ONSALE INC, 424B4, 1997-04-18

ONSALE INC
424B4, 1997-04-18
BUSINESS SERVICES, NEC

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<PAGE>

FILED PURSUANT TO RULE 424 (b)(4)
REGISTRATION STATEMENT NO. 333-18459

2,500,000 SHARES

[LOGO OF ONSALE(TM)]

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by ONSALE,
Inc. ("ONSALE" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. See "Underwriting" for a
discussion of the factors considered in determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "ONSL."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 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.................................. $6.00 $0.42 $5.58
Total (3).................................. $15,000,000 $1,050,000 $13,950,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting offering expenses payable by the Company estimated at
$1,000,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock, solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $17,250,000, the Underwriting Discount will
total $1,207,500 and the Proceeds to Company will total $16,042,500. See
"Underwriting."

The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them, and subject to their right
to reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about April 22, 1997.

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

MONTGOMERY SECURITIES ALEX. BROWN & SONS
INCORPORATED

April 17, 1997
<PAGE>

<TABLE>
<S> <C>
COVER GATEFOLD
Caption: ONSALE's live 24-hour auction house is located at http://www.onsale.com on
the Internet's World Wide Web.
Picture: A picture of the first page a person might see when they visit ONSALE's Web
site on the World Wide Web. It displays pictures of several products that
are being auctioned and lists other products that are being auctioned.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."

LEFT SIDE OF GATEFOLD TO INSIDE FRONT COVER
Graphic: ONSALE Logo
Caption: How ONSALE works
Caption: ONSALE's auctions are designed to be fun and exciting, adding the "lure of
the bargain" and "thrill of the hunt" to the retailing experience. At
ONSALE, customers do not purchase merchandise--they "WIN" it!
Graphic: A Web page button with the ONSALE logo and the word "HOME"
Caption: 1:45 PM--ONSALE customer JK of Hillsborough, CA logs into ONSALE's Web site.
Graphic: A Web page button with an image of a gavel and the word "BID"
Caption: 1:51 PM--JK places a bid on the Hewlett-Packard Vectra XU, bumping customer
TB of Twin Falls, ID off the Current High Bidders List.
Graphic: A Web page button with an image of a downward pointing arrow and the word
"OUTBID"
Caption: 1:51 PM--TB has been Outbid!! His bid is now replaced by JK's bid and
comment, "Hasta La Vista TB."
Graphic: A Web page button with an image of an envelope and the word "E-MAIL"
Caption: 1:54 PM--TB receives the "You've Been Outbid" E-mail.
Graphic: A Web page button with an image of a downward pointing arrow and the word
"OUTBID"
Caption: 2:05 PM--TB responds by increasing his bid, bumping JK off the Current High
Bidders List.
Graphic: A Web page button with an image of an envelope and the word "E-MAIL"
Caption: 2:15 PM--JK receives the "You've Been Outbid" E-mail and logs back into
ONSALE's Web site.
Graphic: A Web page button with an image of a gavel and the word "BID"
Caption: 2:17 PM--JK increases his bid online adding the comment "New Leader of the
Pack," bumping TB off the Current High Bidders List again.
Graphic: A Web page button with the ONSALE logo as if torn in half and the word
"CLOSED"
Caption: 2:30 PM--After several rounds of bidding, Auction #35786 is automatically
closed by ONSALE's custom auction software. JK is a winner! The winners are
now displayed online.
RIGHT SIDE OF GATEFOLD TO INSIDE FRONT COVER
Caption: THE ONSALE INTERACTIVE PROCESS (Caption runs across the entire top of the
page).
Caption: ONSALE Product Page
Picture: A page on ONSALE's World Wide Web site displaying a picture of a personal
computer being bid upon by bidders from around the country.
PAGE OPPOSITE GATEFOLD TO INSIDE FRONT COVER
Caption: Bid Page
Picture: The page on ONSALE's World Wide Web site that a person completes to bid in
an auction conducted by the Company.
Caption: Winner's Circle
Picture: A page displaying a list of winning bidders in the auction of a personal
computer.
</TABLE>

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.

THE COMPANY

ONSALE has sold approximately $32 million of merchandise to more than 60,000
customer accounts from its first auction in May 1995 through December 31, 1996.
For a discussion of how the Company recognizes revenue from these sales, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and Note 1 of Notes to Financial Statements. To date, the
Company has auctioned over 362,000 merchandise items, of which over 117,000
were auctioned in the fourth quarter of 1996. More than 1.2 million unique
Internet users have visited ONSALE's electronic auctions. Over 109,000 of these
users are bidders registered with the Company, with over 48,000 registering in
the fourth quarter of 1996 alone.

The Internet is an increasingly significant global medium for communication
and commerce. International Data Corporation ("IDC") estimates that the total
value of goods and services purchased on the Web will increase from $318
million in 1995 to $95 billion in the year 2000. The Internet is evolving into
a unique marketing channel, just as retail stores, mail order catalogs and
television shopping have previously evolved as unique channels.

The Company believes the Internet is particularly well suited for selling
certain types of merchandise, such as refurbished and close-out merchandise,
because a large target market can be reached quickly and inexpensively. The
disposal of refurbished and close-out merchandise represents a substantial
burden on many manufacturers because such merchandise rapidly declines in value
making it difficult to establish a market price. Manufacturers have an interest
in accessing 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 Company's auction sales format leverages a chief advantage of the
Internet--the ability to change dynamically merchandise mix, prices and visual
presentations. Currently, the Company auctions over 1,500 items each week.
These items generally range in price from $25 to $1,500 and are sold in
quantities of one to several hundred. Customers can bid 24 hours a day, 7 days
a week. As customer bids are received, ONSALE's Web pages are instantly updated
to display the current high bidders' initials, city and state, and an optional
comment to personalize the bidding. The entire auction process, from the
posting of the items for auction through notification of the winners, has been
automated by the Company through internally developed proprietary software. In
addition, the Company has developed proprietary software that automates product
fulfillment functions, including billing, shipping and tracking.

The Company's objective is to be one of the dominant retailers on the
Internet. The Company intends to leverage its position as a leading Internet
retailer of refurbished and close-out merchandise by enhancing its brand
recognition, continuing to provide a compelling shopping experience, developing
incremental revenue opportunities and building on its leading technology.
Moreover, ONSALE intends to increase the percentage of merchandise it purchases
for its own account with the goal of expanding gross margins and improving
customer service.

In addition, ONSALE believes that relationships with merchandise vendors are
critical to its long-term success. The Company employs a staff of experienced
buyers from the computer and consumer electronics industries to build
relationships with and purchase inventory from manufacturers and other vendors.
The Company intends to hire additional merchandise buying staff and enhance its
automated systems in order to expand and strengthen such relationships.
ONSALE's merchandise has included brands such as AST, AT&T, Aiwa, Apple, Canon,
Compaq, Dell, Hewlett-Packard, Intel, JVC, Kenwood, Lexmark, NEC, Packard Bell,
Sanyo, Seagate, Toshiba and Uniden.

RISK FACTORS

This offering involves a number of risks including, but not limited to, the
Company's limited history of operations and fluctuations in operating results,
its dependence on merchandise vendors and other third parties, the inventory
and price risks associated with the merchandise that the Company sells, current
and potential competition, the limited management and other resources that the
Company has available to it to address its rapid growth, and the numerous risks
associated with technological change and the Internet. See "Risk Factors."

3
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THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company................ 2,500,000 shares
Common Stock to be outstanding after this offering. 16,383,060 shares(1)
Use of proceeds.................................... Working capital and other
general corporate
purposes. See "Use of
Proceeds."
Nasdaq National Market symbol...................... ONSL
</TABLE>

SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM
QUARTER ENDED INCEPTION YEAR
------------------------------------ (JULY 1994) TO ENDED
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1995 1996
-------- -------- --------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue.......... $ 577 $ 1,810 $ 3,576 $ 8,306 $ 140 $14,269
Gross profit........... 159 430 911 1,230 113 2,730
Income (loss) from
operations............ 17 111 115 124 (440) 367
Net income (loss)...... 15 100 106 140 (440) 361
Net income (loss) per
share(2).............. $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ (0.03) $ 0.02
Shares used to compute
net income (loss) per
share(2).............. 15,326 15,326 15,326 15,326 15,326 15,326
SUPPLEMENTAL FINANCIAL
DATA:
Gross merchandise
sales(3).............. $ 1,792 $ 5,290 $ 9,246 $14,399 $ 1,252 $30,727
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------
PRO AS
ACTUAL FORMA(4) ADJUSTED(5)
------ -------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents. $2,649 $4,595 $17,545
Working capital........... 1,731 3,677 16,627
Total assets.............. 5,680 7,626 20,576
Long-term debt............ -- -- --
Total stockholders'
equity................... 2,328 4,274 17,224
</TABLE>
- --------
(1) Based on shares outstanding as of December 31, 1996. Also reflects 608,730
shares of Common Stock resulting from the exercise of outstanding warrants,
which occurred in March 1997. Does not include 1,612,910 shares issuable
upon the exercise of options outstanding as of such date under the
Company's 1995 Equity Incentive Plan, at a weighted average per share
exercise price of $1.27, or an aggregate of 2,122,090 shares available for
future grant or issuance under the Company's employee benefit plans. See
"Management--Director Compensation" and "Management--Employee Benefit
Plans."
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net income (loss) per
share.
(3) Represents what the Company's total revenue would have been if sales where
the Company acted as a commissioned auction agent for its vendors ("Agent
Sales") were recorded as transactions where the Company purchased or
accepted consignment of merchandise from vendors for resale at auction
("Principal Sales"). This presentation of sales on a gross basis does not
affect the Company's gross profit or net income. Management believes that
gross merchandise sales provide a more consistent comparison between
historical periods and to future periods than does total revenue. Gross
merchandise sales should not be considered in isolation or as a substitute
for other information prepared in accordance with generally accepted
accounting principles ("GAAP"). See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 1 of Notes to
Financial Statements.
(4) Reflects the exercise of all outstanding warrants for aggregate proceeds to
the Company of approximately $1.9 million, which occurred in March 1997.
(5) Adjusted to reflect the sale of 2,500,000 shares of Common Stock in this
offering at the initial public offering price per share of $6.00 and after
deducting the underwriting discount and estimated offering expenses.

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

Except where otherwise indicated, all share and per share data in this
Prospectus have been adjusted to reflect (i) the conversion of all outstanding
shares of Preferred Stock of the Company into shares of Common Stock, (ii) the
reincorporation of the Company as a Delaware corporation and associated changes
in the Company's charter documents and (iii) the adoption or amendment of
certain employee benefit plans, all of which have occurred or will occur before
the closing of this offering. See "Description of Capital Stock." In addition,
unless otherwise indicated, all information in this Prospectus (i) assumes the
Underwriters' over-allotment option will not be exercised and (ii) reflects a
three-for-one stock split of the Company's Common Stock effective on November
1, 1996. Certain information presented in this Prospectus, including
information relating to the number or amount of customer accounts, merchandise
items auctioned and units sold, unique and registered bidders, repeat customers
and average winning bid, has been derived from the Company's internal
information systems.

4
<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 the Common Stock offered hereby. 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 below.

LIMITED OPERATING HISTORY

The Company was founded in July 1994 and began conducting auctions on the
Internet in May 1995. 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 a dependence on key vendors for merchandise, an evolving and
unpredictable business model, management of growth, the Company's ability to
anticipate and adapt to a developing market, acceptance by consumers of the
Company's Internet auctions and refurbished and close-out merchandise sold at
such auctions, development of equal or superior Internet auctions by
competitors, 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, manage
product obsolescence and pricing risks, 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 retailing services. There can be no
assurance that the Company will be successful in doing what is required to
address these risks. The Company's revenue depends substantially upon the
level of auction activity, which is, in turn, related to the availability of
merchandise from the Company's vendors and the expansion of its customer base.
This availability is difficult to forecast with any degree of certainty.
Accordingly, a substantial reduction in merchandise availability would have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company has relatively low operating
margins and plans to increase its operating expenses significantly in order to
increase the size of its staff, expand its marketing efforts to enhance its
brand image, purchase larger volumes of merchandise to be sold at auction,
increase its software development efforts, and support its growing
infrastructure. As a result, the Company may experience net losses through at
least the four quarters of 1997. Moreover, at any time 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. Further, in view of
the rapidly evolving nature of the Company's business and its extremely
limited operating history, the Company believes that period-to-period
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

FLUCTUATIONS IN OPERATING RESULTS

5
<PAGE>

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. In addition, the Company may experience net losses for at least the
four quarters of 1997. See "--Limited Operating History" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

RELIANCE ON MERCHANDISE VENDORS

The Company is entirely dependent upon vendors to supply it with merchandise
for sale through the Company's Internet auctions and the availability of
merchandise is unpredictable. In 1996, approximately 30% of the Company's
gross merchandise sales was derived from merchandise acquired from five
vendors, although no vendor accounted for more than 10% of gross merchandise
sales. The Company has no long-term contracts or arrangements with its vendors
that guarantee the availability of merchandise for its auctions. 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 Web site. The Company also relies on many of its vendors to process
and ship merchandise to customers. The Company has limited control over the
shipping procedures of its vendors, and shipments by these vendors have often
been subject to delays. Although most merchandise sold by the Company carries
a warranty supplied either by the manufacturer or the vendor and the Company
is not obligated to accept merchandise returns, the Company in fact has
accepted returns from customers for which the Company did not receive
reimbursements from its vendors or manufacturers. 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--Merchandise,"
"Business--Vendor Relationships" and "Business--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. The Company has limited control over these third
parties and no long-term relationships with any of them. The Company does not
own a gateway onto the Internet, but instead relies on an Internet service
provider to connect the Company's Web site to the Internet. From time to time,
the Company has experienced temporary interruptions in its Web site connection
and also its telecommunications access. Continuous or prolonged interruptions
in the Company's Web site connection or in its telecommunications access would
have a material adverse effect on the Company's business, results of
operations and financial condition. 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. The Company does not currently own or
lease warehouse space and relies instead on a contract warehouse, Gage
Marketing Group ("Gage"). Accordingly, any service interruptions experienced
by this warehouse as a result of labor problems or otherwise could have a
material adverse effect on the Company's business, results of operations and
financial condition. Due to difficulties with its previous warehouse, the
Company entered into its relationship with Gage in December 1996 and
immediately began shifting its business to Gage. This transition resulted in a
significant diversion of management time, customer dissatisfaction from
shipment failures, delays and mistakes and significant additional customer
service requirements and expenses in an effort to address this customer
dissatisfaction. One customer has threatened a lawsuit on behalf of himself
and other customers whom he believes were damaged by the shipment problems
during the transition period. The Company has little experience on which to
assess whether Gage will be capable

6
<PAGE>

of adequately providing the warehouse and distribution services that it
currently requires or will require if the Company expands its volume. 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--Merchandise Distribution" and
"Business--Technology and Operations."

