transaction reporting and tracking process as seamless and simple as possible,
with an emphasis on speed. The Company's hardware and software systems are
designed to integrate seamlessly and manage real-time transactions with
limited human intervention. The Company's current strategy is to license
commercially available technology wherever possible rather than seek
internally-developed solutions and to focus its internal software development
efforts on creating and enhancing the specialized, proprietary software that
is unique to its business. The Company's auction processing and auction
management applications discussed below are jointly owned, in perpetuity, by
the Parent and the third-party developers of the software pursuant to
agreements between the Parent and such third-party developers. The agreements
provide that the Parent and the third-party developers of the software jointly
own all patent, copyright and other proprietary rights with respect to the
Company's auction processing and auction management applications and certain
general purpose libraries (used for general website and Java software
development) which have been developed by the third-party developers and are
used with the auction processing and auction management applications. The
agreements provide that the Parent and the third-party developers of the
software jointly own all patent, copyright and other proprietary rights with
respect to the initial auction processing and auction management applications
software platform developed for the Parent by the third-party developers (the
"Original Auction Software") and certain general purpose libraries (used for
general website and Java software development) (the "Libraries") used with the
Original Auction Software. The three agreements material to the Company's
ownership rights in externally developed software are the agreements with each
of the two co-developers of the Original Auction Software (one of which is
David L. Matthews, the Company's Director of Applications Development) and an
Assignment and License Agreement between the Parent and the Company. Under the
first two agreements with the co-developers of the Original Auction Software,
such individuals have granted the Parent (i) joint ownership rights in the
Original Auction Software, related work product and the Libraries developed by
them prior to December 1997 and (ii) in the case of Mr. Matthews, sole
ownership rights to the software and related work product developed for the
Parent beginning in December 1997. Under the Assignment and License Agreement
with the Parent, the Parent has assigned to the Company all of its right,
title and interest in the copyrights in (i) the Original Auction Software and
Libraries covered by the third-party developer agreements described above and
(ii) the on-line auction software developed by the Parent's employees for the
Company, which consist primarily of interfaces with existing distribution,
credit processing and other administrative systems. Under the Assignment and
License Agreement, the Company has granted to the Parent a perpetual, non-
exclusive, transferable, royalty-free license to those portions of the
assigned software that are not specific to the operation of the Company's
current on-line auction system.

As co-owners of the Original Auction Software and the Libraries, the two co-
developers and the Company have the right to grant licenses covering such
software and libraries without the consent or notification of the other co-
owners. In addition, the two co-developers have previously granted a license
covering such software and libraries to the Parent (which is included in the
rights being assigned to the Company under an Assignment and License Agreement
with the Parent) and another third party. Such licensees have the right to
use, distribute, re-license and otherwise modify the licensed source codes
without royalties or further payment to any of the other co-developers or
licensees.

Substantial modifications and enhancements to the Company's Original Auction
Software and Libraries have been made by employees of the Parent and the
Company on a work-for-hire basis and are the property of the Company.

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AUCTION PROCESSING AND AUCTION MANAGEMENT APPLICATIONS. The Company uses a
set of automated software applications for receiving and validating bids,
registering bidders, placing customers on the Company's mailing list, listing
currently active and recent winning and losing bids and reviewing and
submitting customer service requests. The Company's internally-developed
proprietary auction management software continually tracks every bid posted on
all auctions and utilizes regression analysis to assist the Company in
determining the number of products to auction at any given time. The Company
believes that this system enables it to maximize margins in each product
category.

ORDER PROCESSING APPLICATIONS. The Company uses a set of applications for
processing successful bids as they are converted into customer orders. These
applications charge customer credit cards, print order information, transmit
order information electronically to the Company's contract warehouse and
vendors, and deposit transaction information into the Company's 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 credit card numbers are maintained behind
appropriate fire walls. The software used is made available through the Parent
pursuant to the terms of the warehouse sublease between the Parent and the
Company.

MARKETING APPLICATIONS. The Company has developed a set of applications for
sending automated broadcast e-mails to customers on a frequent basis. This
software extracts e-mail addresses from the Company's mailing list, sends e-
mails to the designated recipients and automatically services requests from
customers to remove them from the mailing list.

SYSTEMS OPERATIONS

The continued uninterrupted operation of the Company's Website is critical
to its business, and the Company strives to maximize uptime of the Website.
The Company uses the services of Pacific Bell and other Internet service
providers to provide connectivity to the Internet over a dedicated DS-3 line.
IDT Corporation provides Internet traffic and data routing services to the
Company as well as e-mail services. MCI provides frame relay services for the
Company's back office operations. The Company believes that these
telecommunication and Internet service facilities are essential to the
Company's operation. The Pacific Bell, IDT Corporation and MCI Internet
access, traffic, data routing and e-mail services and frame relay services are
provided by such parties through agreements with the Parent and will be made
available to the Company after the Offering under the
Internet/Telecommunications Agreement with the Parent. See "Risk Factors--
Management of Potential Growth; New Management Team," "--Risk of System
Failure; Single Site" and "Certain Transactions--Internet/Telecommunications
Agreement."

The Company's hardware and software systems run in parallel on multiple
servers, which allows the system to balance the workload among the servers.
The system also includes redundant hardware on mission critical components,
which the Company believes would enable it to survive a potential failure of
any server with minimal downtime. In addition, capacity can be quickly and
easily expanded by adding additional servers, without incurring significant
development costs. In particular, the Company strives to maintain access to
its Website and speed of use during the most heavily trafficked times of day--
the evening hours around the time scheduled for auction close. In order to do
this, the Company anticipates expanding its system as usage increases to avoid
any decrease in system response time. The Company pays the Parent for use of
hardware systems that are located in Torrance, California. Prior to the
Offering Closing Date, the Company and the Parent intend to enter into an
agreement pursuant to which the Parent will continue to provide the Company
with certain Internet and telecommunications services, including the related
hardware systems. The Company currently is in discussions with a leading
hosting provider to colocate the Company's servers and to develop a mirrored
site location. Although the Company anticipates continuing to use the Parent's
hardware systems for the near term, within one year following the Offering,
the Company intends to purchase its own hardware and software systems, at an
estimated cost of approximately $500,000. The Company expects to fund its
purchase of such capital equipment with working capital (including the
proceeds from the Offering). See "Certain Transactions--
Internet/Telecommunications Agreement."

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INSURANCE COVERAGE

Through the date of the Distribution, the Company will be covered by the
insurance policies maintained by the Parent. As of September 30, 1998, the
Parent maintained, among other types of coverage, a commercial liability
policy with an aggregate limit of $27 million, including a $25 million
umbrella policy, and a transit cargo policy with a limit of $1.5 million, a
workers compensation policy with a limit of $1 million and blanket crime
coverage with a limit of $2 million. Following the Distribution, the Company
will be required to obtain its own insurance.

COMPETITION

The Company believes that the principal competitive factors affecting its
market are the ability to attract customers at favorable customer acquisition
costs, operate the Website in an uninterrupted manner and with acceptable
speed, provide effective customer service and obtain merchandise at
satisfactory prices. Although the Company believes that it currently competes
favorably with respect to such factors, there can be no assurance that the
Company can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources than the Company.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

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confidentiality agreements and non-compete agreements executed by each manager
and technical measures to establish and protect its proprietary rights. The
uBidSM service mark is registered in the United States. There can be no
assurance that the Company will be able to secure significant protection for
its service marks or trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "uBid" or
other service marks or trademarks of the Company, thereby impeding the
Company's ability to build brand identity and possibly leading to customer
confusion. The inability of the Company to protect the name "uBid" adequately
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company's proprietary software is
protected by copyright laws. The source code for the Company's proprietary
software also is protected under applicable trade secret laws. All patent,
copyright and other proprietary rights with respect to the Company's auction
processing and auction management applications and certain general purpose
libraries are co-owned by the Company and the third-party developers of such
applications and libraries pursuant to various agreements among such third-
party developers and the Parent which the Parent has assigned to the Company.
As part of its confidentiality procedures, the Company generally enters into
agreements with its employees and consultants and limits access to and
distribution of its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions taken by the
Company, it might be possible for a third party to copy or otherwise obtain
and use the Company's software or other proprietary information without
authorization or to develop similar software independently. Policing
unauthorized use of the Company's technology is difficult, particularly
because the global nature of the Internet makes it difficult to control the
ultimate destination or security of software or other data transmitted. The
laws of other countries may afford the Company little or no effective
protection of its intellectual property.

The Company may in the future receive notices from third parties claiming
infringement by the Company's software or other aspects of the Company's
business. While the Company is not currently subject to any such claim, any
future claim, with or without merit, could result in significant litigation
costs and diversion of resources including the attention of management, and
require the Company to enter into royalty and licensing agreements, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such royalty and licensing agreements, if
required, may not be available on terms acceptable to the Company or at all.
In the future, the Company may also need to file lawsuits to enforce the
Company's intellectual property rights, to protect the Company's trade secrets
or to determine the validity and scope of the proprietary rights of others.
Such litigation, whether successful or unsuccessful, could result in
substantial costs and diversion of resources, which could have a material
adverse effect on the Company's business, results of operations and financial
condition.

The Company also relies on a variety of technologies that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's Website to perform key functions. There can be no
assurance that these third-party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss or
inability of the Company to maintain or obtain upgrades to any of these
technology licenses could result in delays in completing its proprietary
software enhancements and new developments until equivalent technology could
be identified, licensed or developed and integrated. Any such delays would
materially adversely affect the Company's business, results of operations and
financial condition. See "Risk Factors--Protection of Intellectual Property."

EMPLOYEES

As of September 30, 1998, the Company employed 49 people and 49 full-time
equivalent contract personnel related to the Company's distribution center and
call center. None of the Company's employees is represented by a labor union,
and the Company considers its employee relations to be good. Competition for
qualified personnel in the Company's industry is intense, particularly for
software development and other technical staff. The Company believes that its
future success will depend in part on its continued ability to attract, hire
and retain qualified personnel. See "Risk Factors--Management of Potential
Growth; New Management Team" and "--Dependence on Key Personnel; Need for
Additional Personnel."

45
<PAGE>

FACILITIES

The Company's principal administrative, engineering, merchandising and
marketing facilities total approximately 4,000 square feet, and are located in
Elk Grove Village, Illinois under leases that are shared with the Parent and
expire in 2002. The Company anticipates taking additional adjacent space under
its existing lease and expanding into that space in the near future to
accommodate expected growth. Since Inception, the Company has been dependent
upon the Parent for warehousing and distribution services. In July 1998, the
Company became responsible for its own warehousing and distribution and
entered into a sublease for 100,000 square feet of the Parent's 325,000 square
foot distribution center in Memphis, Tennessee. The sublease provides for the
Company's continued use of the Parent's sophisticated inventory control and
shipping systems during the term of the sublease. The sublease is at a monthly
rate equal to the Parent's obligation to the landlord, plus taxes and
utilities, and will expire in 2002. The Company believes that it has adequate
space for its current needs. As the Company expands, it expects that suitable
additional space will be available on commercially reasonable terms, although
no assurance can be made in this regard. The Company does not own any real
estate.

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers, key employees and directors of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gregory K. Jones............ 37 Chairman, President and Chief Executive Officer
Thomas E. Werner............ 41 Vice President and Chief Financial Officer
George Lu................... 34 Vice President--Information Systems
Timothy E. Takesue.......... 30 Vice President--Merchandising
David L. Hirschman.......... 35 Senior Vice President--Operations
Joel D. Ludvigsen........... 32 Director of Auction Planning
David L. Matthews........... 29 Director of Applications Development
Brian A. Williams........... 29 Director of Marketing
Frank F. Khulusi............ 32 Director
Howard A. Tullman........... 54 Director
Norman H. Wesley............ 48 Director
</TABLE>

GREGORY K. JONES. Mr. Jones has been President and Chief Executive Officer
of the Company since November 1997, and Chairman of the Board since July 1998.
Prior thereto, from October 1995 to November 1997, Mr. Jones was Senior Vice
President of Strategic Markets at APAC TeleServices, Inc., a provider of
outsourced telephone-based marketing, sales and customer management solutions.
Prior thereto, from October 1990 to October 1995, Mr. Jones served as the
President and Chief Operating Officer of The Reliable Corporation/Office 1, a
Chicago-based direct mail/retailer of office products. Before that, from
January 1988 to October 1990, Mr. Jones was a Senior Manager, consulting on
systems and technology strategic planning for the accounting/consulting firm
of Ernst & Young LLP. He sits on the Board of Directors of Ohio-based D.I.Y.
Home Warehouse, an operator of 16 warehouse-format home improvement centers,
and of E-Sport, an Internet sports content company. Mr. Jones received his
B.A. degree from Miami University (Ohio) and his M.M. in marketing and finance
from the J.L. Kellogg Graduate School of Management of Northwestern
University.

THOMAS E. WERNER. Mr. Werner has been Vice President and Chief Financial
Officer of the Company since October 1998. From December 1995 to October 1998,
Mr. Werner was Corporate Controller for Gateway, Inc., a manufacturer and
marketer of personal computers and related products. From March 1995 until
December 1995, Mr. Werner was Vice President and Assistant Corporate
Controller for Dade International, a manufacturer of medical diagnostic
equipment and products. From 1989 until 1995, Mr. Werner held various
financial management positions with Baxter International, a manufacturer and
distributor of health care products. Mr. Werner received his B.S. degree in
Business from Indiana University and is a Certified Public Accountant.

46
<PAGE>

GEORGE LU. Mr. Lu has been Vice President--Information Systems of the
Company since February 1998. Prior thereto, from March 1994 to January 1998,
Mr. Lu was employed by Rand McNally & Company, most recently in the position
of technical development manager for Rand McNally New Media and TDM. Prior
thereto, from March 1993 to March 1994, Mr. Lu was with AECOM Corp. as a
senior systems analyst. Mr. Lu received his B.S. degree from Huazhong
University, currently known as Central China Normal University, and his M.S.
degree from the University of Memphis.