RISKS OF A PRINCIPAL SALES MODEL

Historically, the Company had little inventory or price risk because it
either acted as a sales agent for vendors that retained title to the
merchandise auctioned by the Company or took merchandise from vendors on
consignment. Recently, the Company has begun purchasing merchandise from
vendors and thereby assuming the inventory and price risks of these products
to be sold at auction. These risks are especially significant because the
merchandise currently auctioned by the Company--computers, peripherals and
consumer electronics--is characterized by rapid technological change,
obsolescence and price erosion. As the Company transitions to the Principal
Sales model, its success will depend on its ability to liquidate its inventory
rapidly through its auctions and the ability of its buying staff to purchase
inventory at attractive prices relative to its resale value at auction. Due to
the inherently unpredictable nature of auctions, it is impossible to determine
with any certainty whether an item will sell for more than the price paid by
the Company. Further, because minimum bid prices for the merchandise listed on
the Company's Web site 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--Merchandise" and "Business--Vendor Relationships."

COMPETITION

The electronic commerce market, particularly on the Internet, 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 small Internet auction houses, (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, a wholly-owned subsidiary of Home Shopping Network Inc., New England
Circuit Exchange, America Online, Inc. ("America Online") and CUC
International Inc., (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 and (iv) companies with substantial
customer bases in the computer and peripherals catalog business, including
Micro Warehouse, Inc. and CDW Computer Centers, Inc., which may devote more
resources to Internet commerce in the future. In particular, America Online
has taken a minority equity interest in Internet Liquidators International,
Inc. ("ILI") and announced that the two companies have formed a strategic
partnership under which revenue from ILI's auction platforms will be shared
with America Online and America Online will provide a direct link for ILI's
members to reach ILI's electronic commerce site on the Web. Also, the Company
believes Micro Warehouse, Inc. is contemplating the introduction of an online
auction Web site in the next several months, that Ziff-Davis has reserved a
Web domain name including the word "auction" and that CompUSA is considering
opening an auction site on the Web for its refurbished products.

7
<PAGE>

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, technical, marketing and other resources than the Company. As a
result, they 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."

MANAGEMENT OF GROWTH; LIMITED SENIOR MANAGEMENT RESOURCES

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 14 employees at June 30, 1996 to 54 employees at December 31,
1996 and its sales increased from approximately 3,300 units per week at the
beginning of the third quarter of 1996 to over 12,000 units per week at the
end of the fourth quarter of 1996. 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 until January 1997 included only three
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, including improvement of its financial and other internal management
systems, on a timely basis, and to train, manage and expand its already
growing employee base. 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 vendors, freight companies,
warehouse operators, other Web sites 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. In addition, during the
second half of 1997, the Company expects to begin offering credit to certain
of its customers that have been prequalified as having appropriate credit
ratings and, accordingly, will be required to manage the associated risks of
accounts receivable expansion and collection. Such credit would typically be
used to expand the Company's customer base to include large purchasers that
presently find it difficult or are unable to purchase under the Company's
auction procedures, which require use of a credit card number. The Company
expects that its new offerings will allow government, educational and large
corporate instututions to buy on an open account or purchase order basis up to
a predetermined credit limit and will allow VARs and other resellers and
individuals reluctant to trust their credit card numbers to the security of
the Internet to purchase on a COD (cash on delivery) basis. 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 Web site and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license leading
technologies, enhance its existing services, develop new proprietary
technology that addresses the increasingly sophisticated and varied needs of
its prospective customers, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. The
development of Web

8
<PAGE>

site 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 Web site and proprietary
technology to customer requirements or emerging industry standards. If the
Company is unable, for technical, legal, financial or other reasons, to adapt
in a timely manner in response to changing market conditions or customer
requirements, or if the Company's Web site and proprietary technology do 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 refurbished and close-out merchandise such as that offered by the
Company. 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" and "Business--Technology and
Operations."

DEVELOPING MARKET; UNCERTAIN ACCEPTANCE OF THE INTERNET AS A MEDIUM FOR
COMMERCE

The market for the Company's services has only recently begun to develop and
is rapidly changing. As is typical for a new and rapidly evolving industry,
demand and market acceptance for recently introduced services and products
over the Internet are subject to a high level of uncertainty and there exist
few proven services and products. Moreover, since the market for the Company's
Internet auctions is new and evolving, it is difficult to predict the size of
this market or its future growth rate, if any. The success of the Company's
Internet auctions will depend upon the adoption of the Internet as a medium
for commerce by a broad base of consumers and vendors. There can be no
assurance that widespread acceptance of Internet commerce in general, or of
the Company's Internet auctions in particular, will occur. The Company has
historically relied on consumers and vendors who have historically used
traditional means of commerce to purchase and sell merchandise. For the
Company to be successful, these consumers and vendors must accept and utilize
novel ways of conducting business and exchanging information. In addition,
vendors must be persuaded to adopt new selling models. Moreover, critical
issues concerning the commercial use of the Internet, such as ease of access,
security, reliability, cost and quality of service, remain unresolved and may
affect the growth of Internet use or the attractiveness of conducting commerce
online. There can be no assurance that there will be broad acceptance of the
Internet as an effective medium for commerce by consumers and vendors or that
the market for the Company's Internet auctions will develop successfully or
achieve widespread acceptance. If the market for Internet-based online
auctions fails to develop, develops more slowly than expected or becomes
saturated with competitors, or if the Company's Internet auctions do not
achieve market acceptance, the Company's business, results of operations and
financial condition will be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Business Strategy."

UNCERTAIN ACCEPTANCE OF THE ONSALE BRAND

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 ONSALE brand will depend largely on the Company's success in
maintaining its position as a leader in Internet commerce. 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. To the extent the Company
expands the focus of its operations beyond the auction and sale of refurbished
and close-out computers, peripherals and consumer electronics or explores the
use of the Company's Web site as an advertising medium for services and
products

9
<PAGE>

of other companies, the Company risks diluting its brand, confusing consumers
and decreasing interest from vendors. Furthermore, in order to attract and
retain customers and to promote and maintain the ONSALE brand in response to
competitive pressures, the Company may find it necessary to increase its
marketing and advertising budgets or 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 "Business--Sales and Marketing."

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 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 foreign countries, and as the Company sells to numerous consumers
resident in such states and foreign countries, such jurisdictions may claim
that the Company is required to qualify to do business as a foreign
corporation in each such state and foreign country. 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 the Company's senior management and
other key personnel, particularly its founder, President and Chief Executive
Officer, S. Jerrold Kaplan, and its founder, Vice President of Development and
Operations and Chief Technical Officer, Alan S. Fisher. The loss of either of
these individuals could have a material adverse effect on the Company's
business, results of operation and financial condition. The Company does not
have long-term employment agreements with any of its key personnel and
maintains no key person life insurance. In addition, 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 Mountain View, California. The Company's systems are vulnerable to
damage from earthquake, fire, floods, power loss, telecommunications failures,
break-ins and similar events. The Company does not presently have redundant
systems or a formal disaster recovery plan. A

10
<PAGE>

substantial interruption in these systems would have a material adverse effect
on the Company's business, results of operations and financial condition. The
Company's coverage limits on its property and business interruption insurance
may not be adequate to compensate the Company for all losses that may occur.
Despite the implementation of network security measures by the Company, its
servers are also vulnerable to computer viruses, physical or electronic break-
ins 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--Facilities."

INTERNET COMMERCE SECURITY RISKS

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 from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information. 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 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 patent, trademark, copyright and trade secret laws, as well as
confidentiality agreements and technical measures to establish and protect its
proprietary rights. The Company has applied for five patents in the United
States covering various aspects of electronically managed Internet auctions
and various aspects of providing customer service via automated email. There
can be no assurance that patents will issue from any of the Company's pending
applications, that any patents granted to the Company will not be challenged
and invalidated, or that any claims allowed from pending patents will be of
sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company. The Company has registered the ONSALE(R)
trademark in the United States and claims trademark rights in, and has applied
for trademark registrations in the United States for, a number of other marks.
There can be no assurance that the Company will be able to secure significant
protection for these trademarks. It is possible that competitors of the
Company or others will adopt product or service names similar to "ONSALE" and
the Company's other trademarks, 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 "ONSALE" adequately would 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 as a
trade secret. 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

11
<PAGE>

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, 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, including its database and Internet server software, which is
used in the Company's Web site 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 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."

CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS

Upon completion of this offering, the Company's officers, directors and
greater than 5% stockholders (and their affiliates) will, in the aggregate,
beneficially own approximately 81.9% of the Company's outstanding Common Stock
(80.1% if the Underwriters' over-allotment option is exercised in full). As a
result, such persons, acting together, will have the ability to control all
matters submitted to stockholders of the Company for approval (including the
election and removal of directors and any merger, consolidation or sale of all
or substantially all of the Company's assets) and to control the management
and affairs of the Company. Accordingly, such concentration of ownership may
have the effect of delaying, deferring or preventing a change in control of
the Company, impede a merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of the
Company, which in turn could have an adverse effect on the market price of the
Company's Common Stock. See "Management" and "Principal Stockholders."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Company's Common Stock (including shares
issued upon the exercise of outstanding options) in the public market after
this offering could adversely affect the market price of the Common Stock.
Such sales also might make it more difficult for the Company to sell equity or
equity-related securities in the future at a time and price that the Company
deems appropriate. In addition to the 2,500,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), as
of the date of this Prospectus, there will be 13,883,060 shares of Common
Stock outstanding, all of which are restricted shares ("Restricted Shares")
under the Securities Act of 1933, as amended (the "Securities Act"). As of
such date, no Restricted Shares will be eligible for sale in the public market
in addition to the shares offered hereby. Approximately 10,774,330 Restricted
Shares will be available for sale in the public market following the
expiration of 180-day lock-up agreements with the representatives of the
Underwriters. Of the remaining

12
<PAGE>

Restricted Shares, 250,000 shares held by Messrs. Kaplan, Fisher and Mohiuddin
will become eligible each month thereafter until July 21, 1998 as certain
repurchase rights of the Company with respect to those shares lapse and
608,730 shares will be eligible for sale upon the achievement of a one-year
holding period. Montgomery Securities also may, in its sole discretion and at
any time without notice, release all or any portion of the securities subject
to lock-up agreements. In addition, beginning six months after the offering,
the holders of 13,704,303 Restricted Shares will be entitled to certain rights
with respect to registration of such shares for sale in the public market. If
such holders sell in the public market, such sales could have a material
adverse effect on the market price of the Company's Common Stock.

Soon after the offering, the Company expects to register approximately
3,735,000 shares of Common Stock reserved for issuance under its stock option
and purchase plans. As of December 31, 1996, options to purchase a total of
1,612,910 shares were outstanding (although all of the shares issuable upon
exercise of such options will be subject to lock-up restrictions on sale for
180 days after the Effective Date) and 2,122,090 shares of Common Stock were
reserved for future issuance under the Company's stock option and purchase
plans. See "Shares Eligible for Future Sale."

BROAD MANAGEMENT DISCRETION IN ALLOCATION OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby at the initial public offering price of $6.00 per share, after
deducting the underwriting discount and estimated offering expenses, are
estimated to be approximately $13.0 million. The Company has no specific plan
for such net proceeds. The Company intends to use the net proceeds, over time,
primarily for working capital to fund operations (including expansion of the
Company's accounts receivable and merchandise inventory and increased
expenditures on sales and marketing) and for other general corporate purposes.
A portion of the net proceeds also may be used for the acquisition of
businesses, products and technologies that are complementary to those of the
Company. Accordingly, the Company's management will retain broad discretion as
to the allocation of the proceeds of this offering. The failure of management
to apply such funds effectively could have a material adverse effect on the
Company's business, results of operations and financial condition. See "Use of
Proceeds."

NO PRIOR MARKET FOR COMMON STOCK

Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market will
develop or be sustained after this offering or that investors will be able to
sell the Common Stock should they desire to do so. The initial public offering
price has been determined by negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the price
at which the Common Stock will trade upon completion of this offering. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price.

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the shares of Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to factors such
as actual or anticipated variations in the Company's results of operations,
announcements of technological innovations, new sales formats by the Company
or its competitors, developments with respect to patents, copyrights or
proprietary rights, changes in financial estimates by securities analysts,
conditions and trends in the Internet and electronic commerce industries,
adoption of new accounting standards affecting the retail sales industry,
general market conditions and other factors. Further, the stock markets, and
in particular the Nasdaq National Market, have experienced extreme price and
volume fluctuations that have particularly affected the market prices of
equity securities of many technology companies and that often have been
unrelated or disproportionate to the operating performance of such companies.
The trading prices of many technology companies' stocks are at or near
historical highs and reflect price earnings ratios substantially above
historical levels. There can be no assurance that these trading prices and
price earnings ratios will be sustained. These broad market factors may
adversely affect the market price of the Company's Common Stock. These market
fluctuations, as well as general economic, political and market conditions
such as recessions,

13
<PAGE>

interest rates or international currency fluctuations, may adversely affect
the market price of the Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such company. Such
litigation, if instituted, could result in substantial costs and a diversion
of management's attention and resources, which would have a material adverse
effect on the Company's business, results of operations and financial
condition.

IMMEDIATE AND SUBSTANTIAL DILUTION

Purchasers of the Common Stock in this offering will suffer immediate and
substantial dilution of $4.95 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent that
outstanding options to purchase the Company's Common Stock are exercised,
there may be further dilution. See "Dilution."

14
<PAGE>

THE COMPANY

ONSALE was incorporated in California in July 1994 and reincorporated in
Delaware in March 1997. As used in this Prospectus, unless the context
otherwise requires, the terms "Company" and "ONSALE" refer to ONSALE, a
California corporation, and its successor Delaware corporation, ONSALE, Inc.
The Company's Web site is located at http://www.onsale.com. Information
contained in the Company's Web site shall not be deemed to be a part of this
Prospectus. The Company's principal executive offices are located at 1861
Landings Drive, Mountain View, California 94043. The Company's telephone
number is (415) 428-0600.

ONSALE(R) is a registered trademark, and the ONSALE tag logo, Dutch
Auction(TM), Yankee Auction(TM), Put your money where your mouse is(TM),
Steals and Deals(TM) and BidWatch(TM) are trademarks, of the Company. This
Prospectus also includes trade names and trademarks of other companies.

The Company intends to furnish to its stockholders annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be $13.0 million after deducting
the underwriting discount and estimated offering expenses ($15.0 million if
the Underwriters' over-allotment option is exercised in full). The primary
purposes of this offering are to obtain additional capital, to create a public
market for the Common Stock and to facilitate future access to public markets.
The Company has no specific plan for the net proceeds of the offering. The
Company expects to use the net proceeds, over time, primarily for working
capital to fund operations (including expansion of the Company's accounts
receivable and merchandise inventory and increased expenditures on sales and
marketing) and for other general corporate purposes. A portion of the proceeds
also may be used to acquire or invest in complementary businesses or products
or to obtain the right to use complementary technologies. From time to time,
in the ordinary course of business, the Company evaluates potential
acquisitions of such businesses, products or technologies. However, the
Company has no present understandings, commitments or agreements with respect
to any material acquisition of businesses, products or technologies. Pending
use of the net proceeds for the above purposes, the Company intends to invest
such funds in short-term, interest-bearing, investment-grade securities.