TIMOTHY E. TAKESUE. Mr. Takesue joined uBid as Vice President--Merchandising
in December 1997. Prior to December 1997, Mr. Takesue was Director of
Merchandising/Purchasing for Elek-Tek Inc., a catalog, retail and corporate
reseller. Mr. Takesue was a buyer of computer and computer-related products
and accessories at Montgomery Ward from March 1996 to August 1996 and from
February 1988 to March 1996, Mr. Takesue held several positions with Fretter,
Inc., a specialty retailer in appliances, consumer electronics and computers.
During his eight years with that company, Mr. Takesue held the positions of
General Store Manager, District Sales Manager of Indiana, Marketing Manager of
the Ohio region with responsibility for all marketing functions, Regional
Marketing Manager for the New England region, Merchandise Manager with
responsibility for all buying and marketing of computer peripheral, software
and accessory products, and Senior Merchandise Manager with responsibility for
all buying and marketing of computer and related products. Mr. Takesue
attended Wayne State University.

DAVID L. HIRSCHMAN. Mr. Hirschman has been the Company's Senior Vice
President--Operations since April 1997. Prior thereto, Mr. Hirschman served as
Vice President of Marketing Operations at the Parent from August 1996 to March
1997, as Vice President of the Macintosh Marketing Division of the Parent from
May 1996 to July 1996, and from June 1993 to April 1996 as the Vice President
of Product Management at the Parent with responsibility for purchasing,
inventory maintenance and vendor relations. From 1990 to 1993, Mr. Hirschman
was the Purchasing Manager for Sun Computers, a large regional computer
reseller. Mr. Hirschman holds a B.S. degree in business from Washington
University in St. Louis.

JOEL D. LUDVIGSEN. Mr. Ludvigsen joined uBid as Director of Auction Planning
in November 1998. From 1996 to 1998, Mr. Ludvigsen served in the Strategic
Management Consulting department at Bain & Company. From 1988 to 1994, Mr.
Ludvigsen was a manager in the Audit Information Technology Group at KPMG Peat
Marwick. Mr. Ludvigsen is a Certified Public Accountant, and received a B.A.,
summa cum laude, at Luther College and a M.B.A., with Baker Scholar
distinction, at Harvard Graduate School of Business Administration.

DAVID L. MATTHEWS. Mr. Matthews joined uBid as Director of Applications
Development in January 1998. Mr. Matthews was a principal of Intier Corp., a
software development company focusing on object-oriented systems development,
from April 1997 to February 1998. Prior thereto, Mr. Matthews developed online
systems for Web developer Inspired Arts of San Diego LLP, intranet database
systems for Sequana Therapeutics, dial-up systems for VideoTex, Inc. and large
scale NeXT STEP/UNIX development projects at Abbott Labs and SAIC. Mr.
Matthews received his B.S. degree in computer science from the University of
California, San Diego.

BRIAN A. WILLIAMS. Mr. Williams joined uBid as Director of Marketing in
September 1997. From August 1996 to September 1997, Mr. Williams led the
online advertising and promotions department for the online games start-up,
Engage Games Online. From February 1994 to August 1996, Mr. Williams served as
a full-time interactive media consultant for Toyota Motor Sales, USA, working
on the launch of their online and interactive products including the Toyota
Website. Mr. Williams attended California State University, Fullerton.

FRANK F. KHULUSI. Mr. Khulusi has been a director of the Company since its
incorporation, acted as its President until November 1997, and acted as
Chairman of the Board from the Company's incorporation to July 1998. Mr
Khulusi is a co-founder of the Parent and has served as Chairman of the Board,
President and Chief Executive Officer of the Parent since 1987. Mr. Khulusi
attended the University of Southern California.

HOWARD A. TULLMAN. Mr. Tullman joined the Board of Directors in June 1998.
Since June 1997, Mr. Tullman has served as the Chief Executive Officer of
JAMtv Corporation, which operates an Internet music site specializing in the
webcasting of live music events. From October 1996 to May 1997, Mr. Tullman
was one

47
<PAGE>

of the co-managers of Digital Entertainment Networks LLC, the predecessor to
JAMtv Corporation. From October 1993 to September 1996, Mr. Tullman served as
the President and Chief Executive Officer of Imagination Pilots, Inc., a
multimedia software developer which he also founded. Immediately prior to
founding Imagination Pilots, Inc., Mr. Tullman served as the Chief Executive
Officer of Eager Enterprises, Inc., an information industry venture capital
firm which he founded in 1990. Mr. Tullman received his B.A. degree from
Northwestern University and a J.D. from the Northwestern University School of
Law.

NORMAN H. WESLEY. Mr. Wesley became a member of the Board of Directors of
the Company in November 1998. Beginning on January 1, 1999, Mr. Wesley will
become President, Chief Operating Officer and a member of the Board of
Directors of Fortune Brands, Inc., a consumer products company with premier
brands and leading markets in home and office products, golf equipment and
distilled spirits. Mr. Wesley currently serves as Chairman and Chief Executive
Officer of Fortune Brands Home & Office, the consolidated operation of ACCO
World Corporation and MasterBrands Industries, Inc. Mr. Wesley joined ACCO in
1984 as Vice President, Corporate Development, became President and Chief
Operating Officer of that company in 1987 and Chief Executive Officer in 1990.
From 1997 through December 31, 1998, Mr. Wesley will also have served as
Chairman and Chief Executive Officer of MasterBrands Industries, Inc. Mr.
Wesley earned both a B.S. in finance, cum laude, and a M.B.A., magna cum
laude, from the University of Utah.

BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

The Company's Bylaws provide that the number of members of the Company's
Board of Directors shall be determined by the Board of Directors. The number
of directors is currently four. The Board of Directors is divided into three
classes, with each class to be as nearly equal in number as possible. At each
annual meeting of stockholders, the successors to the class of directors whose
term expires at that time will be elected to hold office for a term of three
years and until their respective successors are elected and qualified. The
terms of office will expire at the Company's annual meeting in the year
indicated: Gregory K. Jones--2001; Howard A. Tullman and Norman H. Wesley--
2000; and Frank F. Khulusi--1999. The Company intends to appoint an additional
outside director, in addition to Messrs. Tullman and Wesley (collectively, the
"Outside Directors"), within the next six months. Neither Mr. Tullman nor Mr.
Wesley is, and the additional Outside Director will not be, employed by the
Company nor affiliated with the Parent. All of the officers identified above
serve at the discretion of the Board of Directors of the Company.

Upon the Offering Closing Date, the Company intends to establish three
committees: the Executive Committee, the Audit Committee, and the Compensation
Committee.

The Executive Committee will have full authority to exercise all the powers
of the Board between meetings of the Board, except as reserved by the Board.
The Executive Committee will not have the power to elect or remove executive
officers, approve a merger of the Company, recommend a sale of substantially
all of the Company's assets, recommend a dissolution of the Company, amend the
Certificate of Incorporation or Bylaws, declare dividends on the Company's
outstanding securities, or, except as authorized by the Board, issue any
Common Stock or preferred stock. Effective upon the Offering Closing Date,
Messrs. Jones and Khulusi will be appointed as the members of the Executive
Committee.

The Audit Committee will have the power to oversee the retention,
performance and compensation of the independent public accountants for the
Company, and the establishment and oversight of such systems of internal
accounting and auditing control as it deems appropriate. Messrs. Tullman and
Wesley will serve as the members of the Audit Committee.

The Compensation Committee will review and approve the compensation of
executive officers of the Company, including payment of salaries, bonuses and
incentive compensation, determine the Company's compensation philosophy and
programs, and administer the Company's stock option plans. Messrs. Tullman and
Wesley will serve as the members of the Compensation Committee.

The Board of Directors does not have a nominating committee. However, the
Board of Directors will consider nomination recommendations from stockholders,
which should be addressed to the Company's secretary at its principal
executive offices.

48
<PAGE>

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION INFORMATION

Immediately following the Offering Closing Date, the base salaries and
bonuses of the Named Officers (as defined below) will be at levels determined
by the Parent. Subsequent to the Distribution, the base salaries and bonuses
of all executive officers of the Company will be determined by the
Compensation Committee of the Company.

The following tables set forth certain compensation information with respect
to the Company's Chief Executive Officer and its executive officers and key
employees during the period from Inception to December 31, 1997 (collectively,
the "Named Officers"). All of the information set forth in this table reflects
compensation earned by such individuals for services with the Company. The
Company had no other executive officers whose salary and bonus exceeded
$100,000 in 1997 or whose current salary exceeds $100,000 per annum.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
1997 ANNUAL COMPENSATION ------------
------------------------------- SECURITIES 1998
OTHER ANNUAL UNDERLYING ALL OTHER ANNUAL
NAME AND PRINCIPAL POSITION (1) SALARY($) BONUS($) COMPENSATION OPTIONS COMPENSATION($) SALARY($) (2)
- ------------------------------- --------- -------- ------------ ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones
Chairman, President and
Chief Executive Officer....... 19,519 -- -- 366,494 -- 175,000
Thomas E. Werner
Vice President and Chief
Financial Officer (3)......... -- -- -- -- -- 160,000
George Lu
Vice President--Information
Systems (3)................... -- -- -- -- -- 120,000
Timothy E. Takesue
Vice President--Merchandising. 16,076 20,000 -- 54,974 -- 96,000
David L. Hirschman
Sr. Vice President--
Operations (4)................ 69,560 -- -- -- -- 152,000
Joel D. Ludvigsen
Director of Auction
Planning (3).................. -- -- -- -- -- 60,000
David L. Matthews
Director of Applications
Development (3)............... -- -- -- -- -- 95,000
Brian A. Williams
Director of Marketing......... 15,600 -- -- 7,330 -- 57,000
</TABLE>
- -------
(1) Frank Khulusi, the Chairman of the Board, President and Chief Executive
Officer of the Parent, served as President and Chief Executive Officer of
the Company until November 1997. In addition, Richard M. Finkbeiner, the
former Chief Financial Officer of the Parent, served as the Chief
Financial Officer of the Company from Inception through September 21,
1998. Neither Mr. Khulusi nor Mr. Finkbeiner received any compensation
from the Company in 1997. However, the compensation paid by the Parent to
Mr. Khulusi in 1997 consisted of salary of $395,266, a cash bonus of
$25,000 and an option to purchase 100,000 shares of Parent Common Stock
with an exercise price of $7.125 per share. Mr. Finkbeiner's compensation
from the Parent consisted of salary of $233,063, a cash bonus of $94,653,
relocation expenses and allowances paid by the Parent in an aggregate
amount of $15,246 and an option to purchase 20,000 shares of Parent
Common Stock with an exercise price of $7.125 per share. All compensation
paid to Messrs. Khulusi and Finkbeiner was for services provided to the
Parent, and no allocation was made for services provided to the Company
by these individuals.

(2) Figures are based on annualized salary, excluding bonus, if any.

(3) Messrs. Lu, Matthews, Werner and Ludvigsen joined the Company in 1998.

(4) Prior to joining the Company, Mr. Hirschman was employed by the Parent
and received for his services to the Parent in 1997 a salary of $70,369,
a cash bonus of $18,336 and an option to purchase 24,600 shares of Parent
Common Stock with an exercise price ranging from $5.50 to $6.00 per
share.

49
<PAGE>

OPTION GRANTS DURING 1997

INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (1)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10%
- ---- ---------- ------------- -------------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory K. Jones........ 366,494 80% $0.27 2007 $ 62,231 $ 157,706
Timothy E. Takesue...... 54,974 12 0.27 2007 9,335 23,656
Brian A. Williams....... 7,330 2 0.27 2007 1,245 3,154
</TABLE>

YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997 DECEMBER 31, 1997 (2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gregory K. Jones............ -- 366,494 $ -- $ --
Thomas E. Werner............ -- -- -- --
George Lu................... -- -- -- --
Timothy E. Takesue.......... -- 54,974 -- --
David L. Hirschman.......... -- -- -- --
Joel D. Ludvigsen........... -- -- -- --
David L. Matthews........... -- -- -- --
Brian A. Williams........... -- 7,330 -- --
</TABLE>
- --------
(1) Assumes appreciation at the independently appraised value of the Common
Stock of 5% and 10% per year over the ten-year option period as mandated
by the rules and regulations of the Securities and Exchange Commission,
and does not represent the Company's estimate or projection of the future
value of the Common Stock. If the initial offering price per share had
been used to calculate potential realizable value, instead of the
independently appraised value, appreciation at an assumed annual rate of
5% and 10% would have resulted in values of approximately $4.0 million
and $10.2 million, respectively. The actual value realized may be greater
or less than the potential realizable values set forth in the table.

(2) Calculated by determining the difference between the fair market value of
the securities underlying the option at December 31, 1997 ($0.27 per
share as determined by the Stock Option Committee of the Board of
Directors based, among other factors, upon the limited operating history
and revenues of the Company, the operating losses of the Company, the
market value per share of Parent Common Stock and the portion of the
Parent's business represented by the Company) and the exercise price of
the Named Officer's option.

COMPENSATION OF DIRECTORS

Mr. Tullman and Mr. Wesley were each granted an option to purchase 18,325
shares of Common Stock, at an exercise price of $6.82 and $11.79,
respectively, per share, in connection with their becoming directors of the
Company. The Company currently intends to grant options to purchase shares of
Common Stock to all non-employee directors of the Company under the 1998 Stock
Incentive Plan. See "--Stock Options." Other than as will be provided in such
Plan and the reimbursement of reasonable expenses incurred with attending
Board and Committee meetings, the Company has not yet adopted specific
policies on directors' compensation and benefits following the Offering
Closing Date.

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with Gregory K. Jones,
President and Chief Executive Officer of the Company. The agreement with Mr.
Jones is terminable by Mr. Jones upon 30 days prior

50
<PAGE>

written notice or by the Company at any time. Pursuant to this agreement, Mr.
Jones receives base salary in the amount of $175,000, subject to increase or
decrease by mutual agreement or pursuant to the Board of Directors' annual
review policy and budgeting procedures. Mr. Jones is also eligible to receive
annual bonuses, at the sole discretion of the Board, up to a current maximum
annual amount of $50,000.