DIVIDEND POLICY

The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain any future earnings for
use in its business and does not anticipate paying any cash dividends in the
foreseeable future.

15
<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of December 31, 1996, the capitalization of the Company on a pro forma basis
to give effect to the exercise of all outstanding warrants and the conversion
of all outstanding shares of Preferred Stock into Common Stock, and the pro
forma capitalization of the Company as adjusted to give effect to the sale of
the 2,500,000 shares of Common Stock offered hereby (at the initial public
offering price of $6.00 per share and after deducting the underwriting
discount and estimated offering expenses).

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity(1):
Preferred Stock, $0.001 par value; 2,000,000
shares authorized:
Convertible Series A; 600,000 shares
designated; 365,191 shares issued and
outstanding, actual; no shares designated,
issued or outstanding, pro forma and as
adjusted...................................... $ 1 $ -- $ --
Convertible Series B; 204,521 shares
designated; no shares
issued or outstanding, actual; no shares
designated, issued or outstanding, pro forma
and as adjusted............................... -- -- --
Common Stock, $0.001 par value; 30,000,000
shares authorized: 12,178,757 shares issued and
outstanding, actual; 13,883,060 shares issued
and outstanding, pro forma; 16,383,060 shares
issued and outstanding, as adjusted(2)......... 12 14 16
Additional paid-in capital...................... 2,494 4,439 17,387
Accumulated deficit............................. (79) (79) (79)
Less: note receivable from stockholder.......... (100) (100) (100)
------ ------ -------
Total stockholders' equity.................... 2,328 4,274 17,224
------ ------ -------
Total capitalization......................... $2,328 $4,274 $17,224
====== ====== =======
</TABLE>
- --------
(1) See Notes 4 and 5 of Notes to Financial Statements.
(2) Excludes (i) 1,612,910 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1996 under the Company's 1995
Equity Incentive Plan, at a weighted average per share exercise price of
$1.27, (ii) 1,872,090 shares reserved for future grants under its 1995
Equity Incentive Plan, (iii) 100,000 shares reserved for future grants
under its 1996 Directors Stock Option Plan and (iv) 150,000 shares
reserved for future issuances under its 1996 Employee Stock Purchase Plan.
See "Management--Director Compensation," "Management--Employee Benefit
Plans" and Note 6 of Notes to Financial Statements.

16
<PAGE>

DILUTION

The pro forma net tangible book value of the Company as of December 31,
1996, assuming the exercise of all outstanding warrants for an aggregate
purchase price of approximately $1.9 million and the conversion of all
outstanding shares of Preferred Stock into shares of Common Stock, was
approximately $4.3 million, or $0.31 per share of Common Stock. "Pro forma net
tangible book value per share" is determined by dividing the number of
outstanding shares of Common Stock into the net tangible book value of the
Company (total tangible assets less total liabilities). After giving effect to
the sale by the Company of the 2,500,000 shares of Common Stock offered hereby
(based upon the initial public offering price of $6.00 per share and after
deducting the underwriting discount and estimated offering expenses), the pro
forma net tangible book value of the Company as of December 31, 1996 would
have been approximately $17.2 million, or $1.05 per share. This represents an
immediate increase in pro forma net tangible book value of $0.74 per share to
existing stockholders and an immediate dilution of $4.95 per share to new
investors. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $6.00
Pro forma net tangible book value per share as of December 31,
1996........................................................... $0.31
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 0.74
-----
Pro forma net tangible book value per share after offering...... 1.05
-----
Dilution per share to new investors............................. $4.95
=====
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1996, the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
by the existing stockholders and by the investors purchasing shares of Common
Stock in this offering, based upon the initial public offering price of $6.00
per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 13,883,060 84.7% $ 4,460,000 22.9% $0.32
New investors............... 2,500,000 15.3 15,000,000 77.1 $6.00
---------- ----- ----------- -----
Total..................... 16,383,060 100.0% $19,460,000 100.0%
========== ===== =========== =====
</TABLE>

The foregoing table assumes (i) the exercise of all outstanding warrants for
an aggregate purchase price of approximately $1.9 million and the conversion
of all outstanding shares of Preferred Stock into shares of Common Stock and
(ii) no exercise of the Underwriters' over-allotment option or stock options
outstanding under the Company's 1995 Incentive Stock Plan as of December 31,
1996. As of December 31, 1996, there were options outstanding under the
Company's 1995 Equity Incentive Plan to purchase a total of 1,612,910 shares
of Common Stock, at a weighted average exercise price of $1.27 per share. To
the extent that any of these options is exercised, there will be further
dilution to new investors. See "Capitalization" and Note 6 of Notes to
Financial Statements.

17
<PAGE>

SELECTED FINANCIAL 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 this Prospectus. The statement of operations data for
the period from inception (July 1994) through December 31, 1995 and for the
year ended December 31, 1996 and the balance sheet data as of December 31,
1995 and 1996 are derived from financial statements of the Company that have
been audited by Price Waterhouse LLP, independent accountants, and are
included elsewhere in this Prospectus. The statement of operations data for
the quarters ended March 31, June 30, September 30 and December 31, 1996 are
derived from unaudited financial statements of the Company and include, in the
opinion of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Company's results of
operations for those periods. The historical results are not necessarily
indicative of future results.

<TABLE>
<CAPTION>
PERIOD FROM
QUARTERS ENDED INCEPTION YEAR
--------------------------------------------- (JULY 1994) TO ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1996 1996 1996 1995(1) 1996
--------- -------- ------------- ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Merchandise............ $ 468 $1,493 $2,990 $ 7,622 $ 30 $12,573
Commission............. 109 317 586 684 110 1,696
------ ------ ------ ------- ------ -------
Total revenue.......... 577 1,810 3,576 8,306 140 14,269
Cost of revenue......... 418 1,380 2,665 7,076 27 11,539
------ ------ ------ ------- ------ -------
Gross profit............ 159 430 911 1,230 113 2,730
------ ------ ------ ------- ------ -------
Operating expenses:
Sales and marketing.... 58 115 339 379 144 891
General and
administrative........ 32 89 275 362 227 758
Engineering............ 52 115 182 365 182 714
------ ------ ------ ------- ------ -------
Total operating
expenses.............. 142 319 796 1,106 553 2,363
------ ------ ------ ------- ------ -------
Income (loss) from
operations............. 17 111 115 124 (440) 367
Interest and other
income................ -- -- 3 34 -- 37
------ ------ ------ ------- ------ -------
Income (loss) before
income taxes........... 17 111 118 158 (440) 404
Provision for income
taxes................. (2) (11) (12) (18) -- (43)
------ ------ ------ ------- ------ -------
Net income (loss)....... $ 15 $ 100 $ 106 $ 140 $ (440) $ 361
====== ====== ====== ======= ====== =======
Net income (loss) per
share(2)............... $ 0.00 $ 0.00 $ 0.01 $ 0.01 $(0.03) $ 0.02
====== ====== ====== ======= ====== =======
Shares used to compute
net income (loss) per
share(2)............... 15,326 15,326 15,326 15,326 15,326 15,326
====== ====== ====== ======= ====== =======
SUPPLEMENTAL FINANCIAL
DATA:
Gross merchandise
sales(3).............. $1,792 $5,290 $9,246 $14,399 $1,252 $30,727
====== ====== ====== ======= ====== =======
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 20 $ 2,649
Working capital (deficiency)........................................... (449) 1,731
Total assets........................................................... 73 5,680
Long-term obligations.................................................. -- --
Total stockholders' equity (deficit)................................... (419) 2,328
</TABLE>
- --------
(1) The Company's results of operations for the period from inception (July
1994) to December 31, 1994 have been combined with the results of
operations for the year ended December 31, 1995 due to the Company's
limited activity during the earlier period. During 1994, the Company
incurred expenses and reported a net loss of $41,000.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the number of shares used to compute net income (loss)
per share.
(3) Represents what the Company's total revenue would have been if sales where
the Company acted as a commissioned auction agent for its vendors ("Agent
Sales") were recorded as transactions where the Company purchased or
accepted consignment of merchandise from vendors for resale at auction
("Principal Sales"). This presentation of sales on a gross basis does not
affect the Company's gross profit or net income. Management believes that
gross merchandise sales provide a more consistent comparison between
historical periods and to future periods than does total revenue. Gross
merchandise sales should not be considered in isolation or as a substitute
for other information prepared in accordance with GAAP. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 1 of Notes to Financial Statements.

18
<PAGE>

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

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."

OVERVIEW

ONSALE is an electronic retailer pioneering a new sales format, the
interactive 24-hour online auction, designed to serve as an efficient and
entertaining marketing channel. The Company currently specializes in selling
refurbished and close-out computers, peripherals and consumer electronics over
the Internet's World Wide Web. The Company was incorporated in July 1994 and
commenced auctioning products on the Internet in May 1995. For the period from
inception (July 1994) to December 31, 1995, the Company's operating activities
related primarily to recruiting personnel, purchasing operating assets,
establishing vendor relationships and developing the computer infrastructure
necessary to conduct live auctions on the Internet. During that period, the
Company had total revenue of $140,000. The Company achieved profitability in
the first quarter of 1996 and thereafter has increased its total revenue and
net income in each quarter. However, the Company has elected to increase its
operating expenses significantly and therefore may experience net losses at
least through the four quarters of 1997.

The Company obtains merchandise from vendors in one of two primary
arrangements, either the Principal Sales model or the Agent Sales model. Under
the Principal Sales model, the Company either purchases the merchandise or
acquires the rights to sell merchandise under consignment relationships with
vendors. For sales of merchandise owned by ONSALE, the Company is responsible
for conducting the auction, billing the customer, shipping the merchandise to
the customer and processing merchandise returns. The Company recognizes the
full sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction,
the Company bears both inventory and credit risk with respect to sales of its
inventory. 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. For sales on consignment, the
Company will either take physical possession of the merchandise or the vendor
will retain physical possession of the merchandise. In either case, the
Company is not obligated to take title to the merchandise unless it
successfully sells the merchandise at auction. Upon completion of an auction,
the Company 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. Subsequently, the Company pays the vendor
any amounts due for the purchase of the related merchandise. The Company
records the full sales amount as revenue upon the verification of the credit
card authorization and shipment of the merchandise. In consignment
transactions, the Company is at risk of loss for collecting all of the auction
proceeds, delivery of the merchandise and returns from customers. 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. In the second half of 1997, the Company expects to begin offering
credit to certain of its customers that have been prequalified as having
appropriate credit ratings and, accordingly, will be required to manage the
associated risks of accounts receivable expansion and collection. In Agent
Sales transactions, the Company conducts electronic auctions and processes
orders in exchange for a commission on the sale of the vendor's merchandise.
Under this arrangement, at the conclusion of an auction the Company forwards
the order information to the vendor, which then charges the customer's credit
card and ships the merchandise to the customer. In an Agent Sales transaction,
the Company does not take title to or possession of the merchandise, and the
vendor bears all of the risk of credit card chargebacks. For Agent Sales
transactions, the Company recognizes the commissions as revenue upon
completion of the auction process and the forwarding of the auction sales
information to the vendor. The vendor is typically responsible for merchandise
returns. Under primarily the Principal Sales model, the Company will allow
customers to return products, in certain circumstances. Accordingly, the
Company provides for allowances for estimated future returns at the time of
shipment based on historical data.

19
<PAGE>

From its inception through the third quarter of 1995, the Company derived
all of its revenue from Agent Sales. However, as the Company grew, it
experienced increasing constraints on the amount of merchandise it could
obtain and sell under the Agent Sales model. Further, the Company believed
that, by utilizing the Principal Sales model, it could control the
availability of merchandise more effectively, improve customer service, and
achieve higher gross margins over time. As a result, the Company began to use
the Principal Sales model for an increasing number of transactions. By the
fourth quarter of 1996, Principal Sales transactions represented 52.9% of the
Company's gross merchandise sales. The gross merchandise sales amounts
represent what the Company's total revenue would have been if all Agent Sales
had been made as Principal Sales. Due to the ongoing evolution in the
Company's operations toward the Principal Sales model, management believes
that the information on gross merchandise sales is relevant to a reader of the
Company's financial statements since it provides a more consistent comparison
between historical periods and a more accurate comparison to future periods
than does total revenue. Gross merchandise sales should not be considered in
isolation or as a substitute for other information prepared in accordance with
GAAP.

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 merchandise and commission revenue in recent periods, there can be
no assurance that the Company's revenue will continue at its current level or
increase. The Company's revenue depends substantially upon the level of
auction activity on its Web site, which, in turn, depends upon the
availability of merchandise from the Company's vendors. This availability is
difficult to forecast with any degree of certainty. Accordingly, a substantial
reduction in merchandise availability would have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, the Company has relatively low operating margins and plans to
increase its operating expenses significantly in order to increase the size of
its staff, expand its marketing efforts, purchase larger volumes of
merchandise to be sold at auction and support its growing infrastructure.
Through 1996, neither the Company's President nor its Vice President of
Development and Operations received any salary or bonus. On January 1, 1997,
each began receiving a salary at the annual rate of $100,000. Had the Company
compensated its President and Vice President of Development and Operations
during 1996, the estimated pro forma net income and net income per share for
the year ended December 31, 1996, would have been $281,000 and $0.02,
respectively. Since December 1996, the Company has hired three additional Vice
Presidents. See "Management--Executive Compensation." 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--Limited
Operating History."

RESULTS OF OPERATIONS

Total Revenue

Total revenue is comprised of commissions on Agent Sales and the gross value
of Principal Sales paid to the Company by the customer. The Company had only
$140,000 of total revenue in the period from inception (July 1994) to December
31, 1995, most of which was derived from Agent Sales. Gross merchandise sales
for that period were $1.3 million. In 1996, total revenue and gross
merchandise sales grew to $14.3 million and $30.7 million, respectively. The
Company's revenue growth was due to significant growth in the Company's
customer base and in the amount of merchandise obtained from vendors. During
1996, the portion of the Company's gross merchandise sales derived from
Principal Sales increased to 40.9%.

The Company intends to increase its purchasing of merchandise from vendors,
particularly from manufacturers, because the Company believes it will achieve
higher gross margins over time by purchasing merchandise. Accordingly, the
Company expects future revenue from purchased inventory under the Principal
Sales model to be more significant, in both absolute dollars and as a
percentage of total revenue, than revenue

20
<PAGE>

from consigned inventory under the Principal Sales model and revenue under the
Agent Sales model. During the fourth quarter of 1996, gross merchandise sales
was comprised of the following:

<TABLE>
<S> <C>
Principal Sales model - purchased inventory................. $ 2,308,000
Principal Sales model - consigned inventory................. 5,314,000
Agent Sales model........................................... 6,777,000
-----------
Gross merchandise sales..................................... $14,399,000
===========
</TABLE>

During the fourth quarter of 1996, the Company purchased or consigned
inventory under the Principal Sales model from three vendors for which the
Company previously sold merchandise under the Agent Sales model. After the
transition, the Company recorded revenue relating to these three vendors at
the full sales amount. This transition resulted in an increase in fourth
quarter total merchandise revenue for Principal Sales by approximately $1.0
million from amounts which would have been recorded under the Agent Sales
model if there was no change in terms with these vendors. There were no
vendors that changed from the Agent Sales model to the Principal Sales model
prior to the fourth quarter of 1996.