If the agreement is terminated prior to October 22, 2000, Mr. Jones will
receive an amount equal to six months of his base compensation as severance,
and he will continue to receive health benefits for six months after such
termination.

Pursuant to his employment agreement, Mr. Jones was granted an option to
purchase 366,494 shares of Common Stock at an exercise price of $0.27 per
share. See "--Other Stock Options."

In addition to Mr. Jones' employment agreement as described above, Thomas
Werner, Vice President and Chief Financial Officer of the Company, and David
Hirschman, Senior Vice President--Operations of the Company, have the right to
receive three months salary if their employment is terminated by the Company.

STOCK OPTIONS

1998 STOCK INCENTIVE PLAN

The Company's 1998 Stock Incentive Plan (the "1998 Stock Incentive Plan")
was adopted by the Board of Directors and the Parent, as sole stockholder, in
August 1998. The purpose of the 1998 Stock Incentive Plan is to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees, directors and
consultants of the Company and its subsidiaries and to promote the success of
the Company's business. The 1998 Stock Incentive Plan provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Code and the granting of nonstatutory stock options, stock
appreciation rights, dividend equivalent rights, restricted stock, performance
units, performance shares, and other equity-based rights ("Awards") to
employees, directors and consultants of the Company. Initially 1,832,470
shares of Common Stock are reserved for issuance under the 1998 Stock
Incentive Plan. Commencing January 2, 2000, the number of shares of Common
Stock reserved for issuance under the 1998 Stock Incentive Plan will be
increased by a number equal to 3% of the number of shares of Common Stock
outstanding as of December 31 of the immediately preceding calendar year,
provided that the number of shares of Common Stock available for grant of
incentive stock options shall be 476,442 shares, and such number shall not be
subject to adjustment as described above. Where the Award agreement permits
the exercise or purchase of the Award for a certain period of time following
the recipient's termination of service with the Company, disability, or death,
the Award will terminate to the extent not exercised or purchased on the last
day of the specified period or the last day of the original term of the Award,
whichever occurs first. To date, no Awards have been granted under the 1998
Stock Incentive Plan.

With respect to Awards granted to directors or officers, the 1998 Stock
Incentive Plan is administered by the Board of Directors or a committee
designated by the Board of Directors constituted to permit such Awards to be
exempt from Section 16(b) of the Securities Exchange Act of 1934, as amended,
in accordance with Rule 16b-3 thereunder. With respect to Awards granted to
other participants, the 1998 Stock Incentive Plan is administered by the Board
of Directors or a committee designated by the Board of Directors. In each
case, the Board of Directors or such committees (the "Plan Administrator")
shall determine the provisions, terms and conditions of each Award, including,
but not limited to, the Award vesting schedule, repurchase provisions, rights
of first refusal, forfeiture provisions, form of payment (cash, shares of
Common Stock, or other consideration) upon settlement of the Award, payment
contingencies and satisfaction of any performance criteria. Incentive stock
options are not transferable by the optionee other than by will or the laws of
descent or distribution, and each incentive stock option is exercisable during
the lifetime of the optionee only by such optionee. Other Awards shall be
transferable to the extent provided in the agreement evidencing the Award. The
exercise price of incentive stock options must be at least equal to the fair
market value of the Common Stock on the date of grant, and the term of the
option must not exceed ten years. The term of other Awards will be determined
by the Plan Administrator. With respect to an employee who owns stock
possessing more than 10%

51
<PAGE>

of the voting power of all classes of the Company's outstanding capital stock,
the exercise price of any incentive stock option must equal at least 110% of
the fair market value of the Common Stock on the grant date and the term of
the option must not exceed five years. The exercise or purchase price of other
Awards will be such price as determined by the Plan Administrator. The
consideration to be paid for the shares of Common Stock upon exercise or
purchase of an Award will be determined by the Plan Administrator and may
include cash, check, shares of Common Stock, a promissory note, or the
assignment of part of the proceeds from the sale of shares acquired upon
exercise or purchase of the Award.

In the event of an acquisition of the Company through the sale of all or
substantially all of its assets, a merger or other business combination in
which the Company is not the surviving entity ("Corporate Transaction"),
outstanding Awards under the 1998 Stock Incentive Plan, except as otherwise
provided in a specific Award Agreement, terminate unless assumed by the
successor company or its parent; provided that all outstanding but unvested
options will become fully vested, and all restricted stock will be released
from any forfeiture restrictions, immediately prior to the effective date of
the Corporate Transaction.

Unless terminated sooner, the 1998 Stock Incentive Plan will terminate
automatically in 2008. The Board has the authority to amend, suspend or
terminate the 1998 Stock Incentive Plan subject to stockholder approval of
certain amendments and provided no such action may affect Awards previously
granted under the 1998 Stock Incentive Plan.

OTHER STOCK OPTIONS

Prior to the Offering, the Company granted nonqualified options to key
employees of the Company to purchase Common Stock. Pursuant to such option
program as of September 30, 1998, options to purchase 869,690 shares of the
Company's Common Stock were granted to such key employees at a weighted
average purchase price of $.71 per share. These options have expiration dates
ranging from 2007 to 2008, provided that an option will terminate following 90
days after cessation of employment (other than for death or disability) and
following one year after cessation of employment for death or disability.

The options vest at a rate of 20% per year, except that, in the case of
options granted to Messrs. Hirschman and Matthews, employees of the Company,
the first 20% installment will vest on the Offering Closing Date. Upon a
merger, sale of substantially all of the assets or similar transaction
involving the Company that results in a change of control ("Change of
Control"), Mr. Jones' option will become fully vested. In the case of the
other options, upon a Change of Control, the next 20% installment of the
option will vest (the "Accelerated Installment") along with a prorated amount
of any additional number of unvested shares covered by the option calculated
by (x) subtracting the number of full months remaining until the normal annual
vesting date of the Accelerated Installment from 12, (y) dividing the
difference by 12 and (z) multiplying the resulting fraction times the number
of shares covered by the next 20% installment. Notwithstanding the vesting
described above, no option will be exercisable until the earlier of (i) the
Distribution Date or (ii) 18 months following the Offering Closing Date.

The following table shows, as of November 16, 1998, with respect to each of
the Named Officers of the Company holding an option granted pursuant to the
Company's informal stock option program, the number of shares covered by the
option and the exercise price of such option.

<TABLE>
<CAPTION>
NAME OF INDIVIDUAL SHARES SUBJECT
OR PERSONS IN GROUP TO OPTIONS GRANT DATE(S) EXERCISE PRICE
------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Gregory K. Jones.............. 366,494 10/22/97 $0.27
Thomas E. Werner.............. 109,948 10/26/98 8.87
George Lu..................... 73,298 1/20/98; 3/30/98 0.27
Timothy E. Takesue............ 73,298 12/10/97; 3/30/98 0.27
David L. Hirschman............ 109,948 1/8/98 0.27
Joel D. Ludvigsen............. 32,984 11/2/98 11.79
David L. Matthews............. 73,298 1/22/98 0.27
Brian A. Williams............. 16,492 12/11/97; 7/6/98 0.27; 11.79
</TABLE>

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<PAGE>

In addition, on December 2, 1998 the Company granted to George Lu, Timothy
Takesue, another current employee and one new employee, options to purchase
27,000, 27,000, 5,000 and 35,000 shares of Common Stock, respectively, with an
exercise price equal to the initial public offering price.

401(k) PLAN

Currently, the Company's employees participate in the Parent's 401(k)
Savings and Retirement Plan. The Services Agreement to be entered into by the
Company and the Parent will provide that, for the lesser of (i) one year after
the Distribution or (ii) until such time as the Company establishes its own
401(k) plan, the Company's employees will continue to participate in the
Parent's 401(k) plan. See "Certain Transactions--Services Agreement." The
Company intends to adopt its own 401(k) Savings and Retirement Plan in the
future that is intended to qualify for preferential tax treatment under
section 401(k) of the Code ("401(k) Plan"). Although the Company has not yet
adopted the specific terms of the 401(k) Plan, the Company intends that most
of the employees of the Company will be eligible to participate in the 401(k)
Plan upon adoption.

OWNERSHIP OF PARENT COMMON STOCK BY THE COMPANY'S DIRECTORS AND EXECUTIVE
OFFICERS

No present or future officer or director currently owns any shares of Common
Stock, all of which are currently owned by the Parent. Upon consummation of
the Distribution, such directors and officers will receive shares of Common
Stock in respect of shares of Parent Common Stock held by them on the record
date for the Distribution. The following table sets forth the number of shares
of Parent Common Stock beneficially owned on September 30, 1998 by each of the
Company's directors, the Named Officers and all directors and Named Officers
of the Company as a group. Except as otherwise noted, the individual director,
director nominee or executive officer or their family members had sole voting
and investment power with respect to such securities. Percentages of shares
beneficially owned are based upon 10,238,703 shares of Parent Common Stock
outstanding at September 30, 1998, plus for each person named below any shares
of Parent Common Stock that may be acquired by such person within 60 days of
such date upon exercise of outstanding stock options or warrants.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
---------------------
NAME NUMBER PERCENT
---- ----------- ---------
<S> <C> <C>
Gregory K. Jones....................................... -- --
Thomas E. Werner....................................... -- --
George Lu.............................................. 1,250 *
Timothy E. Takesue..................................... -- --
David L. Hirschman (1)................................. -- --
Joel D. Ludvigsen...................................... -- --
David L. Matthews...................................... 2,000 *
Brian A. Williams...................................... -- --
Frank F. Khulusi (2)................................... 1,816,875 17.7%
Howard A. Tullman...................................... 1,000 *
Norman H. Wesley....................................... -- --
All directors and Named Officers as a group (11
persons).............................................. 1,821,125 17.7%
</TABLE>
- --------
* Less than 1%

(1) Mr. Hirschman holds options to purchase 17,600 shares of Parent Common
Stock the unvested portion of which will be forfeited upon consummation of
the Offering in accordance with the negotiated terms of Mr. Hirschman's
initial employment with the Company.

(2) The aggregate amount of Parent Common Stock beneficially owned by Mr.
Khulusi includes (i) 8,575 shares held in trust for the children of Mr.
Khulusi's sister, as to which Mr. Khulusi acts as trustee, and
(ii) 47,215 shares covered by options which are exercisable within 60 days
of September 30, 1998.

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<PAGE>

CERTAIN TRANSACTIONS

The following includes brief summaries of the anticipated provisions of the
Separation and Distribution Agreement and each of the Services Agreement, the
Tax Indemnification and Allocation Agreement, the Joint Marketing Agreement
and the Internet/Telecommunications Agreement (collectively, the "Ancillary
Agreements"), each between the Company and the Parent. The summaries of such
agreements are qualified in their entirety by such agreements, copies of which
will be filed as exhibits to the Registration Statement of which this
Prospectus is a part.

HISTORICAL INTERCOMPANY RELATIONSHIPS

Prior to the Offering Closing Date, the Company has been a wholly-owned,
indirect subsidiary of the Parent. As a wholly-owned subsidiary, the Company
has received various services provided by the Parent, including administration
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing. The Parent has also provided
the Company with the services of a number of its executives and employees. In
consideration for these services, the Parent has historically allocated a
portion of its overhead costs related to such services to the Company.
Management of the Company believes that the amounts allocated to the Company
have been no less favorable to the Company than the expenses the Company would
have incurred to obtain such services on its own or from unaffiliated third
parties. None of these services have been provided to the Company pursuant to
any written agreement between the Company and the Parent.

SEPARATION AND DISTRIBUTION AGREEMENT

The Parent has announced that, subject to satisfaction of certain
conditions, the Parent intends to distribute to its stockholders no sooner
than 180 days after the consummation of the Offering all of the Common Stock
of the Company owned by the Parent at that time. The Separation and
Distribution Agreement to be entered into between the Company and the Parent
will set forth certain agreements among the Company and the Parent, with
respect to the principal corporate transactions required to effect the
Separation, the Offering and the Distribution, and certain other agreements
governing the relationship among the parties thereafter.

THE OFFERING. The Separation and Distribution Agreement provides that the
Company shall consummate the Offering. On the Offering Closing Date, the
Parent will own 7,329,883 of the outstanding shares of Common Stock, which
will represent approximately 82.3% of the voting power of all the outstanding
shares of Common Stock (80.1% if the Underwriters exercise their over-
allotment option in full).

THE DISTRIBUTION. The Separation and Distribution Agreement provides that,
subject to the terms and conditions thereof, the Parent and the Company will
take all reasonable steps necessary and appropriate to cause all conditions to
the Distribution to be satisfied and to effect the Distribution. The Parent
Board will have the sole discretion to determine the Distribution Date at any
time commencing 180 days after the Offering Closing Date and ending on or
prior to December 31, 1999. The Parent has agreed to consummate the
Distribution promptly but in no event prior to 180 days after consummation of
the Offering, subject to the satisfaction, or waiver by the Parent Board, of
the following conditions:

(i) the PwC Opinion shall have been obtained, in form and substance
satisfactory to the Parent, and be confirmed at the time of Distribution;

(ii) if the Company decides to seek a Letter Ruling, the Letter Ruling
shall have been obtained, and shall continue in effect, to the effect that,
among other things, the Distribution will qualify as a tax-free
distribution for federal income tax purposes under Section 355 of the Code
and the Distribution by the Parent of Common Stock to stockholders of the
Parent will not result in recognition of any income, gain or loss for
federal income tax purposes to the Parent or the Parent's stockholders, and
such ruling shall be in form and substance satisfactory to the Parent, in
its sole discretion;

(iii) any material governmental approvals and third party consents
necessary to consummate the Distribution shall have been obtained and be in
full force and effect;

54
<PAGE>

(iv) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing
the consummation of the Distribution shall be in effect, and no other event
outside the control of the Parent shall have occurred or failed to occur
that prevents the consummation of the Distribution; and

(v) no other events or developments shall have occurred subsequent to the
Offering Closing Date that, in the sole judgment of the Parent Board, would
result in the Distribution having a material adverse effect on the Parent
or on the stockholders of the Parent.