Cost of Revenue

Cost of revenue consists principally of the costs of merchandise acquired
under the Principal Sales model and the costs of warehouse handling, credit
card processing and inbound shipping for such merchandise. Cost of revenue was
minimal in absolute dollars and as a percentage of gross merchandise sales in
the period from inception (July 1994) to December 31, 1995 because most
transactions were structured as Agent Sales, which historically have had no
significant associated costs. Cost of revenue increased by approximately $11.5
million in 1996 both as a result of growth in the Company's overall business
and as a result of the ongoing shift from the Agent Sales model to the
Principal Sales model. In addition, the Company incurred approximately
$108,000 of costs associated with commission revenue due to certain write-offs
it experienced with respect to amounts due from certain vendors associated
with Agent Sales transactions.

Gross Profit

Overall gross profit was $113,000 in the period from inception (July 1994)
to December 31, 1995 and $2.7 million in 1996. In the latter period, gross
profit on Principal Sales was $1.1 million or 9.1% of merchandise revenue made
under the Principal Sales model after giving effect to the $108,000 of cost of
commission revenues. Gross profit on Principal Sales was adversely affected by
a non-recurring cost of $130,000, or 1.0% of merchandise revenue, under the
Principal Sales model, which resulted from the Company's shift in contract
warehouses. The remainder of gross profit ($1.6 million), which is
attributable to Agent Sales, represented 8.7% of gross merchandise sales made
under the Agent Sales model.

Operating Expenses

The Company's operating expenses have increased significantly since the
Company's inception. This trend reflects the costs associated with the
formation of the Company, recruiting of personnel, the development of its
infrastructure, increased efforts to expand and market its services, and the
Company's continued focus on enhancing its internal accounting policies and
controls. The Company believes that continued expansion of its operations is
essential to enhancing its brand name and maintaining its market share.

Sales and Marketing. Sales and marketing expenses consist primarily of
payroll and related expenses for sales and marketing personnel, advertising
expenditures and promotional material. Sales and marketing expenses were
$144,000 and $891,000 for the period from inception (July 1994) to December
31, 1995 and for 1996, respectively. Sales and marketing expenses as a
percentage of gross merchandise sales were 11.5% and 2.9% for the period from
inception (July 1994) to December 31, 1995 and for 1996, respectively. The
dollar increase in sales and marketing expenses was primarily attributable to
expansion of the Company's Internet and print

21
<PAGE>

advertising, increases in the Company's marketing staff and increased expenses
associated with promotion and marketing of the Company's services. The Company
expects sales and marketing expenses to increase in absolute dollars as it
endeavors to enhance its brand recognition but not to increase as a percentage
of gross merchandise sales. However, there can be no assurance that gross
merchandise sales will increase as rapidly as sales and marketing expenses.

General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses for customer service, merchandising,
executive, accounting and logistical personnel, recruiting and other general
corporate expenses. General and administrative expenses were $227,000 and
$758,000 for the period from inception (July 1994) to December 31, 1995 and
for 1996, respectively. General and administrative expenses as a percentage of
gross merchandise sales were 18.1% and 2.5% for the period from inception
(July 1994) to December 31, 1995 and for 1996, respectively. The dollar
increase in general and administrative expenses was due to an increase in
salaries and benefits, primarily due to the hiring of additional personnel,
and facilities expenses. The Company expects general and administrative
expenses to increase in absolute dollars and to represent a more significant
percentage of gross merchandise sales in 1997 and 1998 than in 1996 as the
Company expands its officer group, staff and facilities, incurs additional
costs related to being a public company, and begins compensating its
President, Mr. Kaplan (see "Management--Executive Compensation").

Engineering. Engineering expenses consist primarily of payroll and related
expenses for engineering personnel and consultants who develop, operate and
monitor the Company's Web site and related systems. Engineering expenses were
$182,000 and $714,000 for the period from inception (July 1994) to December
31, 1995 and for 1996, respectively. Engineering costs as a percentage of
gross merchandise sales were 14.5% and 2.3% for the period from inception
(July 1994) to December 31, 1995 and for 1996, respectively. The dollar
increase in engineering expenses was primarily attributable to increased
staffing and associated costs relating to enhancing the features and
functionality of the Company's Web site and related systems. To date, all
engineering costs have been expensed as incurred. The Company did not
compensate Mr. Fisher, its Vice President of Development and Operations,
during these periods but began compensating Mr. Fisher in January 1997 (see
"Management--Executive Compensation"). The Company expects engineering
expenses to increase in absolute dollars in the future but not to increase as
a percentage of gross merchandise sales. However, there can be no assurance
that gross merchandise sales will increase more rapidly than engineering
expenses.

Income Taxes

The Company had a net loss for the period from inception (July 1994) to
December 31, 1995 and thus no provision for income taxes was recorded for that
period. For 1996, the Company generated income before income taxes of $404,000
and recorded a provision for income taxes of $43,000, representing an
effective income tax rate of 10.6%. This effective tax rate was below the
statutory rate primarily because the Company utilized its net operating loss
carryforwards. As of December 31, 1996, the Company had fully utilized its net
operating loss carryforwards for federal and state income tax purposes. See
Note 7 of Notes to Financial Statements.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters of 1995 and 1996. In the opinion of
management, this information has been prepared substantially on the same basis
as the financial statements appearing elsewhere in this Prospectus, and all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly the unaudited
quarterly results when read in conjunction with the financial statements of
the Company and related notes thereto appearing elsewhere in this Prospectus.
The operating results for any quarter are not necessarily indicative of the
operating results for any future period.

22
<PAGE>

<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1995 (1) 1995 1995 1995 1996 1996 1996 1996
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise............ $ -- $ -- $ -- $ 30 $ 468 $1,493 $2,990 $7,622
Commission............. -- 17 23 70 109 317 586 684
---- ---- ----- ----- ------ ------ ------ -------
Total revenue......... -- 17 23 100 577 1,810 3,576 8,306
Cost of revenue......... -- -- -- 27 418 1,380 2,665 7,076
---- ---- ----- ----- ------ ------ ------ -------
Gross profit............ -- 17 23 73 159 430 911 1,230
---- ---- ----- ----- ------ ------ ------ -------
Operating expenses:
Sales and marketing.... 1 30 44 69 58 115 339 379
General and
administrative........ 54 49 61 63 32 89 275 362
Engineering............ 31 25 49 77 52 115 182 365
---- ---- ----- ----- ------ ------ ------ -------
Total operating
expenses............. 86 104 154 209 142 319 796 1,106
---- ---- ----- ----- ------ ------ ------ -------
Income (loss) from oper-
ations................. (86) (87) (131) (136) 17 111 115 124
Interest and other
income................ -- -- -- -- -- -- 3 34
---- ---- ----- ----- ------ ------ ------ -------
Income (loss) before in-
come taxes............. (86) (87) (131) (136) 17 111 118 158
Provision for income
taxes................. -- -- -- -- (2) (11) (12) (18)
---- ---- ----- ----- ------ ------ ------ -------
Net income (loss)....... $(86) $(87) $(131) $(136) $ 15 $ 100 $ 106 $ 140
==== ==== ===== ===== ====== ====== ====== =======
SUPPLEMENTAL FINANCIAL
DATA:
Gross merchandise sales
(2)................... $ -- $226 $ 199 $ 827 $1,792 $5,290 $9,246 $14,399
==== ==== ===== ===== ====== ====== ====== =======
</TABLE>

- --------
(1) The Company's results of operations for the period from inception (July
1994) to December 31, 1994 have been combined with the results of
operations for the quarter ended March 31, 1995 due to the Company's
limited activity during the earlier period. During 1994, the Company
incurred expenses and reported a net loss of $41,000.
(2) Represents what the Company's total revenue would have been if sales where
the Company acted as a commissioned auction agent for its vendors ("Agent
Sales") were recorded as transactions where the Company purchased or
accepted consignment of merchandise from vendors for resale at auction
("Principal Sales"). This increased sales amount does not affect the
Company's gross profit or net income. Management believes that gross
merchandise sales provide a more consistent comparison between historical
periods and to future periods than does total revenue. Gross merchandise
sales should not be considered in isolation or as a substitute for other
information prepared in accordance GAAP. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 1 of
Notes to Financial Statements.

The Company's merchandise revenue, commission revenue, total revenue and
gross merchandise sales have all increased significantly from one quarter to
the next since the quarter ended September 30, 1995. Merchandise revenue has
increased as a percentage of gross merchandise sales each quarter since
September 30, 1995, representing 3.6%, 26.1%, 28.2%, 32.3% and 52.9% of such
sales in the quarters ended December 31, 1995, March 31, 1996, June 30, 1996,
September 30, 1996 and December 31, 1996, respectively.

Cost of revenue (less the $108,000 cost of commission revenue in the fourth
quarter of 1996) as a percentage of merchandise revenue increased from 89.1%
in the third quarter of 1996 to 91.4% in the fourth quarter of 1996,
representing a gross margin decrease on Principal Sales from 10.9% to 8.6%.
The fourth quarter gross margin was adversely affected by non-recurring costs
of $130,000, or 1.7% of merchandise revenue, which resulted from the Company's
shift in contract warehouses. Excluding such non-recurring costs, fourth
quarter gross margin on merchandise revenue would have been 10.3%. Gross
margin on Agent Sales varied from 8.2% to 9.4% in the four quarters of 1996.

23
<PAGE>

RECENT RESULTS OF OPERATIONS

During the quarter ended March 31, 1997, the Company's total revenue was
approximately $12.3 million and its gross merchandise sales were approximately
$17.9 million (see note (1) below). These amounts represented increases of
48.3% and 24.6%, respectively, over the quarter ended December 31, 1996. The
Company's gross profit on Principal Sales was $1.2 million or 10.5% of
merchandise revenue made under the Principal Sales model. The remainder of
gross profit ($565,000), which is attributable to Agent Sales, represented
9.0% of gross merchandise sales made under the Agent Sales model. The
Company's income from operations for the quarter ended March 31, 1996 was
$48,000 representing a decline of $76,000 from the immediately preceding
quarter due to the Company's decision to continue to increase certain
operating expenses as described in "Risk Factors--Limited Operating History."
The Company believes the decision to increase operating expenses may cause the
Company to experience losses through at least the three quarters ending
December 31, 1997.

The reconciliation of total revenue to gross merchandise sales for the
quarter ended March 31, 1997 is as follows.

<TABLE>
<S> <C>
Total revenue................................................... $12,314,000
Plus: gross Agent Sales......................................... 6,245,000
Less: net Agent Sales........................................... (618,000)
-----------
Gross merchandise sales(1)...................................... $17,941,000
===========
</TABLE>

During the quarter ended March 31, 1997, gross merchandise sales were
comprised of the following:

<TABLE>
<S> <C>
Principal Sales model--purchased inventory...................... $ 4,561,000
Principal Sales model--consigned inventory...................... 7,135,000
Agent Sales model............................................... 6,245,000
-----------
Gross merchandise sales(1)...................................... $17,941,000
===========
</TABLE>
- --------

(1) Gross merchandise sales is a non-GAAP measure of total sales generated by
the Company, on some of which commissions (net Agent Sales) were paid.
See--"Overview" above.

FLUCTUATION IN OPERATING RESULTS

The Company's operating results have fluctuated in the past, and are
expected to continue 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 attract new customers at a steady rate, 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 pricing erosion, (iv)
consumer confidence in encrypted transactions in the Internet environment, (v)
the amount and timing of costs relating to expansion of the Company's
operations, (vi) the announcement or introduction of new types of merchandise
or customer services by the Company or its competitors, (vii) technical
difficulties with respect to consumer use of the auction format on the
Company's Web site, (viii) delays in revenue recognition at the end of a
fiscal period as a result of shipping or logistical problems, (ix) the level
of merchandise returns experienced by the Company and (x) 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.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
the private sale of convertible preferred stock for approximately $2.3
million, cash flows from operations and advances from its founders of $496,000
(which were repaid in December 1996). Net cash used in operating activities
for the period from inception (July 1994) to December 31, 1995 was $210,000
and net cash provided by operating activities for 1996

24
<PAGE>

was $1.1 million. The net cash used in operating activities from inception
(July 1994) to December 31, 1995 was primarily attributable to the net loss
from operations of $440,000, partially offset by increases in accrued expenses
and accounts payable of $117,000 and $103,000, respectively. The net cash
provided by operating activities during 1996 was primarily attributable to net
income of $361,000 and increases in accounts payable of $2.2 million, deferred
revenue of $602,000 and accrued expenses of $363,000, partially offset by
increases in inventory, prepaid expenses and other current assets, and
accounts receivable of $1.5 million, $439,000 and $373,000, respectively.

Net cash of $270,000 provided by financing activities from inception (July
1994) to December 31, 1995 resulted entirely from advances from two of the
Company's founders. In 1996, a venture capital group purchased Series A
Preferred Stock and certain warrants for approximately $2.3 million. The
Company used these funds to repay the advances to the founders. Net cash used
in investing activities comprised purchases of property and equipment of
$40,000 and $606,000 for the period from inception (July 1994) to December 31,
1995 and for 1996, respectively.

As of December 31, 1996, the Company had approximately $2.6 million of cash
and cash equivalents. In March 1997, the Company received proceeds of
approximately $1.9 million upon exercise of outstanding warrants. Also in
March 1997, the Company obtained a $2.0 million line of credit from Silicon
Valley Bank. However, the amount the Company may borrow may not exceed the
Company's monthly earnings before interest, taxes, depreciation and
amortization, annualized. Borrowings under the line bear interest at an annual
rate of 1.5% over the bank's prime rate. The credit line expires on September
30, 1997, unless the Company completes a public offering of $10 million or
more on or before April 30, 1997 which then extends the maturity date to one
year after such public offering. Pursuant to the line of credit, Silicon
Valley Bank has been granted a continuing security interest in substantially
all assets of the Company, now owned or hereafter acquired, including
intellectual property. Pursuant to the line of credit, the Company is required
to maintain certain financial ratios (including a ratio of "quick assets"
(cash, cash equivalents, accounts receivable and investments, with maturities
not to exceed 90 days) to current liabilities (less deferred revenue) of at
least 2.5 to 1, and a ratio of total liabilities to tangible net worth of not
more than 0.5 to 1), is prohibited from incurring a loss of more than $250,000
in any month or a loss in each of two consecutive months and has agreed to
certain negative covenants, including a prohibition on incurring additional
indebtedness, other than secured equipment financing debt, indebtedness to
trade creditors incurred in the ordinary course of business and debt that is
subordinated to the debt owing under the line of credit, and a prohibition,
with limited exceptions, on creating additional security interests in the
assets of the Company. In connection with the line, the Company issued the
bank a five-year warrant to purchase 8,571 shares of its Common Stock with an
exercise price of $7.00. As of that date, the Company's principal commitments
consisted of obligations outstanding under its operating leases. Although the
Company has no material commitments for capital expenditures, it anticipates
purchasing approximately $550,000 of property and equipment in 1997, primarily
for computer equipment and furniture and fixtures. As the Company continues to
enter into more transactions structured as Principal Sales, the Company will
need to commit more cash to support a larger merchandise inventory. Also, as a
result of the Company's intention to offer credit to certain customers, the
Company may require additional cash to support growth in account receivables.
The Company plans to increase its operating expenses significantly in order to
increase the size of its staff, expand its marketing efforts to enhance its
brand image, purchase larger volumes of merchandise to be sold at auction,
increase its software development efforts and support its growing
infrastructure. As a result, the Company may experience net losses through at
least the four quarters of 1997. Thus, the Company may well have to finance
its capital expenditures, increased inventory, increased accounts receivable
and some portion of its growth in operating expenses from the proceeds of this
offering. The Company believes that the net proceeds from this offering,
together with its current cash and cash equivalents, borrowings under its line
of credit and its cash flows from operations, if any, will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures
for at least the next 12 months. Thereafter, if cash generated from operations
is insufficient to satisfy the Company's liquidity requirements, the Company
may seek to sell additional equity or convertible debt securities or obtain
another credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available to the Company in
amounts or on terms acceptable to the Company.

25
<PAGE>

BUSINESS

OVERVIEW

ONSALE has sold approximately $32 million of merchandise to more than 60,000
customer accounts from its first auction in May 1995 through December 31,
1996. To date, the Company has auctioned over 362,000 merchandise items, of
which over 117,000 were auctioned in the fourth quarter of 1996. More than 1.2
million unique Internet users have visited ONSALE's electronic auctions. Over
109,000 of these users are bidders registered with the Company, with over
48,000 registering in the fourth quarter of 1996 alone.

INDUSTRY BACKGROUND

Electronic Commerce on the Internet

The Internet is an increasingly significant global medium for communication
and commerce. Growth in Internet usage has been driven by the emergence of the
Web, which uses graphical user interface technology to simplify the
transmission and retrieval of information over the Internet. IDC estimates the
number of Web users will increase from approximately 16 million at the end of
1995 to approximately 34 million at the end of 1996 and to approximately 163
million by the year 2000. As the number of users has grown, retailers have
been attracted to the Internet as a medium for reaching millions of consumers
at low cost. IDC estimates that the total value of goods and services
purchased on the Web will increase from $318 million in 1995 to $95 billion in
the year 2000.

The Internet is evolving into a unique marketing channel, just as retail
stores, mail order catalogs and television shopping have previously evolved as
unique channels. By directly operating their own Web sites, Internet retailers
can interact with customers in real-time by frequently adjusting their product
mix, pricing and visual presentation. In addition, the global reach of the
Internet allows retailers to build large, geographically-dispersed customer
bases more quickly than traditional retailers and catalog marketers. Unlike
traditional marketing channels, Internet retailers do not have the burdensome
costs of a significant retail store infrastructure, the continuous printing
and mailing costs of a catalog marketer or the store personnel or call center
costs borne by traditional retailers and catalog marketers.

Historically, online "shopping malls" available on the larger private
networks, like America Online and CompuServe, as well as on the Internet, have
offered merchandise from major catalog and retail firms, such as Land's End,
Damark and L.L. Bean. In these online malls, the customer shops by moving from
one page to the next in an online catalog until an item of interest is
located. While straightforward in concept, this method of selling has
limitations. The merchandise available online is usually identical to that
available through the merchants' own catalogs and retail stores, providing no
unique advantage to online retailing. There typically is no price advantage to
online merchandise, because the merchants do not wish to compete with their
own catalogs and retail stores on the basis of price. As a result, traditional
implementations of online catalogs fail to exploit a chief advantage of the
Internet medium--the ability to change dynamically product mix, pricing and
visual presentation.

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Market for Refurbished and Close-out Merchandise

Each year, manufacturers dispose of significant volumes of refurbished and
close-out merchandise. Refurbished products are those that typically require a
nominal amount of service, such as minor repairs, cleaning and repackaging,
prior to being sold as refurbished goods. Close-out merchandise includes new
products that have or will shortly become obsolete, typically due to a change
in selling seasons or the introduction of new models.

While the market for refurbished and close-out products is difficult to
measure, the Company believes that several billions of dollars of such
merchandise are sold each year. The PC and consumer electronics markets in
particular are characterized by significant quantities of such merchandise due
to short product life cycles and the prevalence of returned items through the
consumer retailing channel. According to IDC, the total PC market in the
United States was estimated to be greater than $65.6 billion in 1996. The
Company estimates that the portion of this market that ended up as refurbished
and close-out goods exceeded $3.8 billion in 1996.

The disposal of refurbished and close-out goods represents a substantial
burden on many manufacturers. Refurbished and close-out goods are sold through
a fragmented industry consisting of 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." Since manufacturers lack control over pricing and product placement
in this fragmented channel, the prices they realize on products are often
affected. These channel conflicts also undermine channel loyalty and the
vendor's brand image. Manufacturers have an interest in accessing 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.

ONSALE TODAY

The Company posts online descriptions and images of merchandise for sale on
its Web site on a continuing basis. Currently, the Company operates three
auctions per week in two-day auction cycles. ONSALE generally offers over 500
different items at any given time, selling quantities from one to several
hundred of each item with items that generally range in price from $25 to
$1,500 each. Customers can bid 24 hours a day, 7 days a week. Each week, tens
of thousands of customers visit the Company's site to review the latest
merchandise and bid on items of interest. When customers are outbid, they
receive an email message alerting them and permitting them to increase their
bid by return email or via the Company's Web site. At the designated closing
time, the winning bidders are selected and an email message is sent to them
confirming their purchases. The entire auction process, from the posting of
the items for auction through notification of the winners, has been automated
by the Company through the use of internally developed proprietary software.
In addition, the Company has developed proprietary software that automates
product fulfillment functions, including billing, shipping and tracking.

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The Company believes that online auctions represent an exciting sales format
that leverages the unique characteristics of the Internet, such as
interactivity and the sense of community built by customers competitively
bidding in an auction environment. Furthermore, the Company believes the
knowledge, interests and spending habits of the typical Internet user make
computers, peripherals and consumer electronics ideal merchandise for this
sales format and that refurbished and close-out merchandise are particularly
well suited for the online auction format because there is no widely accepted
fair market value for those items. The difference of opinion among potential
purchasers regarding the value of such goods permits the spirited bidding of
the interactive auction process. In contrast to the market for new merchandise
where vendors traditionally set a fixed price, both the vendors and customers
for refurbished and close-out merchandise accept variability in pricing. The
Company's Internet auctions are designed to offer customers the following
benefits:

. Compelling Merchandise and Pricing. The Company's rotating merchandise
mix gives customers the opportunity to bid on desirable items and
includes a number of different product categories, mostly from well
known, name brand manufacturers. Every auction cycle includes new items,
which keeps the Web site fresh and appealing. This changing product/price
mix and the auction format give the Company's visitors the impression
that they may be able to obtain exceptional deals every time they visit
the site. This compelling sales format has led to repeat customers who
bid on average five times during the quarter ended December 31, 1996.

. Entertainment and Excitement. The Company's auctions are designed to be
fun and exciting, adding the "lure of the bargain" and the "thrill of the
hunt" to the retailing experience. The Company's customers do not simply
purchase merchandise--they "win" it. Competition and gamesmanship are
inherent in the Company's auction format, which the Company believes
enables it to attract and maintain a large and loyal customer base.
During September 1996, the average visitor to the Company's Web site
spent approximately 42 minutes watching and bidding in auctions,
according to a survey conducted by PC Meter.

. Community. As part of their bids, bidders are allowed to place brief
comments that are displayed in the list of currently winning bids on each
merchandise item page. Bidders use these comments to communicate with
other bidders in attempts to "psyche out" or cooperate with other
bidders. These comments, which generally are humorous, good-natured and
in the spirit of competition, build a sense of community. This
interactive shopping medium creates a sense of being "where the action
is."

. Convenience. The Company brings retail shopping directly into consumers'
homes and offices. Customers do not need to travel to fixed locations
during limited hours to purchase items. ONSALE's Web site enables
customers to place bids at any time during the day or night, in an
unintimidating atmosphere and without the pressure of salespeople or
auctioneers.

The Company believes that it also provides substantial benefits to vendors.
By pioneering a novel sales format in a new medium available to a very broad
audience, the Company believes that it offers vendors a way to sell
refurbished and close-out merchandise quickly at attractive prices with
minimal interference with other marketing channels. The Company's business
format is designed to offer vendors the following benefits:

. Efficient Distribution Solution. ONSALE's frequently updated electronic
auction format provides manufacturers a distribution channel designed to
accommodate unpredictable, odd lot quantities and to reach a
geographically broad group of consumers. The Company believes it
represents an efficient alternative to existing channels and a practical
solution to a large and growing problem for vendors--the disposal of
refurbished and close-out merchandise.

. Resolution of Channel Conflict. Sales of refurbished and close-out
merchandise through ONSALE are designed to avoid the channel conflicts
inherent in other distribution channels, where similar or identical
merchandise sell at different prices. By selling to a geographically-
broad customer base, the Company reduces the cannibalizing effect that
the sales of refurbished and close-out merchandise can have on the
distribution of new products in a limited local area.

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. Superior Inventory Liquidation. Manufacturers and vendors in the process
of liquidating refurbished and close-out merchandise are compelled to
liquidate inventory in a quick and expedient manner due to rapid price
declines while attempting to get the best prices possible for their
merchandise. By increasing the frequency of the Company's auctions and by
its ability to add new items continuously, the Company is able to post
the inventory items for auction immediately upon receipt of the
merchandise and increase the vendors' ability to dispose of inventory
quickly. By selling inventory quickly, vendors are able to avoid some of
the inventory price erosion that is typical in other channels and to
obtain attractive prices for their products. In addition, the Company's
automated systems simplify the liquidation process, creating a convenient
sales channel for vendors.

BUSINESS STRATEGY

The Company's objective is to become one of the dominant retailers on the
Internet. The Company intends to leverage its position as a leading Internet
retailer of refurbished and close-out merchandise by pursuing the following
key strategies:

Increase Market Awareness and Brand Recognition

The Company believes that ONSALE is a leading brand name in Internet
commerce. The Company operates in a market in which its brand franchise is
critical to attracting high quality vendors and a high level of customer
traffic. Accordingly, the Company's strategy is to promote, advertise and
increase its visibility through a variety of marketing and promotional
techniques, including advertising on leading Internet sites and in printed
media, conducting an ongoing public relations campaign and obtaining links
from other Web sites.

Provide Compelling Retailing Experience for Customers

The Company believes auction buyers are attracted by the perceived bargain
prices and the inherent excitement of competitively winning desired
merchandise. Accordingly, the Company intends to continue offering customers a
wide array of opportunities to buy desired merchandise at bargain prices by
increasing the frequency of the Company's auctions (currently three cycles per
week) and continuing to rotate the selection of merchandise.

Expand and Strengthen Long-Term Vendor Relationships

The Company's ability to attract, secure and obtain large quantities of
branded merchandise for its Internet auctions is key to its success. The
Company is aggressively building its merchandise buying staff to facilitate
securing long-term relationships with a variety of merchandise vendors. The
Company seeks to be its vendors' preferred choice for liquidating refurbished
and close-out merchandise. The Company intends to strengthen its vendor
relationships by offering better purchasing terms and more convenient service
through more automated order processing and superior logistical arrangements.
In addition, the Company believes its rapid auction process makes it a
convenient sales channel for vendors to liquidate large volumes of
merchandise.

Emphasize Principal Sales Model

When the Company commenced operations, it performed most of its business on
an agency basis by conducting auctions on behalf of its vendors, which
fulfilled orders and collected payment. The Company is increasing the number
of vendor relationships where it acts as a principal and performs or arranges
most of the order fulfillment, payment and shipping functions, as well as
provides limited customer support. By purchasing merchandise and undertaking
these additional functions, the Company believes that it will be able to
expand its gross margins, improve its customer service and control its costs
more efficiently.

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Develop Incremental Revenue Opportunities

The Company believes that a significant opportunity exists to develop
incremental revenue opportunities, including expanding its product mix with
other products that are well suited for the Internet's electronic format. The
Company also believes that the high level of traffic on its Web site provides
an attractive alternative for advertising on its Web site. In addition, the
Company is considering expanding its sales to customers outside its current
markets of the United States and Canada.

Build on Leading Technology

The Company believes that one of its competitive advantages is its
internally developed proprietary software that is specifically designed for
Internet auctions. This software conducts automated auctions with thousands of
customers, processes those customers' orders and payments, coordinates and
performs order fulfillment and provides certain customer support functions.
The Company intends to enhance its software to provide an even more compelling
shopping experience, as well as to streamline its order processing,
warehousing and distribution, and customer support functions.

THE ONSALE PROCESS

The entire ONSALE auction process is fully automated. The Company posts
descriptions and images of the merchandise being offered for auction on its
Web site. The Company generally offers customers the opportunity to bid for
merchandise through the "Yankee auction" format. In this format, a number of
identical items of merchandise are offered for sale at the same time. When the
auction closes, the highest bidders win the available inventory at their
actual bid prices. Thus, 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. This
allows customers to employ a variety of strategies that make bidding
interesting.

To bid, a customer completes and submits a simple electronic registration
form found on the Company's Web site. Once registered, the customer can bid
and buy at will. As bids are received, ONSALE's Web pages are instantly
updated to display the current high bidders' initials, city and state, and an
optional comment to personalize the bidding. Customers are notified by email
when they are outbid and can then respond by return email or via the Company's
Web site to increase the bid. In addition, customers can monitor their bid
status on ONSALE's Web site. Once an auction has closed, the Company's auction
software informs the winning bidders by email and creates an order. The
customer's credit card is then charged and the merchandise is shipped either
by the Company or its vendor.

The Company from time to time uses other auction formats, including the
following: (i) the "Dutch auction," in which the Company offers a number of
identical items for sale at the same time and the highest bidders win the
available inventory at the lowest successful bidder's price; (ii) the
"Standard" auction for the auction of a single item of merchandise, in which
the auctioned item goes to the highest bidder; (iii) the "Buy or Bid" auction,
in which the Company permits customers to bid on an item either at the posted
asking price, or below the asking price in the hope of receiving the item at
the lower price; and (iv) the "Straight Sale," in which the Company posts each
item at a listed price and customers' orders immediately are accepted at the
listed price.

MERCHANDISE

The Company offers more than 500 different merchandise items for auction
three times per week. This merchandise consists primarily of refurbished and
close-out computers, peripherals and consumer electronics. The Company
believes that rotating its merchandise mix keeps its Web site fresh and
appealing and encourages customers to revisit the site frequently. The Company
believes a well-coordinated merchandise assortment is key to its success, and
employs a staff of seasoned buyers from the computer and consumer electronics
industries to achieve this goal.