The Company and the Parent have agreed that, after the Offering Closing
Date, none of the parties will take, or permit any of its affiliates to take,
any action which reasonably could be expected to prevent the Distribution from
qualifying as a tax-free distribution to the Parent and the Parent's
stockholders pursuant to Section 355 of the Code. The parties have also agreed
to take any reasonable actions necessary in order for the Distribution to
qualify as a tax-free distribution to the Parent and the Parent's stockholders
pursuant to Section 355 of the Code. Without limiting the foregoing, after the
Offering Closing Date and prior to the Distribution Date, the Company will not
issue or grant, directly or indirectly, any shares of its capital stock or any
rights, warrants, options or other securities to purchase or acquire (whether
upon conversion, exchange or otherwise) any shares of its capital stock
(whether or not then exercisable, convertible or exchangeable).

REGISTRATION RIGHTS. The Separation and Distribution Agreement will provide
that the Parent, and Messrs. Frank and Sam Khulusi, holders of approximately
18% and 19%, respectively of Parent Common Stock, will have the right in
certain circumstances, but in no event prior to 180 days after the Offering
Closing Date (in the case of the Parent) and 180 days after the Distribution
(in the case of Messrs. Frank and Sam Khulusi), to require the Company to use
its best efforts to register for resale shares of Common Stock held by them
under the Securities Act of 1933, as amended ("1933 Act"), subject to certain
conditions, limitations and exceptions. The Company also will agree with the
Parent and Messrs. Frank and Sam Khulusi that if the Company files a
registration statement for the sale of securities under the 1933 Act, then
such persons may, subject to certain conditions, limitations and exceptions,
include in such registration statement shares of Common Stock held by them. In
addition, for an additional 90 days after the applicable 180-day period, the
Company will be entitled to include its shares in any requested Demand
Registration and to reduce the number of shares to be sold by the Parent or
Messrs. Frank and Sam Khulusi thereunder to a minimum of 20%, collectively, of
the total offering plus the amount of any underwriters' over-allotment option.
In the case of Messrs. Frank and Sam Khulusi, the Company will bear up to
$100,000 of the cost of the first, and up to $50,000 of the second, requested
registrations and will bear the cost of all piggyback registrations. In
addition, the Parent's registration rights will terminate upon consummation of
the Distribution.

RELEASES AND INDEMNIFICATION. The Separation and Distribution Agreement
provides for a full and complete release and discharge as of the Offering
Closing Date of all liabilities, known or unknown, existing or arising from
all acts and events occurring or failing to occur or alleged to have occurred
or to have failed to occur and all conditions existing or alleged to have
existed on or before the Offering Closing Date, between the Company and the
Parent (including any contractual agreements or arrangements existing or
alleged to exist between them on or before the Offering Closing Date), except
as expressly set forth in the Separation and Distribution Agreement.

Except as provided in the Separation and Distribution Agreement, the Company
has agreed to indemnify, defend and hold harmless the Parent and each of the
Parent's directors, officers and employees from and against all liabilities
relating to, arising out of or resulting from: (i) the failure of the Company
or any other person to pay, perform or otherwise promptly discharge any
liabilities of the Company in accordance with their respective terms; (ii) any
breach by the Company of the Separation and Distribution Agreement or any of
the Ancillary Agreements; and (iii) any untrue statement or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, with respect to all information contained
in this Prospectus or the Registration Statement of which it forms a part.

Except as provided in the Separation and Distribution Agreement, the Parent
has agreed to indemnify, defend and hold harmless the Company and each of the
Company's directors, officers and employees from and

55
<PAGE>

against all liabilities relating to, arising out of or resulting from: (i) the
failure of the Parent or any other person to pay, perform or otherwise
promptly discharge any liabilities of the Parent other than the liabilities of
the Company; and (ii) any breach by the Parent of the Separation and
Distribution Agreement or any of the Ancillary Agreements. Neither the Company
nor the Parent is obligated under the Separation and Distribution Agreement to
indemnify the other for: (i) any liability, contingent or otherwise, assumed,
transferred, assigned or allocated to the other under the Separation and
Distribution Agreement or any Ancillary Agreement; (ii) any liability for the
sale, lease, construction or receipt of goods, property or services purchased,
obtained or used in the ordinary course of business between the parties prior
to the Offering Closing Date; (iii) any liability for unpaid amounts for
products or services or refunds owing on products or services due on a value-
received basis for work done by one party at the request or on behalf of the
other; (iv) any liability that the Company or the Parent may have with respect
to indemnification or contribution pursuant to the Separation and Distribution
Agreement for claims brought against other party by third persons; or (v)
generally, any liability the release of which would result in the release of
any person other than a person released pursuant to the Separation and
Distribution Agreement.

The Separation and Distribution Agreement contains provisions that govern,
except as otherwise provided in any Ancillary Agreement, the resolution of
disputes, controversies or claims that may arise between or among the parties.
These provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management (or
other mutually agreed) representatives of the parties. If such efforts are not
successful, any party may submit the dispute, controversy or claim to
mandatory, binding arbitration, subject to the provisions of the Separation
and Distribution Agreement. The Separation and Distribution Agreement contains
procedures for the selection of a sole arbitrator of the dispute, controversy
or claim and for the conduct of the arbitration hearing, including certain
limitations on discovery rights of the parties. These procedures are intended
to produce an expeditious resolution of any such dispute, controversy or
claim.

In the event that any dispute, controversy or claim is, or is reasonably
likely to be, in excess of $5 million, or in the event that an arbitration
award in excess of $5 million is issued in any arbitration proceeding
commenced under the Separation and Distribution Agreement, subject to certain
conditions, any party may submit such dispute, controversy or claim to a court
of competent jurisdiction and the arbitration provisions contained in the
Separation and Distribution Agreement will not apply. In the event that the
parties do not agree that the amount in controversy is in excess of $5
million, the Separation and Distribution Agreement provides for arbitration of
such disagreement.

NONCOMPETITION; CERTAIN BUSINESS TRANSACTIONS. The Separation and
Distribution Agreement provides that, for a period of nine months after the
Distribution Date, the Parent will not directly or indirectly, including by
way of acquisition of other companies, engage in the Internet online auction
business in substantially the same manner and format as conducted by the
Company on the date of the Separation and Distribution Agreement (the "Company
Business"). The Separation and Distribution Agreement also provides for the
allocation of certain corporate opportunities following the Offering Closing
Date and prior to the Distribution Date. During this period, neither the
Company nor the Parent will have any duty to communicate or offer such
opportunities to the other and may pursue or acquire any such opportunity for
itself or direct such opportunity to any other Person. Except as otherwise
contemplated under the intercompany agreements, it is anticipated that all
contracts between the Company and the Parent after consummation of the
Offering will be at arms length. See "Risk Factors--No Duty to Communicate
Corporate Opportunities."

EXPENSES. The Company has agreed to pay all third-party costs, fees and
expenses relating to the Offering, all of the reimbursable expenses of the
Underwriters pursuant to the Purchase Agreement (as defined below), all of the
costs of producing, printing, mailing and otherwise distributing this
Prospectus, as well as the Underwriters' discount as provided in the Purchase
Agreement. See "Underwriting." Except as expressly set forth in the Separation
and Distribution Agreement or in any Ancillary Agreement, whether or not the
Distribution is consummated, each party shall bear its own respective third-
party fees, costs and expenses paid or incurred in connection with the
Distribution.

56
<PAGE>

TERMINATION. The Separation and Distribution Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of the Parent
and the Company, or by the Parent at any time prior to the Offering Closing
Date; however, it shall be a condition to the Offering hereby that the
Separation and Distribution Agreement remains in full force and effect on the
Offering Closing Date. If the Separation and Distribution Agreement is
terminated prior to the Offering Closing Date, no party thereto (or any of its
respective directors or officers) will have any liability or further
obligation to any other party. In the event of any termination of the
Separation and Distribution Agreement on or after the Offering Closing Date,
only the provisions of the Separation and Distribution Agreement that obligate
the parties to pursue the Distribution, or take, or refrain from taking,
actions which would or might prevent the Distribution from qualifying for tax-
free treatment under Section 355 of the Code, will terminate and the other
provisions of the Separation and Distribution Agreement and each Ancillary
Agreement will remain in full force and effect.

SERVICES AGREEMENT

Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a services agreement (the "Services Agreement") pursuant to which
the Parent will provide to the Company various administrative services,
including general accounting services, credit services and payroll and
benefits administration.

GENERAL ACCOUNTING SERVICES. Pursuant to the Services Agreement, the Parent
will provide uBid with accounts payable services and general ledger services.
The services will be provided on a cost-plus 10% basis. This portion of the
Services Agreement may be cancelled by either party on 90 days prior written
notice and may be renewed by mutual agreement of the parties.

CREDIT SERVICES. The Services Agreement will also provide for the provision
by the Parent to uBid of credit services, including full credit checking and
analysis at a cost to uBid of $1.50 per transaction. The Parent will undertake
to use its best efforts to process each credit check within 24 hours of
receipt of the Company's request. This portion of the Services Agreement may
be cancelled by either party on 90 days prior written notice and may be
renewed by mutual agreement of the parties.

PAYROLL AND BENEFITS ADMINISTRATION. During a transition period for the
lesser of (i) one year or (ii) until such time as the Company establishes its
own 401(k) plan, the Parent will administer uBid's payroll and uBid's
employees will continue to be covered under the Parent's health insurance plan
and will continue to participate in the Parent's 401(k) plan. The Company will
reimburse the Parent for all payroll and benefits costs, and the Parent will
receive a monthly servicing fee on a cost-plus 10% basis per covered or
participating employee. This portion of the Services Agreement may be
cancelled by either party on 90 days prior written notice and may be renewed
by mutual agreement of the parties.

Payments pursuant to the Service Agreement shall be made monthly in arrears
within 30 days after the Company's receipt of an invoice detailing the
services rendered. The Company believes that the fees for services to be
provided under the Services Agreement will be no less favorable to the Company
than could have been obtained by the Company from unaffiliated third parties.

The Services Agreement will have an initial term of one year and may be
cancelled at any time at the option of either the Company or the Parent upon
90 days prior written notice. Following the initial term, the Company may seek
to renew or extend the term or to modify the scope of the services to be
provided by the Parent under the Services Agreement.

Any services rendered to the Company by the Parent beyond the services to be
provided under the terms of the Services Agreement that the Parent determines
are not covered by the fees provided for under the terms of the Services
Agreement will be billed to the Company as described in the Services
Agreement, or on such other basis as the Company and the Parent may agree,
provided that the price payable by the Company for non-covered services will
be established on a negotiated basis which is no less favorable to the Company
than the charges for comparable services from unaffiliated third parties.

57
<PAGE>

TAX INDEMNIFICATION AND ALLOCATION AGREEMENT

Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a Tax Indemnification and Allocation Agreement, which will provide
that if any one of certain events occurs, and such event causes the
Distribution not to be a tax-free transaction to the Parent under Section 355
of the Code, then the Company will indemnify the Parent for income taxes the
Parent may incur by reason of the Distribution not so qualifying under the
Code (the "Distribution Taxes"). Such events include any breach of
representations relating to the Company's activities and ownership of its
capital stock made to the Parent or in connection with the PwC Opinion or any
solicitation of a Letter Ruling. In connection with the Distribution,
confirmation of the PwC Opinion at the time of the Distribution and any Letter
Ruling, the Company will likely make certain representations regarding its
intentions at the time of the Distribution with respect to its business.

The Tax Indemnification and Allocation Agreement will also provide that the
Parent will indemnify the Company for Distribution Taxes for which the Company
has no liability to the Parent under the circumstances described above.

In addition to the foregoing indemnities, the Tax Indemnification and
Allocation Agreement will provide for: (i) the allocation and payment of taxes
for periods during which the Company and the Parent are included in the same
consolidated group for federal income tax purposes or the same consolidated,
combined or unitary returns for state tax purposes; (ii) the allocation of
responsibility for the filing of tax returns; (iii) the conduct of tax audits
and the handling of tax controversies; and (iv) various related matters.

For periods during which the Company is included in the Parent's
consolidated federal income tax returns or state consolidated, combined, or
unitary tax returns (which will include the periods on or before the
Distribution Date), the Company will be required to pay an amount of income
tax equal to the amount it would have paid had it filed its tax return as a
separate entity, except in cases where the consolidated or combined group as a
whole realizes a detriment from consolidation or combination. The Company will
be responsible for its own separate tax liabilities that are not determined on
a consolidated or combined basis. The Company will also be responsible in the
future for any increases to the consolidated tax liability of the Company and
the Parent that is attributable to the Company, and will be entitled to
refunds for reductions of tax liabilities attributable to the Company for
prior periods.

The Company will be included in the Parent's consolidated group for federal
income tax purposes so long as the Parent beneficially owns at least 80% of
the total voting power and value of the outstanding Common Stock. Each
corporation that is a member of a consolidated group during any portion of the
group's tax year is jointly and severally liable for the federal income tax
liability of the group for that year. While the Tax Indemnification and
Allocation Agreement allocates tax liabilities between Company and the Parent
during the period on or prior to the Offering Closing Date in which the
Company is included in the Parent's consolidated group, the Company could be
liable in the event federal tax liability allocated to the Parent is incurred,
but not paid, by the Parent or any other member of the Parent's consolidated
group for the Parent's tax years that include such periods. In such event, the
Company would be entitled to seek indemnification from the Parent pursuant to
the Tax Indemnification and Allocation Agreement. See "Risk Factors--Control
of Company; Relationship with the Parent."

As a condition to the Parent effecting the Distribution, the Company will be
required to indemnify the Parent for any tax liability suffered by the Parent
arising out of actions by the Company after the Distribution that would cause
the Distribution to lose its qualification as a tax-free distribution or to be
taxable to the Parent for federal income tax purposes under Section 355 of the
Code. For example, Section 355 generally provides that a company that
distributes shares of a subsidiary in a spin-off that is otherwise tax-free
will incur U.S. federal income tax liability if 50% or more, by vote or value,
of the capital stock of either the company making the distribution or the
subsidiary is acquired by one or more persons acting pursuant to a plan or
series of related transactions that include the spin-off. To ensure that
issuances of equity securities by the Company will not cause the Distribution
to be taxable to the Parent, the Tax Indemnification and Allocation Agreement
contains certain restrictions on issuances of equity securities of the Company
and its repurchase of equity securities until three years following the
Restriction Period. Until the second anniversary of the Distribution Date, the
Company cannot issue Common

58
<PAGE>

Stock and other equity securities (including the shares sold in the Offering)
that would cause the number of shares of Common Stock distributed by the
Parent in the Distribution to constitute less than 60% of the outstanding
shares of Common Stock unless the Company first obtains either the consent of
the Parent or a favorable IRS letter ruling that the issuance will not affect
the tax-free status of the Distribution. After this period until the end of
the third year from the Distribution Date, the Company cannot issue Common
Stock and other equity securities that, when combined with equity securities
sold in and after the Offering would cause the number of shares of Common
Stock distributed by the Parent in the Distribution to constitute less than
55% of the outstanding shares of Common Stock unless the Company first obtains
the consent of the Parent or a favorable IRS letter or opinion of tax counsel
that the issuance would not affect the tax-free status of the Distribution.
These restrictions on the issuance of equity securities may impede the ability
of the Company to raise necessary capital or to complete acquisitions, if any,
using equity securities. The foregoing prohibitions do not apply to issuances
of debt securities of the Company that are not convertible into Common Stock
or other equity securities. The same requirements for an IRS ruling, consent
of the Parent or an opinion of counsel are applicable to any proposed
repurchases of Common Stock during the Restriction Period. In the event that
the Company is required to indemnify and reimburse the Parent for any tax
liability incurred by the Parent arising out of the Distribution, such
indemnification and reimbursement would have a material adverse effect on the
business, results of operations and financial condition of the Company. See
"Risk Factors--Tax Indemnification Obligation, Limitation on Issuances of
Equity Securities Following the Distribution" and "--Limited Ability to Issue
Common Stock Prior to Distribution."

PARENT STOCK OPTIONS. Parent Stock Options outstanding as of the
Distribution Date will, as of the Distribution Date, become options to
purchase shares of both Parent Common Stock and Common Stock ("Adjusted
Options"). The number of shares of Common Stock that will be subject to such
Adjusted Options will be based upon the ratio of the number of shares of
Common Stock distributed to the Parent's stockholders in the Distribution
divided by the total number of shares of Parent Common Stock outstanding on
the record date for the Distribution. In addition, the exercise price for each
Adjusted Option will be allocated between the option to purchase Parent Common
Stock and the option to purchase Common Stock based on the respective average
post-Distribution closing prices of Parent Common Stock and Common Stock on
the Nasdaq National Market for the 30 days following the ex-dividend date for
the Distribution. The options to purchase Common Stock covered by the Adjusted
Options will be issued under the Company's 1998 Stock Incentive Plan.

As of September 30, 1998, there were outstanding options to purchase 854,893
shares of Parent Common Stock. Based on the number of shares of Parent Common
Stock and options to purchase Parent Common Stock outstanding on September 30,
1998 and the number of shares of Common Stock to be outstanding on the
Offering Closing Date, options to purchase approximately 612,017 shares of
Common Stock would have been granted in connection with Adjusted Options.

JOINT MARKETING AGREEMENT

Prior to the Offering Closing Date, the Company and the Parent intend to
enter into a joint marketing agreement (the "Marketing Agreement"), pursuant
to which the Parent and the Company will agree to continue certain joint
marketing efforts presently in place. The Marketing Agreement will provide
that the Company shall continue to be presented on the home page of the
Parent's "PC Mall" Website on at least one quarter of the page as well as
receive a banner advertisement on the home page of the Parent's "PC Mall"
Website. The Marketing Agreement will provide that uBid shall provide to the
Parent a button that "clicks through" from the home page of the Company's
Website to the Parent's "PC Mall" Website. As consideration for these
marketing services, the Company will either make a payment of $10,000 per
month to the Parent or the Parent, in its sole discretion, may elect to
receive a banner advertisement on each page of the Company's Website in lieu
of the monthly payment. The Marketing Agreement will have a term of one year
and shall be terminable by either party upon 60 days prior written notice.

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<PAGE>

INTERNET/TELECOMMUNICATIONS AGREEMENT

Prior to the Offering Closing Date, the Company and the Parent also intend
to enter into an Internet/telecommunications agreement (the
"Internet/Telecommunications Agreement") pursuant to which the Parent will
continue to provide the Company with certain Internet and telecommunications
services, including hosting the Company's Website. The Company will agree to
reimburse the Parent for all telecommunications charges (other than personnel
charges), as well as pay additional monthly personnel charges on a cost-plus
10% basis and capital equipment charges based on standard lease rates. The
Internet/Telecommunications Agreement will have an initial term of one year
and be cancelable, at the option of either party, upon 90 days prior written
notice, provided that, upon such cancellation, the Company shall be required
to purchase all capital equipment from the Parent at its depreciated book
value.

SUBLEASE AGREEMENT

In July 1998, the Company and the Parent entered into a sublease currently
covering 100,000 square feet of the Parent's 325,000 square foot distribution
center in Memphis, Tennessee. The sublease provides for the Company's
continued use of the Parent's sophisticated inventory control and shipping
systems during the term of the sublease. The sublease is at a monthly rate
equal to the Parent's obligations to the landlord, plus taxes and utilities,
and will expire in 2002.

OTHER RELATIONSHIPS WITH THE PARENT

On the Offering Closing Date, the Parent will own 7,329,883 shares of Common
Stock, which will represent approximately 82.3% of the voting power of all
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). In addition, Frank F. Khulusi, a director of
the Company, also is the Chairman, President and Chief Executive Officer of
the Parent.

PARENT CREDIT AGREEMENT

The Parent is party to a credit agreement pursuant to which it has a credit
facility of up to $60 million. Under the credit agreement, each of the
Parent's subsidiaries, including the Company, is required to guarantee the
Parent's obligations and to grant the lender a security interest in its assets
to secure the obligations under the guaranty. The lender has signed a letter
consenting to both the Offering and the Distribution and agreeing that the
Company's guaranty obligations will cease, and the security interest in the
collateral will be released, concurrently with the consummation of the
Offering. In connection with obtaining the lender's consent thereto, the
Company and the Parent have entered into an agreement with the lender,
effective from the consummation of the Offering through the Distribution, that
provides that neither the Company nor the Parent will make certain transfers
to each other of their respective assets which might impair the effectiveness
or enforceability of the lender's security interest in assets of the Parent.

PAYABLE TO PARENT

Since Inception, the Parent has provided the funds to finance the Company's
operations in the form of advances (approximately $3.7 million at September
30, 1998) that bear interest at the prime rate. The Company expects that the
amount of such advances through the Offering Closing Date will approximate $5
million. These advances will become payable 18 months following the Offering
Closing Date with interest payable monthly.

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<PAGE>

PRINCIPAL STOCKHOLDER

Prior to the Offering Closing Date, the Company has been a wholly-owned,
indirect subsidiary of the Parent. On the Offering Closing Date, the Parent
will own 7,329,883 of the outstanding shares of Common Stock, which will
represent approximately 82.3% of the voting power of all outstanding shares of
Common Stock (80.1% if the Underwriters exercise their over-allotment option
in full). Except for the Parent, the Company is not aware of any person or
group that will beneficially own more than 5% of the outstanding shares of
Common Stock upon the Offering Closing Date.

The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of November 1, 1998 and
as adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person who is known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each of the Company's Named Officers, and (iv) all directors and Named
Officers of the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
NUMBER OF NUMBER OF OWNED
SHARES SHARES TO BE -----------------
BENEFICIALLY SOLD IN THE BEFORE AFTER
BENEFICIAL OWNER (1) OWNED OFFERING OFFERING OFFERING
- -------------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Creative Computers, Inc. (2)....... 7,329,883 -- 100.0% 82.3%
Gregory K. Jones (3)............... 73,299 -- * *
Thomas E. Werner................... -- -- * *
George Lu.......................... -- -- * *
Timothy E. Takesue................. -- -- * *
David L. Hirschman (4)............. 21,990 -- * *
Joel D. Ludvigsen ................. -- -- * *
David L. Matthews (5).............. 14,660 -- * *
Brian A. Williams.................. -- -- * *
Frank F. Khulusi................... -- -- * *
Howard A. Tullman.................. -- -- * *
Norman H. Wesley................... -- -- * *
All directors and Named Officers as
a group (11 persons) (6).......... 109,949 -- 1.5% 1.2%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.

(1) Except as otherwise specified, the address of all persons on the list set
forth above is: 2525 Busse Road, Elk Grove Village, Illinois 60007.

(2) The address of Creative Computers, Inc. is 2555 West 190th Street,
Torrance, California 90504.

(3) Includes options to purchase approximately 73,299 shares of Common Stock
which are presently vested or will vest on the Offering Closing Date.

(4) Includes options to purchase approximately 21,990 shares of Common Stock
which are presently vested or will vest on the Offering Closing Date.

(5) Includes options to purchase approximately 14,660 shares of Common Stock
which are presently vested or will vest on the Offering Closing Date.

(6) Includes an aggregate of 109,949 shares of Common Stock issuable upon the
exercise of options that are presently vested or will vest on the
Offering Closing Date.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The Certificate of Incorporation authorizes 25,000,000 shares of capital
stock consisting of (a) 5,000,000 shares of preferred stock, par value $.001
per share (the "Preferred Stock"), and (b) 20,000,000 shares of Common Stock.
Of the shares of Common Stock, 1,580,000 shares are being offered hereby.
Immediately following the Offering Closing Date, 8,909,883 shares of Common
Stock (9,146,883 shares if the Underwriters exercise their over-allotment
option in full) will be outstanding, of which 7,329,883 shares of Common Stock
will be held by the Parent, and no shares of Preferred Stock will be
outstanding. All of the shares of Common Stock that will be outstanding
immediately following the Offering Closing Date, including the shares of
Common Stock sold in the Offering, will be validly issued, fully paid and
nonassessable. The following summary description of the capital stock of the
Company is qualified by reference to the Certificate of Incorporation and
Bylaws of the Company, copies of which will be filed as exhibits to the
Registration Statement of which this Prospectus is a part.

COMMON STOCK

VOTING. The Common Stock is entitled to one vote per share on all matters
submitted to a vote of the stockholders, including the election of directors.
Except as otherwise required by law or provided in any resolution adopted by
the Board with respect to any series of Preferred Stock, the holders of Common
Stock will possess all voting power. Generally, all matters to be voted on by
stockholders must be approved by a majority (or, in the case of election of
directors, by a plurality) of the votes entitled to be cast by all shares of
Common Stock that are present in person or represented by proxy, subject to
any voting rights granted to holders of any Preferred Stock. Except as
otherwise provided by law, and subject to any voting rights granted holders of
any Preferred Stock, amendments to the Certificate of Incorporation generally
must be approved by a majority of the votes entitled to be cast by all
outstanding shares of Common Stock. The Certificate of Incorporation does not
provide for cumulative voting in the election of directors.

DIVIDENDS. Subject to any preferential rights of any outstanding series of
Preferred Stock created by the Board from time to time, the holders of shares
of Common Stock will be entitled to such cash dividends as may be declared
from time to time by the Board from funds available therefor. See "Dividend
Policy."

LIQUIDATION. Subject to any preferential rights of any outstanding series of
Preferred Stock created from time to time by the Board, upon liquidation,
dissolution or winding up of the Company, the holders of shares of Common
Stock will be entitled to receive pro rata all assets of the Company available
for distribution to such holders.

OTHER RIGHTS. In the event of any merger or consolidation of the Company
with or into another company in connection with which shares of Common Stock
are converted into or exchangeable for shares of stock, other securities or
property (including cash), all holders of Common Stock will be entitled to
receive the same kind and amount of shares of stock and other securities and
property (including cash).

PREFERRED STOCK

The Certificate of Incorporation authorizes the Board to establish one or
more series of Preferred Stock and to determine, with respect to any series of
Preferred Stock, to fix the designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, including, without limitation, the
authority to fix or alter the dividend rights, dividend rates, conversion
rights, exchange rights, voting rights, rights and terms of redemption
(including sinking and purchase fund provisions), the redemption price or
prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and
the number of shares constituting any such series, and the designation
thereof, or any of them and to increase or decrease the number of shares of
any series so created.

62
<PAGE>

The Company believes that the ability of the Board to issue one or more
series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions, and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock, as
well as shares of Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which the Company's securities may be listed or traded.

Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board will make any determination to issue such shares based on
its judgment as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt through which an acquirer may be able to
change the composition of the Board, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock. See
"Risk Factors--Anti-Takeover Effects of Delaware Law and Certain Charter
Provisions."

CERTAIN ANTI-TAKEOVER EFFECTS

Certain provisions of the Certificate of Incorporation and Bylaws,
summarized in the following paragraphs, may be considered to have an anti-
takeover effect and may delay, deter or prevent a tender offer, proxy contest
or other takeover attempt that a stockholder might consider to be in such
stockholder's best interest, including such an attempt as might result in
payment of a premium over the market price for shares held by stockholders.

The Certificate of Incorporation and Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of
Directors will be elected each year. Classification of the Board of Directors
expands the time required to change the composition of a majority of directors
and may tend to discourage a proxy contest or other takeover bid for the
Company. Moreover, under the DGCL, in the case of a corporation having a
classified board of directors, the stockholders may remove a director only for
cause.

The Certificate of Incorporation provides that special meetings of
stockholders may be called by the President and Chief Executive Officer or at
the request of a majority of the Board of Directors of the Company.