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The Company primarily offers merchandise in the following categories:

Personal Computers. The Company offers PCs, including IBM- and
Macintosh-compatible desktops and notebooks.

Printers, Monitors and Scanners. The Company offers laser, laser jet
and color jet printers, color and black and white monitors, related
accessories and toner cartridges, and flatbed scanners.

Computer Peripherals. The Company sells memory chips, disc drives, CPU
chips, controllers, CD-ROMs, multimedia accessories, modems,
motherboards, video cards, mice and keyboards.

Network Equipment. The Company sells a variety of network equipment,
including servers, repeaters, hubs and routers, and Ethernet and token
ring cards and accessories.

Consumer Electronics. The Company sells home theater items (such as
VCRs, receivers, speakers and CD players), photography equipment (such
as camcorders and cameras), portable televisions, portable audio and
car stereo equipment (such as AM/FM cassette and CD players, speakers
and tuners) and home office items (such as facsimile machines,
answering machines and telephones). The Company is continuing to expand
its offerings of consumer electronics.

Software. The Company sells home gameplayer, PC, educational, and home
and office software.

The Company's merchandise has included brands such as AST, AT&T, Aiwa,
Apple, Canon, Compaq, Dell, Hewlett-Packard, Intel, JVC, Kenwood, NEC, Packard
Bell, Sanyo, Seagate, Toshiba and Uniden. Regardless of the source of the
merchandise, most merchandise sold by the Company carries a warranty provided
by the vendor, which greatly reduces the Company's customer service expenses.
The Company is entirely dependent upon vendors to supply it with merchandise
for sale through the Company's Internet auctions and the availability of
merchandise is unpredictable. In 1996, approximately 30% of the Company's
gross merchandise sales was derived from merchandise acquired from five
vendors, although no vendor accounted for more than 10% of gross merchandise
sales. The Company has no long-term contracts or arrangements with its vendors
that guarantee the availability of merchandise for its auctions. 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 Web site. The Company also relies on many of its vendors to process
and ship merchandise to customers. The Company has limited control over the
shipping procedures of its vendors, and shipments by these vendors have often
been subject to delays. Although most merchandise sold by the Company carries
a warranty supplied either by the manufacturer or the vendor and the Company
is not obligated to accept merchandise returns, the Company in fact has
accepted returns from customers for which the Company did not receive
reimbursements from its vendors or manufacturers. 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.

VENDOR RELATIONSHIPS

The Company obtains merchandise directly from computer and electronics
manufacturers, such as Apple Computer, Hewlett-Packard, Lexmark, NEC, Packard
Bell and Toshiba, and indirectly through other vendors, such as Vircom. No
vendor accounted for more than 10% of the Company's gross merchandise sales,
although five of the Company's vendors collectively accounted for over 30% of
its gross merchandise sales in 1996. Since merchandise availability is
unpredictable, strong vendor relationships are critical to the Company's
success. See "Risk Factors--Reliance on Merchandise Vendors." As a result, the
Company's buying staff maintains ongoing contact, frequently on a daily basis,
with its vendors to learn when new merchandise becomes available. The Company
obtains merchandise from vendors through one of two primary arrangements,
either the Principal Sales model or the Agent Sales model.

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. Principal Sales Model. The Company acts as a direct purchaser of
merchandise or a consignment seller for vendors. By purchasing
merchandise, the Company assumes the full inventory and price risk
involved in selling such merchandise. The Company believes its ability to
liquidate its inventory quickly through its Internet auctions somewhat
mitigates the cost of carrying inventory and the price erosion risk. The
Company intends to increase its purchasing of merchandise from vendors,
particularly from manufacturers, because the Company believes it will
achieve higher gross margins by purchasing merchandise. The Company's
ability to achieve higher gross margins, however, depends on the ability
of its buying staff to purchase inventory at attractive prices relative
to the resale value of the inventory at auction, and there can be no
assurance that the Company's buying staff will continue to purchase items
at attractive prices relative to their resale value at auction. Sales of
purchased inventory accounted for 16% of the Company's gross merchandise
sales in the fourth quarter of 1996.

For sales on consignment, the Company upon completion of an auction
takes title to the merchandise, charges a customer's credit card and
either ships the merchandise directly or arranges for a third party to
complete delivery to the customers. Subsequently, the Company pays the
vendor any amounts due for the purchase of the related inventory. By
selling merchandise on consignment, the Company avoids the risk that it
will not be able to liquidate its inventory in a timely manner. However,
the Company is at risk of loss for the collection of all of the auction
proceeds, delivery of the merchandise and returns from customers.
Consignment sales represented 37% of the Company's gross merchandise
sales in the fourth quarter of 1996. See "Risk Factors--Risks of a
Principal Sales Model."

. Agent Sales Model. The Company also sells merchandise by acting as a
sales agent for vendors. Under this arrangement, at the conclusion of an
auction the Company forwards the order information to the vendor, which
then charges the customer's credit card and ships the merchandise. The
Company receives a commission based upon a percentage of the price. In an
agency relationship, the Company does not take title to the merchandise,
and the vendor bears the risk of credit card charge backs. The Company,
however, must rely on the vendor to charge customers and ship merchandise
on a timely basis. In the fourth quarter of 1996, Agent Sales accounted
for 47% of the Company's gross merchandise sales. See "Risk Factors--
Reliance on Merchandise Vendors."

SALES AND MARKETING

The Company sells to end users, small and home office purchasers, and
others. During the quarter ended December 31, 1996, the Company believes that,
on average, more than 8,000 unique customers submitted more than 23,000 bids
each week, that approximately 10% of new visitors became bidders, and that the
average winning bid was approximately $195. See "Risk Factors--Developing
Market; Uncertain Acceptance of the Internet as a Medium for Commerce" and
"Risk Factors--Uncertain Acceptance of the ONSALE Brand."

To achieve its objective of becoming one of the dominant retailers on the
Internet, the Company has developed a marketing strategy based on
strengthening its brand name and increasing customer traffic to its Web site.
The Company employs a mix of media and promotional activities to achieve these
goals.

Internet Advertising. The Company places advertisements on various high-
profile and high-traffic conduit Web sites, including c|net, Lycos, Excite and
Infoseek. These advertisements usually take the form of banners that encourage
readers to click through directly to the Company's Web site.

Print Media Advertising. The Company advertises in general circulation
newspapers and magazines, such as The Wall Street Journal and USA Today, and
in trade publications, such as Computer Shopper.

Public Relations Campaign. The Company's marketing team launched an ongoing
public relations campaign in July 1996. This campaign has resulted in the
Company's being featured on television shows such as

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"CNN Financial News," MSNBC's "The Site" and PBS's "Computer Chronicles" and
in the publication of articles in The Wall Street Journal, Business Week, Web
Week, Computer Reseller News, PC Week Executive and the Los Angeles Times. The
Company was awarded the 1996 Lighthouse Award for Excellence by the
Channelmarker Letter.

Links from Other Web Sites. Approximately 1,000 Web sites have links to
ONSALE's Web site, including links from prominent "What's Cool" pages. The
Company believes such links are a significant factor in increasing brand
awareness and generating customer traffic to the Company's Web site.

Customer Electronic Mail Broadcasts. The Company actively markets to its own
base of customers through email broadcasts. All bidders in the Company's
auctions are automatically added to the Company's electronic mailing list,
which presently numbers over 128,500 registrants. The Company currently sends
more than 385,000 email messages each week announcing new items available at
auction.

Promotional Contests. The Company runs contests and give-away programs from
its Web site to promote bidding by regular customers and new visitors to the
site. The contests usually ask the participant to guess the answer to a
question by placing a zero cost bid in exchange for the chance to win a free
prize, such as a cordless phone. Such contests and give-away programs
acclimate substantial numbers of new customers to the bidding process by
allowing them to bid in a risk-free environment.

MERCHANDISE DISTRIBUTION

The Company does not currently own or lease warehouse space and relies
instead on contract warehouses for the bulk of its fulfillment and logistics
requirements. Due to difficulties with its previous contract warehouse, the
Company entered into its relationship with Gage in December 1996. The Company
is evaluating whether to alter its distribution strategy for purchased
inventory by establishing or acquiring its own warehouse and distribution
facilities, although it has no present intention to do so. The Company also
relies on many of its vendors to process and ship merchandise to customers.
The Company has limited control over the shipping procedures of these vendors,
and shipments by certain of these vendors have been subject to delays. See
"Risk Factors--Reliance on Merchandise Vendors" and "Risk Factors--Reliance on
Other Third Parties."

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. The Company currently employs a staff of 11 full-time
customer support and service personnel who are responsible for handling
customer inquiries, answering customer questions about the bidding process,
tracking shipments, investigating problems with merchandise, and acting as
liaisons between customers and the Company's vendors. In addition, the Company
has automated certain of its customer support and service functions. The
Company is actively working to enhance its customer support and service
operations, through a variety of measures including improved customer
reporting systems. The Company plans to introduce a software system that will
allow customers to track the shipment of their purchases through the Company's
Web site. See "Risk Factors--Reliance on Merchandise Vendors" and "Risk
Factors--Management of Growth; Limited Senior Management Resources."

TECHNOLOGY AND OPERATIONS

The Company uses a combination of its own proprietary technology and
licensed commercially available technology to conduct its Internet auctions.

Proprietary Technology

The Company has devoted significant resources to developing its proprietary
software technology. The Company believes that its success depends, in part,
on the Company's internally developed proprietary auction management software,
which implements a variety of customized auction, markdown and sales formats.
See

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"Risk Factors--Risks Associated with Technological Change; Dependence on the
Internet." The Company's proprietary software components are organized into
the following groups:

Auction Management Applications. The Company uses a set of continuously
running application programs that manage the auctions and sales, update
merchandise Web pages to show the currently winning bidders, send a variety
of email messages to customers informing them that they have been outbid or
have won merchandise, and process incoming bid increases via email.

Transaction Processing Applications. The Company uses a set of
applications for receiving and validating bids, entering registrations to
place the customer on the Company's mailing list, listing currently active
and recent winning and losing bids, and reviewing and submitting customer
service requests.

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
warehouses and vendors, and deposit transaction information into the
Company's accounting system.

Marketing Applications. The Company has developed a set of email
applications for sending broadcast emails to customers on a frequent basis.
This software extracts email addresses from the Company's mailing list,
sends emails to the designated recipients and automatically services
requests from customers to remove them from the mailing list.

Commercially Available Licensed Technology

The Company's strategy has been to license commercially available technology
whenever possible rather than seek a custom-made or internally-developed
solution. The Company believes that this strategy enables it to lower its
operating costs and to respond to changing demands due to growth and
technological shifts. This strategy also allows the Company to focus its
development efforts on creating and enhancing the specialized, proprietary
software that is unique to the Company's business. The Company currently uses
the following commercially available software: Microsoft Windows NT as its
operating environment; Netscape FastTrack Internet server as its front-end for
presenting its merchandise pages and related Web pages to customers who can
use any Web browser; Microsoft Exchange Server to complement its automated
email bidding and broadcast email marketing systems for sending and receiving
email messages to customers; and an Oracle relational database for storing its
customer, bid and merchandise records.

Engineering

The Company's engineering staff consisted of 15 software development
engineers as of December 31, 1996. The Company historically has developed and
expects to continue to develop its proprietary auction management and
marketing software. The Company's engineering strategy includes the
enhancement of features and functionality of its existing software components,
the development of additional new software components, and the integration of
off-the-shelf components into its environment. The Company currently is
investing significant resources in software development and expects to
continue to do so in the future. The Company believes its future success
depends on its ability to continue developing and enhancing its proprietary
software.

Operations

The Company's Web site operations staff consists of four systems
administrators who manage, monitor and operate the Company's Web site. The
continued uninterrupted operation of the Company's Web site is essential to
its business, and it is the job of the site operations staff to ensure, to the
greatest extent possible, the reliability of the Company's Web site. The
Company uses the services of UUNet, an Internet service provider, to provide
connectivity to the Internet over a dedicated T-1 line provided by Pacific
Telesis. UUNet provides Internet traffic and data routing services to the
Company as well as email services. The Company believes that these
telecommunication and Internet service facilities are essential to the
Company's operation and anticipates upgrading these facilities to faster,
though more costly, telecommunication services in the future. See "Risk
Factors--Management of Growth; Limited Senior Management Resources" and "Risk
Factors--Risk of System Failure; Single Site."

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COMPETITION

The electronic commerce market, particularly over the Internet, 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 small Internet auction houses, (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, a wholly-owned subsidiary of Home Shopping Network Inc, New England
Circuit Exchange, America Online, Inc. and CUC International Inc., (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, and (iv) companies with substantial customer bases in the
computer and peripherals catalog business, including Micro Warehouse, Inc. and
CDW Computer Centers, Inc., which may devote more resources to Internet
commerce in the future. In particular, America Online has taken a minority
equity interest in Internet Liquidators International, Inc. ("ILI") and
announced that the two companies have formed a strategic partnership under
which revenue from ILI's auction platforms will be shared with America Online
and America Online will provide a direct link for ILI's members to reach ILI's
electronic commerce site on the Web. Also, the Company believes Micro
Warehouse, Inc. is contemplating the introduction of an online auction site in
the next several months, that Ziff-Davis has reserved a Web domain name
including the word "auction" and that CompUSA is considering opening an
auction site on the Web for its refurbished products.

The Company believes that the principal competitive factors affecting its
market include its ability to secure merchandise for sale, attract new
customers to its site at favorable customer acquisition costs, operate its Web
site in an uninterrupted manner, and develop and enhance its proprietary
auction management software. 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,
service, 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 might
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, technical, marketing and other resources than the Company. As a
result, they 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.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

35
<PAGE>

Company or others will adopt product or service names similar to "ONSALE" and
the Company's other trademarks, 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 "ONSALE" adequately would 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 and also is protected
under applicable trade secret law. 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 technology that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's Web site 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 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 development 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.

LEGAL PROCEEDINGS

On October 17, 1996, Tredex California, Inc. ("Tredex") filed a complaint in
the Superior Court of the State of California in and for the County of Los
Angeles against a former Tredex employee for, among other claims,
misappropriation of trade secrets, intentional interference with contractual
relations, fraud and deceit, breach of fiduciary duty, unfair competition,
conspiracy, unjust enrichment and conversion. Tredex subsequently amended its
complaint to name ONSALE, among others, as a defendant and served ONSALE with
a summons and complaint on January 6, 1997. Tredex alleges that ONSALE
wrongfully obtained customer and vendor lists and other proprietary
information of Tredex from such former employee. Tredex is seeking damages in
excess of $1.75 million from all the defendants collectively. Tredex is also
seeking injunctive relief to stop the defendants from using the customer and
vendor lists and other proprietary information of Tredex. ONSALE has filed a
general denial and is currently investigating Tredex's allegations. Although
there can be no assurance, the Company does not expect the outcome of this
litigation to have a material adverse effect on its results of operations or
financial condition, but the Company could incur significant expenses in
defending this action.