The Bylaws provide that stockholders seeking to bring business before a
meeting of stockholders, or to nominate candidates for election as directors
at an annual meeting of stockholders, must provide timely notice thereof in
writing. To be timely, a stockholder's notice to bring business before a
meeting must be delivered to, or mailed and received at, the principal
executive office of the Company not less than 60 days nor more than 90 days
prior to the scheduled meeting. The Bylaws will also specify certain
requirements pertaining to the form and substance of a stockholder's notice.
These provisions may preclude some stockholders from making nominations for
directors at an annual meeting or from bringing other matters before the
stockholders at a meeting.

The Certificate of Incorporation does not allow the stockholders of the
Company to take action by written consent.

Section 203 of the DGCL ("Section 203") provides that, subject to certain
exceptions specified therein, an "interested stockholder" of a Delaware
corporation shall not engage in any business combination, including mergers or
consolidations or acquisitions of additional shares of the corporation, with
the corporation for a three-year period following the date that such
stockholder becomes an interested stockholder unless: (i) prior to such

63
<PAGE>

date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction which
resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
certain shares); or (iii) on or subsequent to such date, the business
combination is approved by the board of directors of the corporation and
authorized at an annual or special meeting of stockholders by the affirmative
vote of at least 66 2/3% of the outstanding voting stock which is not owned by
the interested stockholder. Except as otherwise specified in Section 203, an
interested stockholder is defined to include (x) any person that owns (or,
within the prior three years, did own) 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within three years immediately prior to the date of
determination and (y) the affiliates and associates of any such person.

Under certain circumstances, Section 203 makes it more difficult for a
person who would be an interested stockholder to effect various business
combinations with a corporation for a three-year period. The Company has not
elected to be exempt from the restrictions imposed under Section 203. However,
the Parent and its affiliates are excluded from the definition of "interested
stockholder" pursuant to the terms of Section 203. The provisions of Section
203 may encourage persons interested in acquiring the Company to negotiate in
advance with the Board, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves either the
business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect
of preventing changes in the management of the Company. It is possible that
such provisions could make it more difficult to accomplish transactions which
the Company's stockholders may otherwise deem to be in their best interests.

LIABILITY OF DIRECTORS; INDEMNIFICATION

The Certificate of Incorporation contains a provision that is designed to
limit directors' liability to the extent permitted by the DGCL and any
amendments thereto. Specifically, directors will not be held liable to the
Company or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability as a result of: (i) any breach of the
duty of loyalty to the Company or its stockholders; (ii) actions or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) payment of an improper dividend or improper repurchase
of the Company's stock under Section 174 of the DGCL; or (iv) actions or
omissions pursuant to which the director received an improper personal
benefit. The principal effect of the limitation of liability provision is that
a stockholder is unable to prosecute an action for monetary damages against a
director of the Company unless the stockholder can demonstrate one of the
specified bases for liability. The provision, however, does not eliminate or
limit director liability arising in connection with causes of action brought
under the federal securities laws. The Certificate of Incorporation does not
eliminate a director's duty of care. The inclusion of this provision in the
Certificate of Incorporation may, however, discourage or deter stockholders or
management from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefited the Company and its stockholders. This provision should not
affect the availability of equitable remedies such as injunction or rescission
based upon a director's breach of the duty of care.

The Certificate of Incorporation and Bylaws also provide that the Company
will indemnify its directors and officers, and may indemnify any of its
employees and agents, to the fullest extent permitted by Delaware law. The
Company is generally required to indemnify its directors and officers for all
judgments, fines, penalties, settlements, legal fees and other expenses
incurred in connection with pending, threatened or completed legal proceedings
because of the director's or officer's position with the Company or another
entity that the director or officer serves at the Company's request, subject
to certain conditions and to advance funds to its directors and officers to
enable them to defend against such proceedings.

At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of the Company where such
indemnification will be required or permitted.

64
<PAGE>

REGISTRATION RIGHTS

After the Offering Closing Date, the Parent and Messrs. Frank and Sam
Khulusi will have the right, in certain circumstances to require registration
of shares of Common Stock under the 1933 Act. The registration rights granted
to the Parent are provided for by the Separation and Distribution Agreement
and will terminate upon the consummation of the Distribution. The registration
rights granted to Messrs. Frank and Sam Khulusi are covered by a separate
agreement and will only become effective if the Distribution occurs. Under the
terms of each of the registration rights agreements between the Company and
these holders of such registrable securities, if the Company proposes to
register any of its securities under the 1933 Act, the registration rights
agreements provide that the holder, or holders, as applicable, are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein (a "Piggyback Registration"). Subject to certain limitations in
the agreements, the Parent, on the one hand, and Messrs. Frank and Sam
Khulusi, on the other hand, may require, on two occasions, that the Company
use its best efforts to register such shares for public resale, subject to
certain limitations ("Demand Registration"). These registration rights are
subject to certain conditions and limitations, among them the right of the
underwriters in a Piggyback Registration to limit the number of shares
included in such registration in certain circumstances. The Company will bear
the cost of all Piggyback Registrations. In addition, the Company will bear
the costs of up to $100,000 of the first, and up to $50,000 of the second,
Demand Registrations of Messrs. Frank and Sam Khulusi. The Parent has agreed
not to request registration of its shares of Common Stock for 180 days
following the Offering Closing Date. Messrs. Frank and Sam Khulusi have agreed
not to request the registration of their shares pursuant to any Demand
Registration for 180 days following the Distribution Date. In addition, for an
additional 90 days after the applicable 180-day period, the Company will be
entitled to include its shares in any requested Demand Registration and to
reduce the number of shares to be sold by the Parent or Messrs. Frank and Sam
Khulusi thereunder to a minimum of 20%, collectively, of the total offering
plus the amount of any underwriters' over-allotment option. If, as a result of
this cutback procedure, the number of shares sold by the Company in the
offering constitutes more than one half of the total shares sold, the
registration of such shares would be treated as a Piggyback Registration, and
the Company would bear the cost of such registration as noted above.

TRANSFER AGENT AND REGISTRAR

LaSalle National Bank will be the transfer agent and registrar for the
Common Stock.

65
<PAGE>

U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

The Parent has received the PwC Opinion to the effect that for Federal
income tax purposes:

1. The Distribution will qualify as a tax-free spin-off under Section 355 of
the Code.

2. The contribution by the Parent of certain rights in software to the
Company, followed by the distribution by the Parent of all of its Common
Stock, will qualify as a reorganization within the meaning of
Section 368(a)(1)(D) of the Code. The Company and the Parent will each be a
"party to the reorganization" within the meaning of Section 368(b).

3. No gain or loss will be recognized by the Parent upon the Distribution.

4. No gain or loss will be recognized by holders of Parent Common Stock
solely as a result of their receipt of Common Stock (including any fractional
shares of Common Stock to which a holder may be entitled) in the Distribution.

5. The aggregate tax basis of Parent Common Stock and Common Stock
(including any fractional shares of Common Stock to which a holder may be
entitled) held immediately after the Distribution by any holder will equal, in
each instance, such holder's tax basis in its Parent Common Stock immediately
before the Distribution, allocated in proportion to the relative fair market
values of Parent Common Stock and Common Stock on the Distribution Date.

6. The holding period of the Common Stock received in the Distribution
(including any fractional shares of Common Stock to which a holder may be
entitled) will include the holding period of Parent Common Stock with respect
to which the Common Stock was distributed, provided that such Parent Common
Stock was held as a capital asset on the Distribution Date.

7. Where cash is received by a holder of Parent Common Stock in lieu of
fractional share interests in the Common Stock such fractional share interests
will be treated as having been issued and then redeemed by such holder. The
difference between the amount of cash received and basis allocable to such
fractional share interest will be a capital gain or loss, as the case may be,
provided that Parent Common Stock is held as a capital asset on the
Distribution Date.

8. Proper allocation of earnings and profits between the Company and the
Parent will be required by current Treasury regulations.

The PwC Opinion is subject to certain factual representations and
assumptions. The Company is not aware of any present facts or circumstances
that would cause such representations and assumptions to be untrue. The Parent
and the Company will also agree to certain restrictions on their future
actions to provide further assurances that the Distribution will qualify as
tax free. See "Risk Factors--Tax Indemnification Obligation; Limitation on
Issuances of Equity Securities Following the Distribution," "--Limited Ability
to Issue Common Stock Prior to Distribution" and "Certain Transactions--Tax
Indemnification and Allocation Agreement." In the event that the Parent
decides to seek a letter ruling from the IRS with respect to the Federal
income tax consequences of the Distribution, there can be no assurance that
the IRS will not take a position contrary to that expressed in the PwC
Opinion. See "Risk Factors--Risk of Noncompletion of a Tax-Free Distribution."

If the Distribution were not to qualify under Section 355 of the Code, then
(i) the Parent would recognize capital gain equal to the excess of (x) the
fair market value of the Common Stock on the Distribution Date over (y) its
adjusted tax basis in the Common Stock, and (ii) each holder of Parent Common
Stock who receives shares of Common Stock in the Distribution would be treated
as if such stockholder received a taxable distribution in an amount equal to
the fair market value of such shares of the Common Stock on the Distribution
Date, taxed first as a dividend to the extent of such stockholder's pro rata
share of the Parent's current and accumulated earnings and profits, and then
as a nontaxable return of capital to the extent of such stockholder's basis in
Parent Common Stock (with any remaining amount being taxed as capital gain).
Pursuant to the Tax Indemnification and Allocation Agreement, the Parent and
the Company will agree that if any one of certain events occurs, and such
event causes the Distribution not to be a tax-free transaction to the Parent
under Section 355, then the Company

66
<PAGE>

will indemnify the Parent for the income taxes the Parent may occur by reason
of the Distribution not so qualifying under the Code. The Parent will
indemnify the Company for such taxes for which the Company has no liability to
the Parent under the Tax Indemnification and Allocation Agreement. Regardless
of such agreement, the Parent and the Company will each be severally liable to
the Internal Revenue Service for the full amount of any such Federal corporate
level tax that is not paid by the other. For a description of the Tax
Indemnification and Allocation Agreement, see "Certain Transactions--Tax
Indemnification and Allocation Agreement."

Stockholders of the Parent should consult their own advisers as to the
specific tax consequences of the Distribution to their particular
circumstances, including the effects of foreign, state and local tax laws and
the effect of possible changes in tax laws.

67
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Of the 8,909,883 shares of Common Stock to be outstanding on the Offering
Closing Date (9,146,883 shares if the Underwriters exercise their over-
allotment option in full) the 1,580,000 shares of Common Stock sold in the
Offering (1,817,000 shares if the Underwriters exercise their over-allotment
option in full) will be freely tradable without restriction under the 1933
Act, except for any such shares which be may acquired by an affiliate of the
Company (an "Affiliate"), as that term is defined in Rule 144 promulgated
under the 1933 Act ("Rule 144"). On the Offering Closing Date, the Parent will
own 7,329,883 shares of Common Stock which will constitute 82.3% of the
outstanding shares of Common Stock (80.1% if the Underwriters exercise their
over-allotment option in full). Parent has announced that, subject to certain
conditions, the Parent intends to distribute to its stockholders in 1999 all
of the Common Stock held by the Parent by means of the Distribution. Shares of
Common Stock to be distributed to the Parent's stockholders in the
Distribution generally will be freely transferable, except for shares of
Common Stock received by persons who may be deemed to be Affiliates. Persons
who may be deemed to be Affiliates generally include individuals or entities
that control, are controlled by, or are under common control with, the Company
and may include directors and certain officers of the Company as well as
significant stockholders of the Company, if any. Persons who are Affiliates
will be permitted to sell the shares of Common Stock that are issued in the
Offering or that they receive in the Distribution only pursuant to an
effective registration statement under the 1933 Act or an exemption from the
registration requirements of the 1933 Act, including exemptions provided by
Rule 144.

The shares of Common Stock held by the Parent are deemed "restricted
securities" as defined in Rule 144, and may not be sold other than through
registration under the 1933 Act or pursuant to an exemption from the
regulations thereunder, including exceptions provided by Rule 144. Subject to
applicable law and to the contractual restriction with the Underwriters
described below, the Parent may sell any and all of the shares of Common Stock
it owns after completion of the Offering. The Separation and Distribution
Agreement will provide that the Parent will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale shares of Common Stock held by the Parent. See "Certain Transactions--
Separation and Distribution Agreement." The Company, each of its directors and
executive officers and the Parent have each agreed, for a period of 180 days
after the date of this Prospectus, not to offer or sell any shares of Common
Stock, subject to certain exceptions (including the Distribution), without the
prior written consent of Merrill Lynch on behalf of the Underwriters. See
"Underwriting." In addition, after the Offering Closing Date and prior to the
Distribution Date, the Company has agreed not to issue any shares of its
capital stock or any rights, warrants, or other securities to purchase or
acquire any shares of its capital stock, without the prior consent of the
Parent. See "Certain Transactions--Separation and Distribution Agreement."
Subject to the foregoing restrictions, the Company may issue additional shares
of Common Stock to raise equity or make acquisitions. The Company may also
issue additional shares of Common Stock to the Parent in exchange for
additional investments of cash or other property by the Parent in the Company.

In addition, upon completion of the Distribution, certain stock options
exercisable for shares of Parent Common Stock will be converted into stock
options exercisable for shares of Common Stock. See "Certain Transactions--Tax
Indemnification and Allocation Agreement." In addition, subject to the prior
consent of the Parent, the Company may grant options to purchase shares of
Common Stock to employees, non-employee directors and independent contractors
of the Company pursuant to the 1998 Stock Incentive Plan. See "Management--
Stock Options." The Company currently expects to file promptly following the
Offering Closing Date a registration statement under the 1933 Act to register
shares reserved for issuance under the 1998 Stock Incentive Plan. Shares
issued pursuant to the 1998 Stock Incentive Plan after the effective date of
such registration statement (other than shares issued to Affiliates) generally
will be freely tradable without restriction or further registration under the
1933 Act.

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<PAGE>

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated and William Blair &
Company, L.L.C. are acting as Representatives (the "Representatives") of each
of the Underwriters named below (the "Underwriters"). Subject to the terms and
conditions set forth in a purchase agreement (the "Purchase Agreement") among
the Company and the Underwriters, the Company has agreed to sell to the
Underwriters, and each of the Underwriters severally and not jointly has
agreed to purchase from the Company, the number of shares of Common Stock set
forth opposite its name below.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................. 465,000
William Blair & Company, L.L.C. ................................... 465,000
BT Alex. Brown Incorporated........................................ 100,000
Dain Rauscher Wessels.............................................. 100,000
Deutsche Bank Securities Inc....................................... 100,000
NationsBanc Montgomery Securities LLC.............................. 100,000
Adams, Harkness & Hill, Inc........................................ 50,000
EVEREN Securities, Inc............................................. 50,000
JWGenesis Capital Markets, LLC..................................... 50,000
Volpe Brown Whelan & Company, LLC.................................. 50,000
Wit Capital Corporation............................................ 50,000
---------
Total......................................................... 1,580,000
=========
</TABLE>

In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to such agreement if any of the shares of
Common Stock being sold pursuant to such agreement are purchased. Under
certain circumstances, under the Purchase Agreement, the commitments of non-
defaulting Underwriters may be increased.

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the initial
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $0.60 per
share of Common Stock. The Underwriters may allow, and such dealers may
reallow, a discount not in excess of $0.10 per share of Common Stock on sales
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.

At the Company's request, the Underwriters have reserved for sale at the
initial public offering price up to 110,000 shares of Common Stock offered
hereby for certain individuals who have expressed an interest in purchasing
such shares of Common Stock in the Offering. The number of shares available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares not so purchased will be
offered by the Underwriters to the general public on the same basis as other
shares offered hereby.

The Company has granted an option to the Underwriters, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
237,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting
discount. The Underwriters may exercise this option solely to cover over-
allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the Underwriters exercise this option, each Underwriter will
be obligated, subject to certain conditions, to purchase a number of
additional shares of Common Stock proportionate to such Underwriter's initial
amount reflected in the foregoing table.

Each of the Company, its directors and executive officers and the Parent has
agreed, for a period of 180 days after the date of this Prospectus, subject to
certain exceptions, not to directly or indirectly (i) offer, pledge, sell,

69
<PAGE>

contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant for the sale of or
otherwise dispose of or transfer any shares of Common Stock or securities
convertible into or exchangeable or exercisable for Common Stock, whether now
owned or thereafter acquired by the person executing the agreement or with
respect to which the person executing the agreement thereafter acquires the
power of disposition, or file a registration statement under the 1933 Act with
respect to the foregoing or (ii) enter into any swap or other agreement that
transfers, in whole or in part, the economic consequence of ownership of the
Common Stock whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise, without the prior
written consent of Merrill Lynch on behalf of the Underwriters. See "Shares
Eligible for Future Sale." Additionally, Messrs. Frank and Sam Khulusi have
each agreed, until 180 days following the Distribution Date, not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, or otherwise dispose of or transfer
any shares of Common Stock owned by them, or exercise any demand for
registration of any shares of Common Stock.

Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price of the Common Stock will be
determined through negotiations between the Company and the Representatives.
The factors considered in determining the initial public offering price, in
addition to prevailing market conditions, are price-revenue and discounted
price-earnings ratios of publicly traded companies that the Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry
in which it competes, and an assessment of the Company's management, its past
and present operations, the prospects for, and timing of, future revenues of
the Company, the present state of the Company's development, and the above
factors in relation to market values and various valuation measures of other
companies engaged in activities similar to the Company. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the
Offering at or above the initial public offering price.

The Common Stock has been approved for listing on the Nasdaq National Market
under the symbol "UBID," subject to official notice of issuance. In order to
meet the requirements for listing of the Common Stock on that market, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 400 beneficial owners.

The Underwriters do not expect sales of the Common Stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.

The Company and the Parent have agreed to indemnify, jointly and severally,
the Underwriters against certain liabilities, including liabilities under the
1933 Act, or to contribute to payments the Underwriters may be required to
make in respect thereof.

In connection with the Offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transaction may include over-allotment
and stabilizing transactions and purchases to cover short positions created by
the Underwriters in connection with the Offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Common Stock; and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from the Company in
the Offering. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to broker-dealers in respect of the securities sold in the
Offering may be reclaimed by the Underwriters if such shares of Common Stock
are repurchased by the Underwriters in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price
of the Common Stock, which may be higher than the price that may otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.

70
<PAGE>

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Morrison & Foerster llp,
Irvine, California. Certain legal matters relating to the Offering will be
passed upon for the Underwriters by Latham & Watkins, San Francisco,
California.

EXPERTS

The financial statements of the Company at December 31, 1997 and September
30, 1998 and for the period from Inception to December 31, 1997 and for the
nine months ended September 30, 1998, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the 1933 Act with
respect to the Common Stock offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain
portions of which are omitted as permitted by the rules and regulations of the
Commission. For further information pertaining to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this Prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or such other document, each such statement being
qualified in all respects by such reference.

On the Offering Closing Date, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information, as well as the Registration Statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of such material may also be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. Such materials can also be inspected on the Commission's
site on the Internet at http://www.sec.gov.

71
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................... F-2
Balance Sheets as of December 31, 1997 and September 30, 1998............ F-3
Statements of Operations for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Nine Months Ended September 30, 1998.......... F-4
Statements of Cash Flows for the Period April 1, 1997 (Inception) to
December 31, 1997 and the Nine Months Ended September 30, 1998.......... F-5
Statements of Changes in Stockholder's Deficit for the Period April 1,
1997 (Inception) to December 31, 1997 and the Nine Months Ended
September 30, 1998...................................................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholder
uBid, Inc.

We have audited the accompanying balance sheets of uBid, Inc. (a wholly-
owned subsidiary of Creative Computers, Inc.) as of December 31, 1997 and
September 30, 1998, and the related statements of operations, cash flows and
changes in stockholder's deficit for the period from April 1, 1997 (Inception)
to December 31, 1997 and the nine-month period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of uBid, Inc. as of December
31, 1997 and September 30, 1998, and the results of its operations and its
cash flows for the period from April 1, 1997 (Inception) to December 31, 1997
and the nine-month period ended September 30, 1998, in conformity with
generally accepted accounting principles.

/s/ Ernst & Young LLP

Chicago, Illinois
November 16, 1998, except as to Note 7, as to which the date is November 30,
1998.

F-2
<PAGE>

uBID, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, net of allowances of $20 at
September 30, 1998................................. $ 9 $ 499
Merchandise inventories............................. 2 4,498
Prepaid expenses.................................... 20 10
----- -------
Total current assets............................ 31 5,007
Deferred offering costs............................. -- 739
Fixed assets, net................................... 327 302
----- -------
Total assets.................................... $ 358 $ 6,048
===== =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.................................... $ -- $ 4,760
Accrued professional fees........................... -- 383
Accrued advertising................................. -- 263
Accrued expenses and other current liabilities...... -- 225
----- -------
Total current liabilities....................... -- 5,631
Advances from the Parent............................ 670 3,709
Stockholder's deficit:
Preferred Stock; $.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding........ -- --
Common Stock; $.001 par value; 20,000,000 shares
authorized; 7,329,883 shares issued and
outstanding........................................ 1 1
Additional paid-in-capital.......................... -- --
Accumulated deficit................................. (313) (3,293)
----- -------
Total stockholder's deficit..................... (312) (3,292)
----- -------
Total liabilities and stockholder's deficit..... $ 358 $ 6,048
===== =======
</TABLE>

See notes to the financial statements.

F-3
<PAGE>

uBID, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 NINE-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- -------------
<S> <C> <C>
Net revenues...................................... $ 9 $ 24,125
Cost of revenues.................................. 8 22,192
--------- ---------
Gross profit...................................... 1 1,933
Operating expenses:
Sales and marketing............................. 10 1,353
Technology and development...................... 66 694
General and administrative...................... 212 2,707
--------- ---------
Total operating expenses...................... 288 4,754
--------- ---------
Loss from operations.............................. (287) (2,821)
Interest expense to Parent........................ 26 159
--------- ---------
Loss before income taxes.......................... (313) (2,980)
Provision for income taxes........................ -- --
--------- ---------
Net loss.......................................... $ (313) $ (2,980)
========= =========
Basic and diluted net loss per share.............. $ (0.04) $ (0.41)
========= =========
Shares used to compute basic and diluted net loss
per share........................................ 7,329,883 7,329,883
</TABLE>

See notes to the financial statements.

F-4
<PAGE>

uBID, INC.

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 NINE-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(313) $(2,980)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................... 4 101
Changes in operating assets and liabilities:
Accounts receivable, net...................... (9) (490)
Prepaid expenses.............................. (20) 10
Merchandise inventories, net.................. (2) (4,496)
Accounts payable.............................. -- 4,760
Accrued professional fees..................... -- 383
Accrued advertising........................... -- 263
Accrued expenses and other current
liabilities.................................. -- 225
----- -------
Net cash used by operating activities............. (340) (2,224)
Cash flows from investing activities:
Purchases of property and equipment............. (331) (75)
----- -------
Net cash used by investing activities............. (331) (75)
Cash flows from financing activities:
Issuance of Common Stock to the Parent.......... 1 --
Advances from the Parent........................ 670 3,038
Deferred offering costs......................... -- (739)
----- -------
Net cash provided by financing activities......... 671 2,299
----- -------
Net change in cash and cash equivalents........... -- --
Cash and cash equivalents at beginning of period.. -- --
----- -------
Cash and cash equivalents at end of period........ $ -- $ --
===== =======
</TABLE>

See notes to the financial statements.

F-5
<PAGE>

uBID, INC.

STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT

(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock to the
Parent......................... 7,330 $ 1 $ -- $ -- $ 1
Net loss for the period......... -- -- -- (313) (313)
----- ------ --------- ----------- -------
Balance at December 31, 1997.... 7,330 $ 1 -- (313) (312)
Net loss for the period......... -- -- -- (2,980) (2,980)
----- ------ --------- ----------- -------
Balance at September 30, 1998... 7,330 $ 1 $ -- $ (3,293) $(3,292)
===== ====== ========= =========== =======
</TABLE>

See notes to the financial statements.

F-6
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE DATA)

1. DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF COMPANY

The Company, a wholly-owned, indirect subsidiary of Creative Computers, Inc.
("Parent"), a publicly-traded corporation, was incorporated on September 19,
1997. Beginning on April 1, 1997 ("Inception"), prior to the formation of the
Company, the Parent began funding certain startup and development costs
related to the Company's business. For the period from Inception to September
19, 1997, incorporation of the Company, such costs aggregated approximately
$127 of which approximately $49 were capitalized. The net loss for the period
Inception to September 19, 1997 was approximately $78. On September 19, 1997,
assets and liabilities related to the Company were recorded by the Company at
the Parent's basis. The financial statements have been prepared as if the
Company operated as a stand-alone entity since Inception.

REVENUE RECOGNITION

The Company sells merchandise from vendors under one of two types of sales
transactions. The Company either purchases merchandise and sells it to
customers or sells merchandise to customers under consignment-type revenue
sharing agreements with vendors. For the nine months ended September 30, 1998,
the Company's sales of purchased inventory comprised approximately 97% of
revenues, with consignment-type revenue sharing representing approximately 3%
of revenues.

SALES--PURCHASED INVENTORY

For sales of merchandise owned and warehoused by the Company, the Company is
responsible for conducting the auction, billing the customer, shipping the
merchandise to the customer, processing merchandise returns and collecting
accounts receivable. The Company recognizes the gross sales amount as revenue
upon verification of the credit card transaction authorization and shipment of
the merchandise. In instances where the credit card authorization has been
received but the merchandise has not yet been shipped, the Company defers
revenue recognition until the merchandise is shipped. The Company had no
deferred revenue at December 31, 1997 or September 30, 1998. Revenue from
sales where credit has been extended is recognized when merchandise is
shipped.

SALES--REVENUE SHARING AGREEMENTS

For sales of merchandise under revenue sharing agreements, the Company
either takes physical possession of the merchandise or the vendor retains
physical possession of the merchandise. In either case, the Company is not
obligated to take title to the merchandise nor does it take title unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company purchases the inventory, takes title to the merchandise, charges
the customer's credit card and either ships the merchandise directly or
arranges for a third party to complete delivery to the customer. The Company
records the gross sales amount as revenue upon verification of the credit card
authorization and shipment of the merchandise. In instances where credit card
authorization has been received but the merchandise has not been shipped, the
Company defers revenue recognition until the merchandise is shipped. The
Company had no deferred revenue at December 31, 1997 or September 30, 1998.
Revenue from sales where credit has been extended is recognized when
merchandise is shipped.

F-7
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

MERCHANDISE RETURN POLICY

The Company's return policy is that merchandise sold by the Company is sold
on an "as is" basis and is not returnable. However, the Company, although not
obligated to do so, may accept merchandise returns if a product is defective
or does not conform to the specifications of the item sold at auction, and
attempts to work with its customers to resolve complaints about merchandise.
The Company provides for allowances for estimated future returns at the time
of shipment based on historical experience.

MERCHANDISE INVENTORY

The Company accounts for merchandise inventory under the first-in first-out
method. Inventory is carried at lower of cost or market.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based on the estimated useful lives of the assets
which range from three to five years.

ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS

The Company reviews long-lived assets and certain intangible assets for
impairment when events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. In the event the sum of the
expected undiscounted future cash flows resulting from the use of the asset is
less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset's carrying value over its fair value is recorded. The
Company has recognized no such losses.

SOFTWARE DEVELOPMENT COSTS

In accordance with SOP 98-1, internal and external costs incurred to develop
internal-use computer software are expensed during the preliminary project
stage and capitalized during the application development stage and amortized
over three years. During the period ended December 31, 1997 and the nine-month
period ended September 30, 1998, $39 and $0 was expensed, respectively. As of
December 31, 1997 and September 30, 1998, capitalized software net of
accumulated amortization was $264 and $194, respectively.