36
<PAGE>

On March 6, 1997, the Company filed a complaint in the Superior Court of the
State of California in and for the County of Santa Clara against a Tredex
employee and Tredex, for, among other claims, misappropriation of trade
secrets, fraud and deceit, breach of contract (only against the Tredex
employee), intentional interference with contractual relations, intentional
interference with prospective business relations, unfair competition, unjust
enrichment, conspiracy and conversion. The Company alleges that the Tredex
employee obtained marketing information, financial and technical data, and
other proprietary and confidential information of the Company while
interviewing for a sales position at the Company. The Company believes that
the Tredex employee disclosed some or all of the confidential information that
he obtained from the Company to Tredex, and that Tredex, knowing that the
information was wrongfully obtained, used the information to establish a
competing on-line auction site. The Company is seeking unspecified
compensatory damages as well as injunctive relief against both the Tredex
employee and Tredex. Although there can be no assurance, the Company does not
expect the outcome of this litigation to have a material adverse effect on its
results of operations or its financial condition, but the Company could incur
significant expenses in pursuing this action.

EMPLOYEES

As of December 31, 1996, the Company employed 54 people, including 19 in
engineering, support and operations, quality assurance, and technical
documentation, 11 in merchandise acquisition and marketing, 10 in customer
support and service, 7 in order processing and logistics, and 7 in finance and
administrative functions. The Company also employs independent contractors for
software development, technical documentation, artistic design and product
fulfillment. 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 Growth;
Limited Senior Management Resources" and "Risk Factors--Dependence on Key
Personnel; Need For Additional Personnel."

FACILITIES

The Company's principal administrative, engineering, merchandising and
marketing facilities total approximately 10,392 square feet, and are located
in three separate buildings within an office complex in Mountain View,
California under leases that expire in October 1997, May 1998 and July 1999.
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.

The Company does not currently own or lease warehouse space and relies
instead on contract warehouses for the bulk of its fulfillment and logistics
requirements. The Company may, at some point in the future, acquire or lease
its own warehouse space rather than rely on contract warehouse services.

37
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS

The following table sets forth certain information regarding the executive
officers, key employees and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S. Jerrold Kaplan............... 45 President, Chief Executive Officer and
Director
Alan S. Fisher.................. 36 Vice President of Development and
Operations, Chief Technical Officer and
Director
Merle W. McIntosh............... 41 Senior Vice President of Merchandise
Acquisition
Martha D. Greer................. 43 Vice President of Merchandise Management
John F. Sauerland............... 46 Chief Financial Officer and Secretary
Michael T. Weller............... 29 Vice President of Vendor Relations
Peter L. Harris(1).............. 53 Director
Peter H. Jackson(2)............. 38 Director
Kenneth J. Orton(1)(2).......... 45 Director
</TABLE>
--------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.

Each director will hold office until the next Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors (the "Board").

S. Jerrold Kaplan has been President, Chief Executive Officer and a director
of the Company since co-founding the Company in July 1994. Mr. Kaplan was
Secretary of the Company from July 1995 to December 1996. From September 1989
to October 1993, Mr. Kaplan served as Chairman for GO Corporation, a developer
of pen-based computers. From September 1987 to September 1989, he served as
Chief Executive Officer of GO Corporation. Mr. Kaplan received his B.A. in
History and Philosophy of Science from the University of Chicago and received
his M.S.E. and Ph.D. in Computer and Information Science from the University
of Pennsylvania.

Alan S. Fisher has been Vice President of Development and Operations, Chief
Technical Officer and a director of the Company since co-founding the Company
in July 1994. He also served as Chief Financial Officer of the Company from
July 1994 to July 1996. Mr. Fisher is also President and Chairman of Software
Partners, Inc., a developer and publisher of software products, which he co-
founded in August 1988, although he devotes minimal time to this enterprise.
From April 1984 to August 1988, Mr. Fisher served as Technical Marketing
Manager and Product Development Manager for Teknowledge, Inc., a developer of
artificial intelligence software products. From June 1981 to April 1984, he
served as a member of the technical staff for AT&T Bell Laboratories, a
research and development division for American Telephone & Telegraph Company.
Mr. Fisher received his B.S. in Electrical Engineering from the University of
Missouri and received his M.S. in Electrical Engineering from Stanford
University.

Merle W. McIntosh has been Senior Vice President of Merchandise Acquisition
of the Company since March 1997. From October 1994 to March 1997, Mr. McIntosh
served as Vice President of Purchasing for Micro Warehouse, Inc., a direct
marketer of microcomputer software and peripheral products. From September
1992 to October 1994, Mr. McIntosh served as Director of Product Management
for Entex Information Services, Inc., a computer reseller. From September 1987
to September 1992, Mr. McIntosh was a senior purchasing manager for Wang
Laboratories, a computer manufacturer. From July 1984 to September 1987, he
served as production controller for Sensormatic Electronics Corporation, a
manufacturer of security devices. Mr. McIntosh studied business management at
New Hampshire College.

38
<PAGE>

Martha D. Greer has been Vice President of Merchandise Management of the
Company since December 1996. From March 1996 to December 1996, Ms. Greer
served as a management consultant. From December 1992 to February 1996, she
served as Vice President, Product Management for PC Connection, Inc., a mail-
order reseller of personal computers. From March 1992 to December 1992, she
served as a senior manager for Dataquest, a computer industry market research
firm. Prior to that, she served as a management consultant from January 1990
to March 1992. Ms. Greer received her B.A. in Linguistics from Macalester
College and received her Ph.D. in Experimental Psychology from Harvard
University.

John F. Sauerland joined the Company in July 1996 as its Chief Financial
Officer. He was appointed Secretary of the Company in December 1996. From
March 1995 to July 1996, Mr. Sauerland served as Chief Financial Officer with
ICVerify, Inc., a developer of software. From May 1992 to March 1995, Mr.
Sauerland served as Senior Vice President of Finance, Chief Financial Officer
and Secretary for Natural Wonders, Inc., a specialty retailer. From March 1989
to May 1992, Mr. Sauerland served as Vice President of Finance and Chief
Financial Officer for Natural Wonders, Inc. From January 1989 to March 1989,
he served as controller for Natural Wonders, Inc. Mr. Sauerland received his
B.S. in Business Administration from St. Mary's College and received his
M.B.A. in Finance and Accounting from the University of Santa Clara.

Michael T. Weller has been Vice President of Vendor Relations of the Company
since January 1997. From April 1992 to December 1996, Mr. Weller served as
Senior Director of Marketing at Micro Warehouse, Inc. From March 1990 to March
1992, Mr. Weller served as a channels marketing manager for Farallon
Communications, Inc., a networking hardware developer and manufacturer. From
August 1989 to March 1990, he served as a direct mail specialist for SuperMac
Technologies, a manufacturer of Apple MacIntosh computer clones. Mr. Weller
received his B.A. in Communication Studies from the University of California,
Santa Barbara.

Peter L. Harris has been a director of the Company since December 1996. He
has served as Chairman, Chief Executive Officer and President of Expressly
Portraits, a family portrait studio chain, since August 1995. Previously, Mr.
Harris was Chairman of Accolade, Inc., a publisher of interactive
entertainment software, from May 1994 to January 1996, and Chief Executive
officer of Accolade, Inc. from May 1994 to June 1995. From July 1992 to May
1994, he served as a management consultant. Prior to that, Mr. Harris was
President and Chief Executive Officer of F.A.O. Schwarz from 1985 to July
1992. Mr. Harris serves as a director of Boomtown, Inc., Natural Wonders, Inc.
and Pacific Sunwear of California, Inc. Mr. Harris received his B.A. in
Business Administration from Whittier College.

Peter H. Jackson has been a director of the Company since December 1996. He
has served as President and Chief Executive Officer of Intraware, Inc., a
developer and distributor of intranet software tools and applications, since
co-founding it in August 1996. From April 1994 to May 1996, Mr. Jackson was
President and Chief Operating Officer of Dataflex Corporation, a computer
hardware reseller and services provider. Previously, Mr. Jackson served as
President and Chief Executive Officer of Granite Computer Products, Inc., a
supplier of computer hardware and software for large corporations, which he
founded in March 1985. Granite Computer Products, Inc. was acquired by
Dataflex Corporation in April 1994. Mr. Jackson received his B.A. in History
from the University of California, Berkeley.

Kenneth J. Orton has been a director of the Company since October 1996. Mr.
Orton has been President and Chief Operating Officer for Preview Travel, Inc.,
an online travel service, since April 1994. From September 1989 to March 1994,
he served as Vice President and General Manager for Epsilon, Inc., a wholly-
owned subsidiary of American Express TRS, a database marketing company. Mr.
Orton received his B.A. in Business Administration and Marketing from
California State University, Fullerton.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board consists of Messrs. Orton and
Harris. In October 1996, the Company granted Mr. Orton options to purchase
19,800 shares of Common Stock, with an exercise price of $1.50 per share. In
December 1996, the Company granted Mr. Harris an option to purchase 18,000
shares of

39
<PAGE>

Common Stock with an exercise price of $5.00 per share, and Mr. Harris
purchased 20,000 shares of the Company's Common Stock for an aggregate
purchase price of $100,000 paid with a full recourse promissory note secured
by the shares. Mr. Harris repaid his note in March 1997. Also, in December
1996, the Company granted Mr. Jackson an option to purchase 18,000 shares of
Common Stock with an exercise price of $7.00 per share. Each director's option
vests over four years. Mr. Orton's option provides that, if his services as a
director are involuntarily terminated following a "change of control"
transaction, 50% of the unvested portion of his option will vest immediately.

DIRECTOR COMPENSATION

Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board.

In December 1996, the Board adopted the 1996 Directors Stock Option Plan
(the "Directors Plan") and reserved a total of 100,000 shares of the Company's
Common Stock for issuance thereunder. The Company's stockholders approved the
Directors Plan in January 1997. Members of the Board who are not employees of
the Company, or any parent, subsidiary or affiliate of the Company, are
eligible to participate in the Directors Plan. Each eligible director who
first becomes a member of the Board on or after the date on which this
offering is declared effective by the Securities and Exchange Commission
("Effective Date") will initially be granted an option for 15,000 shares
("Initial Grant") on the later of the Effective Date or the date such director
first becomes a director. On each anniversary of a director's Initial Grant
(or previous grant if such director was ineligible to receive an Initial
Grant), each eligible director will automatically be granted an additional
option to purchase 5,000 shares if such director has served continuously as a
member of the Board since the date of such director's Initial Grant (or
previous grant if such director did not receive an Initial Grant). All options
issued under the Directors Plan will vest as to 12.5% of the shares six months
from the date of grant and as to 2.083% of the shares on the last date of each
month thereafter, provided the optionee continues as a member of the Board or
as a consultant to the Company. Additionally, immediately prior to a "change
in control" transaction, all options granted pursuant to the Directors Plan
will accelerate and will terminate if not exercised prior to the consummation
of the transaction. The exercise price of all options granted under the
Directors Plan must be the fair market value of the Common Stock on the date
of grant.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during 1996 by the
Company's Chief Executive Officer. No other executive officer who held office
at December 31, 1996 met the definition of "most highly compensated executive
officer" within the SEC's executive compensation disclosure rules for this
period.

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------------
AWARDS
------------------
1996 ANNUAL COMPENSATION
---------------------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL POSITIONS SALARY(1) BONUS COMPENSATION(2) UNDERLYING OPTIONS
- ---------------------------- --------- ------- --------------- ------------------
<S> <C> <C> <C> <C>
S. Jerrold Kaplan......... $ -- $ -- $56 --
President and Chief
Executive Officer
</TABLE>
- --------
(1) The Company's other executive officers are Messrs. Sauerland, McIntosh and
Fisher and Ms. Greer. John F. Sauerland, who was appointed the Company's
Chief Financial Officer in July 1996, is currently being compensated at
the rate of $100,000 per year. Martha D. Greer, who was appointed the
Company's Vice President of Merchandise Management in December 1996, is
currently being compensated at the rate of $125,000 per year. Merle W.
McIntosh, who was appointed the Company's Senior Vice President of
Merchandise Acquisition in March 1997, is currently being compensated at
the rate of $175,000 per year. As of January 1, 1997, the Company began
compensating both Mr. Kaplan and Alan S. Fisher, the Company's Vice
President of Development and Operations and Chief Technical Officer, at
the annual salary rate of $100,000. Neither Mr. Kaplan nor Mr. Fisher
received any salary or bonus during 1996.
(2) Represents the portion of Mr. Kaplan's health and life insurance premium
paid by the Company.

40
<PAGE>

Neither Mr. Kaplan nor Mr. Fisher has been granted options by the Company.
For information on options granted to Messrs. Sauerland and McIntosh and Ms.
Greer, see "Employment Agreements" below.

EMPLOYMENT AGREEMENTS

Mr. Sauerland's offer letter of June 1996 provides for an initial annual
salary of $100,000 and a review to bring his salary in line with industry
standard practice immediately following this offering. It also provides that,
should Mr. Sauerland be terminated without formal "cause" following the first
six months of his employment, he would receive severance pay in the amount of
six months' salary. In addition, it provides that Mr. Sauerland will
participate in any appropriate executive incentive plans. At the commencement
of Mr. Sauerland's employment in July 1996, Mr. Sauerland also received an
option to purchase 225,000 shares of Common Stock with an exercise price of
$0.67 per share. The option will vest as to 28,125 shares on February 1, 1997
and as to 4,687.5 shares on the first day of each month thereafter. Further,
if an initial public offering occurs prior to the time that the option is
fully vested, 15,000 shares become vested upon the closing of the offering and
the remaining unvested shares vest monthly pro rata over the remainder of the
four-year vesting period. Additionally, 25% of the unvested options would vest
immediately upon Mr. Sauerland's termination without formal "cause" following
a "change of control" transaction. Mr. Sauerland's employment is "at will" and
thus can be terminated at any time, with or without formal cause.

Ms. Greer's offer letter of December 1996 provides for an initial annual
salary of $125,000. The letter also provides for a one-time payment of $40,000
to reimburse her for her relocation and interim living costs. At the
commencement of her employment in December 1996, Ms. Greer also received an
option to purchase 150,000 shares of Common Stock with an exercise price of
$7.00 per share. The option will vest as to 18,750 shares on June 1, 1997 and
as to 3,125 shares each month thereafter. In addition, the letter provides
Ms. Greer with the right to request a $125,000 loan from the Company before
December 19, 1997 to assist with the purchase of a new home. The loan will
have a term of two years and will have an interest rate of 7%. The interest
will accrue and become payable 18 months from the date of the loan, with
interest payable quarterly thereafter, and with all interest and principal
payable at the earliest of the end of the two-year loan term, the sale of the
property purchased with the loan or the termination of Ms. Greer's employment.
The loan will be secured by a second interest in Ms. Greer's home in New
Hampshire, her current option and any future options to purchase shares of the
Company's Common Stock. Ms. Greer's employment is "at will" and thus can be
terminated at any time, with or without formal cause.