ADVERTISING COSTS

Advertising costs are charged to expense as incurred. Advertising expense
was $0 and $1,248 for the periods ended December 31, 1997 and September 30,
1998, respectively.

INCOME TAXES

The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under this
method, deferred income taxes are recognized by applying enacted statutory tax
rates applicable to future years to differences between the tax bases and
financial reporting amounts of existing assets and liabilities. Valuation
allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.

The operations of the Company are included in the consolidated tax return of
the Parent. The tax provision presented in these financial statements was
determined as if the Company filed a separate return.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for employee stock based compensation in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" and related interpretations in accounting

F-8
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

for its stock based compensation plans, as permitted by Financial Accounting
Standards Board Statement 123 (SFAS 123) "Accounting for Stock Based
Compensation."

NET LOSS PER SHARE

Basic net loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding during the
reported periods. Diluted net loss per share reflects the potential dilution
that could occur if stock options and other commitments to issue Common Stock
were exercised. During the periods ended December 31, 1997 and September 30,
1998, options to purchase 458,118 and 869,690 common shares were anti-dilutive
and have been excluded from the weighted average share computation.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to a
concentration of credit risk consist of accounts receivable from individuals
and merchants located in the United States. Sales are generally made through
credit cards and are pre-approved. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of
accounts receivable and potential credit losses. Such losses have been
immaterial.

CONCENTRATION OF VENDORS

The Company is dependent upon vendors to supply it with merchandise for sale
through the Company's Internet auctions. For the period from Inception to
December 31, 1997 one vendor, the Parent, accounted for approximately 100% of
net revenues from related product sales. For the nine-month period ended
September 30, 1998, the Parent accounted for approximately 11% of net revenues
from related product sales.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
respective reporting periods. Actual results could differ from those
estimates.

STOCK SPLIT

On June 25, 1998, the Board of Directors effected a 100,000-for-one split of
the outstanding shares of the Company's Common Stock. All common shares and
per share data have been retroactively adjusted to reflect the stock split.

2. FIXED ASSETS

Fixed assets consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Computer, machinery and
equipment.............. $ 64 $ 101
Computer software....... 267 306
---- -----
331 407
Less accumulated
depreciation and
amortization........... (4) (105)
---- -----
$327 $ 302
==== =====
</TABLE>

F-9
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

3. RELATED PARTY TRANSACTIONS

Since Inception, the Parent has provided advances to the Company for working
capital and fixed asset purchases of $670 and $3,709 through December 31, 1997
and September 30, 1998, respectively. The advances bear interest at the prime
rate (8.5% at December 31, 1997 and September 30, 1998). Interest expense was
$26 and $159 for the period ended December 31, 1997 and the nine months ended
September 30, 1998, respectively. The Company participates in the Parent's
cash management process. In connection therewith, cash receipts related to the
Company's business are applied directly to reduce the Advances from the
Parent.

It is the Parent's intention to continue to fund these cash needs and will
not require repayment of the advances for the foreseeable future, and in any
case through December 1, 1999. When the Company completes its anticipated
initial public offering of Common Stock (see Note 6), the then outstanding
balance payable to the Parent will be converted to an interest only note at
prime with the principal due 18 months from the IPO date.

In addition, the Parent provides various services such as administration
(accounting, human resources, legal), warehousing and distribution (through
June 1998), Internet/telecom and joint marketing to the Company. In
consideration for those services, the Parent has historically allocated a
portion of its overhead costs related to such services to the Company. The
charges for these services were:

<TABLE>
<CAPTION>
PERIOD FROM
APRIL 1, 1997 NINE-MONTH
(INCEPTION) TO PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- -------------
<S> <C> <C>
Administrative................................ $ 36 $ 353
Warehousing and distribution.................. -- 417
Internet/telecom and joint marketing.......... 172 640
---- ------
$208 $1,410
==== ======
</TABLE>

Administration costs for services provided by the Parent to the Company were
determined by identifying all of the Parent's personnel who supported the
Company. Their pay, based on the number of hours of service provided,
benefits, plus an allocation of overhead, was used to calculate these costs.
Credit card processing for transactions above a certain dollar amount was
based on $1.50 per order. Prior to June 30, 1998, warehousing and distribution
was charged at $4.00 per order and was based on the Parent's fully burdened
cost per order for warehousing and distribution. Effective July 1, 1998 the
Company began subleasing 50,000 square feet of warehouse space from the Parent
at the Parents marginal cost. In October 1998, the sublease was increased to
100,000 square feet at the same terms. The Company is also charged a pro-rata
share, based on square footage, of the warehouse utilities, property taxes,
and other warehouse costs. Direct labor to operate the warehouse was charged
directly to the Company. Internet/telecom service costs includes an allocation
of monthly depreciation for all hardware and software based on usage by the
Company, as well as monthly rates for telecommunication expenses consumed by
the Company. Management asserts that the methods to identify and allocate
costs to the Company for these services provided by the Parent are reasonable.

One of the Company's officers and one of its directors also serve as an
officer and a director, respectively, of the Parent.

4. INCOME TAXES

No tax benefit has been provided for the periods ended December 31, 1997 and
September 30, 1998 pretax losses due to the uncertainty of realization of
these benefits in future years.

F-10
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

The provision for income taxes differed from the amount computed by applying
the U.S. federal statutory rate to income (loss) before income taxes due to
the effects of the following:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Expected taxes at federal statutory tax rate... 34.0% 34.0%
Nonrecognition of tax benefits................. (34.0) (34.0)
----- -----
-- % -- %
===== =====
</TABLE>

Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Deferred tax assets:
Start-up and development costs................ $ 105 $ 89
Net operating loss............................ 10 1,216
Other......................................... 10 12
----- ------
125 1,317
Valuation allowance........................... (125) 1,317
----- ------
$ -- $ --
===== ======
</TABLE>

5. EMPLOYEE BENEFITS

401(k) SAVINGS PLAN

The Parent has a 401(k) Savings Plan which covers substantially all Company
full-time employees. Participants may make tax-deferred contributions of up to
15% of annual compensation (subject to other limitations specified by the
Internal Revenue Code). Administrative and matching costs, which are charged
to the Company by the Parent, were not significant for the period from
Inception to December 31, 1997 and for the nine-month period ended September
30, 1998.

EMPLOYEE STOCK OPTION PLANS

The Company has granted non-qualified options to certain employees and a
director of the Company to purchase Common Stock. All of the options granted
are exercisable only in the event of an Initial Public Offering (IPO) or a
Sale or Merger, as defined. Accordingly, no options were exercisable at
December 31, 1997 or September 30, 1998. The terms of the options provide for
vesting, generally over a 5-year period, except for options to purchase
183,247 shares of common stock at September 30, 1998 which vest as to 20% of
the shares covered by such options upon completion of an IPO. The options
expire 10 years from the date of grant.

The following table summarizes stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER EXERCISE PRICE
------- ----------------
<S> <C> <C>
Granted........................................ 458,118 $0.27
Canceled....................................... --
Exercised...................................... --
-------
Outstanding at December 31, 1997............. 458,118 $0.27
Granted........................................ 414,137 $1.19
Canceled....................................... (2,565) $0.27
Exercised...................................... --
-------
Outstanding at September 30, 1998............ 869,690 $0.71
=======
</TABLE>

The options outstanding at December 31, 1997 all have an exercise price of
$0.27. Of the options granted during the nine months ended September 30, 1998,
options to purchase 373,090, 18,325, 1,832 and

F-11
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

20,890 common shares have exercise prices of $0.27, $6.82, $10.20 and $11.79,
respectively. Options at September 30, 1998 have a weighted average remaining
contractual life of 5.95 years.

Since the options can be exercised only upon the occurrence of either an IPO
or Sale or Merger, as defined, a measurement date as defined by APB 25, has
not yet occurred.

If the Company completes the pending IPO, a measurement date will occur as
of the effective date of the IPO, and the Company will be required to compute
compensation expense based upon the difference between the exercise price of
the options and the IPO price. Based upon the difference between the IPO price
of $15.00 per share contained in the prospectus for the pending IPO, and the
exercise prices of the 1,038,278 options outstanding at November 16, 1998, the
total compensation charge will be approximately $13.3 million, which will be
recognized over the vesting period. Assuming the IPO is completed at December
31, 1998, the compensation charge at that date will be approximately $5.9
million.

The fair value of each stock option grant has been estimated pursuant to
SFAS No. 123 on the date of grant using the minimum value method with the
following weighted average assumptions:

<TABLE>
<S> <C>
Risk free interest rate 6.3%
Expected dividend yield none
Expected lives 6 years
Expected volatility 1
</TABLE>

The weighted average grant date fair values of options granted under the
Plans during the nine months ended September 30, 1998 and the period from
Inception to December 31, 1997 were $0.37 and $0.08, respectively.

Since all options are exercisable only in the event of an IPO or Sale or
Merger, as defined, no compensation expense would be recorded for these Plans
in accordance with SFAS No. 123, since it is not probable that such awards
will be earned.

1998 STOCK INCENTIVE PLAN

In August 1998, the Company's Board of Directors adopted the 1998 Stock
Incentive Plan (the 1998 Plan) and reserved 1,832,470 shares of Common Stock
for issuance thereunder. The plan authorized the award of options, stock
appreciation rights, restricted stock awards and performance based stock
awards (each an Award). The maximum number of shares with respect to options
and stock appreciation rights granted to any employee in any fiscal year is
476,442 shares. Options granted under the Plan may be either incentive stock
options (ISO's) or nonqualified stock options (NSO'S). ISO's may be granted
only to employee (including officers and directors who are also employees).
Awards other than ISO's may be granted to employees, directors and
consultants, as defined.

Options under the Plan may be granted for periods up to ten years and at
prices no less than 85% of the fair value of the shares on the date of grant
provided, however, that the exercise price of an ISO may not be less than 100%
of the fair market value of the shares on the date of grant and the exercise
price of an ISO granted to a 10% shareholder may not be less than 110% of the
fair market value of the shares on the date of grant.

There have been no options granted under the Plan through September 30,
1998.

6. INITIAL PUBLIC OFFERING OF COMMON STOCK

In July 1998, the Company filed a Registration Statement to register up to
1,817,000 shares of its Common Stock for an initial public offering ("IPO").
Following the completion of the IPO, the Parent will continue to

F-12
<PAGE>

uBID, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

own approximately 82% of the Company's outstanding Common Stock and as a
result, will continue to control the Company. The Parent also announced that,
subsequent to the completion of the anticipated IPO, it intends to distribute
to the Parent's shareholders in 1999, subject to certain conditions and
consents, all of the Parent's remaining equity interest in the Company
("Distribution").

The Company and the Parent entered into on or prior to the consummation of
the IPO, certain agreements governing various interim and ongoing
relationships, including subleasing a portion of the Parent's warehouse,
between the Company and the Parent after the completion of the anticipated IPO
and subsequent Distribution. The terms of such agreements will generally
provide for services to be rendered by the Parent similar to those described
in Note 3. The costs of general accounting services, payroll and benefits
administration, and internet/telecommunications will be charged based on the
Parent's cost plus 10%. Credit services will be charged at $1.50 per
transaction. For warehousing and distribution, effective July 1, 1998, the
Company is subleasing a portion of the Parent's distribution facility pursuant
to a sublease agreement and is being charged a pro rata portion of the
Parent's occupancy costs for this facility. Pursuant to the Sublease
Agreement, future minimum lease payments to the Parent are $275,000 annually
in 1999 through 2002 and $206,000 in 2003. The rates or amounts to be paid by
the Company under these agreements are not expected to be materially different
than the rates or amounts currently being charged by the Parent.

7. RESTATEMENT OF CAPITAL ACCOUNTS

On November 28, 1998, the Board of Directors approved a reverse stock split
of approximately 0.732988-for-one of the Company's outstanding Common Stock.
All common shares and per share data have been retroactively adjusted to
reflect this reverse stock split.

F-13
<PAGE>

GOING ONCE......

[color photo of Customers select a bargain [color photo
product page from the that catches their eye from of
Company's Website] uBID'S easy-to-navigate list registration
of products in many different form]
categories. They click on the
"Bid Now!" button and select
how many of that product they
want and the amount they want
to bid. If this is their first
time visiting uBID, they will
be asked to complete a simple
registration form. Registering
with uBID is always FREE!

GOING TWICE.......

[color photo of During a live auction, [color photo
product bid page from customers can track the status of e-mail
the Company's Website] of their bid(s) at their from the
personalized uBID "My Page." Company to a
In addition, uBID customer]
automatically sends out a
"u've Been Outbid" e-mail to
notify customers when they no
longer have a winning bid.
Customers simply click a link
directly from this e-mail to
visit the uBID storefront and
increase their bid.

SOLD!

[color photo of e- If a customer has one of the [color photo
mails from the winning bids at the end of the of customer
Company to a auction, the product is receiving
customer] theirs! Most often, uBID ships box]
their merchandise the next
day! All the details of a
customer's order will be sent
to them via e-mail, as well.

Repeat customers accounted for
approximately 68% of customer
orders for the three months
ended September 30, 1998.
<PAGE>

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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Separation from the Parent................................................ 23
Use of Proceeds........................................................... 25
Dividend Policy........................................................... 25
Capitalization............................................................ 26
Dilution.................................................................. 27
Selected Financial Data................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 35
Management................................................................ 46
Certain Transactions...................................................... 54
Principal Stockholder..................................................... 61
Description of Capital Stock.............................................. 62
U.S. Federal Income Tax Consequences of the Distribution.................. 66
Shares Eligible for Future Sale........................................... 68
Underwriting.............................................................. 69
Legal Matters............................................................. 71
Experts................................................................... 71
Available Information..................................................... 71
Index to Financial Statements............................................. F-1
</TABLE>

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UNTIL DECEMBER 28, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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1,580,000 SHARES

[LOGO OF uBID APPEARS HERE]

COMMON STOCK

----------------

PROSPECTUS

----------------

MERRILL LYNCH & CO.

WILLIAM BLAIR & COMPANY

DECEMBER 3, 1998

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