Mr. McIntosh's offer letter of February 1997 provides for an initial annual
salary of $175,000 commencing on March 12, 1997. The letter also provides for
reimbursement of up to $25,000 of costs associated with his relocation to
California. At the commencement of his employment, Mr. McIntosh also received
an option to purchase 150,000 shares of Common Stock with an exercise price of
$7.00 per share. The option will vest as to 18,750 shares on September 12,
1997 and as to 3,125 shares on the first day of each month thereafter. In the
event that Mr. McIntosh is terminated without formal "cause" following a
"change of control" transaction after the first six months of his employment,
25% of the unvested portion of his option will vest immediately upon his
termination and he will receive three months' severance pay. In addition, the
letter provides Mr. McIntosh with the right to request a $25,000 loan from the
Company before March 12, 1998. The loan will have a term of two years and will
have an interest rate of 7%. The interest will accrue and become payable two
years from the date of the loan, with all interest and principal payable at
the earlier of the end of the two-year loan term or three months after the
termination of Mr. McIntosh's employment. The loan will be secured by Mr.
McIntosh's current option and any future such options to purchase shares of
the Company's Common Stock. Mr. McIntosh's employment is "at will" and thus
can be terminated at any time, with or without formal cause.

EMPLOYEE BENEFIT PLANS

1995 Equity Incentive Plan. In November 1995, the Board adopted and the
Company's stockholders approved the Company's 1995 Equity Incentive Plan (the
"1995 Equity Incentive Plan") and reserved 1,500,000 shares of Common Stock
for issuance thereunder. The 1995 Equity Incentive Plan was amended in August
1996

41
<PAGE>

to increase the number of shares reserved for issuance thereunder from
1,500,000 to 3,032,250. As of December 31, 1996, options to purchase an
aggregate of 1,612,910 shares of Common Stock were outstanding under the 1995
Equity Incentive Plan with exercise prices ranging from $0.033 to $7.00 per
share, and options to purchase 1,872,090 shares were available for grant. In
December 1996, the 1995 Equity Incentive Plan was amended to allow the
issuance of options thereunder to qualify under the exemption contained in
Section 25102(o) of the California Corporate Securities Law of 1968. The
Company's stockholders approved the amendment in December 1996. In December
1996, the Board further amended and restated the 1995 Equity Incentive Plan to
become effective upon the Effective Date. The Company's stockholders approved
the amendment and restatement of the 1995 Equity Incentive Plan in January
1997. The amendment and restatement of the 1995 Equity Incentive Plan
increased the shares reserved for issuance from 3,032,250 to 3,500,000.

The 1995 Equity Incentive Plan provides for the grant of stock options and
the issuance of restricted stock and stock bonuses by the Company to its
employees, officers, directors, consultants, independent contractors and
advisers. No person will be eligible to receive more than 250,000 shares in
any calendar year pursuant to grants under the 1995 Equity Incentive Plan,
other than new employees of the Company who will be eligible to receive up to
a maximum of 750,000 shares in the calendar year in which they commence
employment with the Company. The 1995 Equity Incentive Plan is administered by
the Compensation Committee of the Board, consisting of Messrs. Orton and
Harris, both of whom are "outside directors" as that term is defined in
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
The 1995 Equity Incentive Plan permits the Compensation Committee to grant
options that are either incentive stock options (as defined in Section 422 of
the Code) or nonqualified stock options, on terms (including the vesting
schedule and the exercise price, which may not be less than 85% of the fair
market value of the Company's Common Stock in the case of nonqualified stock
options and 100% in the case of incentive stock options) determined by the
Compensation Committee, subject to certain statutory and other limitations in
the 1995 Equity Incentive Plan. In addition to, or in tandem with, awards of
stock options, the Compensation Committee may grant participants restricted
stock awards to purchase the Company's Common Stock for not less than 85% of
its fair market value at the time of grant or stock bonuses for services
rendered. The other terms of such restricted stock awards may be determined by
the Compensation Committee. No person may receive (i) restricted stock awards,
(ii) stock bonus awards or (iii) options with an exercise price below fair
market value for more than 100,000 shares over the term of the 1995 Equity
Incentive Plan, and the sum of such awards may not exceed 200,000 shares over
the term of the 1995 Equity Incentive Plan. The 1995 Equity Incentive Plan
will terminate in November 2005 unless terminated earlier in accordance with
the provisions of the 1995 Equity Incentive Plan. Under the 1995 Equity
Incentive Plan, shares that (i) are subject to issuance upon exercise of an
option but cease to be subject to such option for any reason other than
exercise of such option, (ii) are subject to an award granted under the 1995
Equity Incentive Plan but are forfeited or are repurchased by the Company at
the original issue price or (iii) are subject to an award that otherwise
terminates without shares being issued will again be available for grant and
issuance in connection with future awards under the 1995 Equity Incentive
Plan.

1996 Employee Stock Purchase Plan. In December 1996, the Board adopted the
1996 Employee Stock Purchase Plan (the "Purchase Plan") and reserved a total
of 150,000 shares of the Company's Common Stock for issuance thereunder. The
Company's stockholders approved the Purchase Plan in January 1997. The
Purchase Plan will become effective on the first business day on which price
quotations for the Company's Common Stock are available on The Nasdaq National
Market. The Purchase Plan permits eligible employees to acquire shares of the
Company's Common Stock through payroll deductions. The Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. Except for the initial offering, each offering under the Purchase
Plan will be for a period of twenty-four months (the "Offering Period")
commencing on February 1 and August 1 of each year and ending on January 31
and July 31 of each year. The first Offering Period will begin on the date on
which price quotations for the Company's Common Stock are first available on
The Nasdaq National Market and will end on January 31, 1999, unless otherwise
determined by the Board prior to the beginning of such Offering Period. Except
for the first Offering Period, each Offering Period will consist of four
purchase periods, each six months in length ("Purchase Period"). The Board has
the power to change the duration of Offering Periods or Purchase Periods
without stockholder approval, provided that the change is

42
<PAGE>

announced at least 15 days prior to the scheduled beginning of the first
Offering Period or Purchasing Period to be affected. Eligible employees may
select a rate of payroll deduction between 2% and 15% of their compensation,
up to an aggregate total payroll deduction for each employee not to exceed
$21,250 in any Purchase Period. Eligible employees may purchase up to
1,500 shares in any Purchase Period. The purchase price for the Company's
Common Stock purchased under the Purchase Plan is 85% of the lesser of the
fair market value of the Company's Common Stock on the first day of the
applicable Offering Period or on the last day of the respective Purchase
Period.

401(k) Plan. The Board maintains the ONSALE, Inc. 401(k) Plan (the "401(k)
Plan"), a defined contribution profit-sharing plan intended to qualify under
Section 401 of the Code. All employees who are at least 21 years old are
eligible to participate in the 401(k) plan. An eligible employee of the
Company may begin to participate in the 401(k) Plan on the earlier of the
first day of January or the first day of July coincident with or immediately
following the later of (i) the date such employee attains age 21 and (ii) the
employee's date of hire. A participating employee may make pre-tax
contributions, subject to limitations under the Code, of a percentage (not to
exceed 15%) of his or her eligible compensation. Employee contributions and
the investment earnings thereon are fully vested at all times. The Company, at
its discretion, may make matching contributions for the benefit of eligible
employees in an amount not to exceed $250 per year. One quarter of the
Company's contributions and the investment earnings thereon become vested upon
the employee's completion of one year of service with the Company and an
additional quarter for each year of service thereafter. The Company made a
minimal contribution to the 401(k) Plan in the fourth quarter of 1996.

INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY

As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director. At this time, Delaware General Corporation Law does not permit
indemnification for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law or (iv)
for any transaction from which the director derived an improper personal
benefit.

As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify
its directors and executive officers to the fullest extent permitted by the
Delaware General Corporation Law, (ii) the Company is required, with certain
exceptions, to advance expenses, as incurred, to its directors and executive
officers in connection with a legal proceeding to the fullest extent permitted
by the Delaware General Corporation Law, (iii) the rights conferred in the
Bylaws are not exclusive and (iv) the Company is authorized to enter into
indemnity agreements with its directors, officers, employees and agents.

The Company plans to enter into indemnity agreements with each of its
directors and executive officers to give such directors and executive officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Company's Bylaws and to provide additional procedural
protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company regarding which
indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.

43
<PAGE>

CERTAIN TRANSACTIONS

Since the Company's inception (July 1994), there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
the Company was or is to be a party in which the amount involved exceeds
$60,000 and in which any director, executive officer or holder of more than 5%
of the Common Stock of the Company had or will have a direct or indirect
material interest other than (i) compensation arrangements that are described
where required under "Management," (ii) the transactions described under
"Compensation Committee Interlocks and Insider Participation" and (iii) the
transactions described below.

PROMOTERS' TRANSACTIONS

Each of S. Jerrold Kaplan, Alan S. Fisher, Razi Mohiuddin and Software
Partners, Inc., a Delaware corporation (collectively the "Founders"), were
involved in the founding and organization of the Company and may be considered
a promoter of the Company. Described below are items of value received by each
of the Founders in connection with services provided to the Company.

At its inception in July 1994, the Company issued 6,000,000 shares to Mr.
Kaplan and 6,000,000 shares to Software Partners, Inc. ("SPI"). Mr. Kaplan
purchased his shares by contributing a business plan that he had prepared for
the Company and SPI purchased its shares by contributing certain software that
it had developed for the Company. The Board valued each person's contribution
at $10,000. In July 1994, SPI distributed its 6,000,000 shares of the
Company's Common Stock to its shareholders, Mr. Fisher and Mr. Mohiuddin, with
Mr. Fisher receiving 3,793,185 shares of the Company's Common Stock and Mr.
Mohiuddin receiving 2,206,815 shares of the Company's Common Stock (the "SPI
Distribution"). At the time of the SPI Distribution, Mr. Fisher and Mr.
Mohiuddin also entered into a voting trust agreement pursuant to which SPI
would act as voting trustee for the shares of the Company's Common Stock held
of record by Mr. Fisher and Mr. Mohiuddin. The Company has the right to
repurchase at their original cost the shares owned by Messrs. Kaplan, Fisher
and Mohiuddin, which right commenced lapsing monthly as to 1/48th of each of
their shares on July 21, 1994 and continues to lapse so long as, in the case
of Mr. Kaplan, Mr. Kaplan and, in the case of Messrs. Fisher and Mohiuddin,
Mr. Fisher is rendering substantial services to the Company.

From inception (July 1994) through mid-1996, Mr. Kaplan and SPI provided
certain advances to the Company for working capital and property and equipment
purchases. At December 31, 1995, the Company owed $56,000 and $214,000 to Mr.
Kaplan and SPI, respectively. During 1996, the Company borrowed an additional
$6,000 and $220,000 from Mr. Kaplan and SPI, respectively. These advances did
not bear interest. The Company repaid a portion of these advances in October
1996 and the balance in December 1996.

Since July 1994, the Company has leased certain of its facilities from SPI.
From inception (July 1994) to December 31, 1995 and for 1996, the Company paid
rent of $18,000 and $28,000, respectively for use of these facilities. The
lease costs for these facilities approximate the actual cost incurred by SPI.

In March 1996, Mr. Kaplan, Mr. Fisher and Mr. Mohiuddin agreed to act as
guarantors of the Company's obligations under the Company's agreement with
Wells Fargo Bank ("Wells Fargo") to have Wells Fargo process credit card
transactions for the Company. Mr. Kaplan, Mr. Fisher and Mr. Mohiuddin are
each liable for any indebtedness the Company owes Wells Fargo.

In June 1996, Mr. Kaplan and SPI agreed to act as guarantors of the
Company's obligations under the Company's agreement with First USA Merchant
Services, Inc. ("First USA") to have First USA process credit card
transactions for the Company. Mr. Kaplan and SPI each are liable to First USA
for any liability or indebtedness the Company owes to First USA.

SECURITIES ISSUANCES

In September 1996, the Company sold an aggregate of 365,191 shares of its
Series A Preferred Stock at a purchase price of $6.39 per share and warrants
to purchase an aggregate of 202,910 shares of Series B Preferred Stock at an
exercise price of $9.59 to the following funds affiliated with Kleiner Perkins
Caufield & Byers

44
<PAGE>

("KPCB"), a beneficial owner of more than 5% of the Company's Common Stock in
the amounts indicated: KPCB VIII (356,061 shares of Series A Preferred Stock
and a warrant to purchase 197,837 shares of Series B Preferred Stock) and KPCB
Information Sciences Zaibatsu Fund II (9,130 shares of Series A Preferred
Stock and a warrant to purchase 5,073 shares of Series B Preferred Stock).
Each share of Preferred Stock will be converted automatically into three
shares of Common Stock upon the closing of this offering. Both entities
exercised their warrants in total for cash in March 1997.

45
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of December
31, 1996 by (i) each stockholder known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director and
(iii) all executive officers and directors as a group. This table assumes the
cash exercise of all outstanding warrants and the conversion of all
outstanding Preferred Stock as of that date.

<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF SHARES ---------------------------------
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ------------------------ --------------------- --------------- -----------------
<S> <C> <C> <C>
S. Jerrold Kaplan(3)(4). 6,000,000 43.2% 36.6%
Alan S. Fisher(4)(5).... 6,000,000 43.2 36.6
Software Partners, Inc.
Razi Mohiuddin(4)(6).... 2,206,815 15.9 13.5
Kleiner Perkins Caufield
& Byers(7)............. 1,704,303 12.3 10.4
Peter L. Harris(8)...... 20,000 * *
Peter H. Jackson(9)..... -- -- --
Kenneth J. Orton(10).... -- -- --
All executive officers
and directors as
a group (6
persons)(11)........... 12,052,812 86.6 73.4
</TABLE>
- --------
* Less than 1%.

(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options or warrants that
are currently exercisable or exercisable within 60 days of December 31,
1996 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.

(2) Assumes that the Underwriters' over-allotment option to purchase up to
375,000 shares from the Company is not exercised.

(3) Represents 5,685,000 shares held of record by Mr. Kaplan, 300,000 shares
held of record by Layne Kaplan (Mr. Kaplan's former spouse) and 15,000
shares held of record by Amy Kaplan Eckman, trustee of the Lily Layne
Kaplan Irrevocable Trust. On April 30, 1996, the Company, Mr. Kaplan and
Layne Kaplan entered into a voting trust agreement pursuant to which Mr.
Kaplan was authorized to act as voting trustee for the 300,000 shares
held of record by Layne Kaplan. This voting trust agreement will
terminate upon the closing of this offering. Mr. Kaplan is President,
Chief Executive Officer and a director of the Company. The address of Mr.
Kaplan is c/o ONSALE, Inc., 1861 Landings Drive, Mountain View,
California 94043.

(4) The Company has the right to repurchase at their original cost the shares
owned by Messrs. Kaplan, Fisher and Mohiuddin, which right commenced
lapsing monthly as to 1/48th of each of their shares on July 21, 1994 and
continues to lapse so long as, in Mr. Fisher's and Mr. Mohiuddin's case,
Mr. Fisher is rendering substantial services to the Company and, in Mr.
Kaplan's case, Mr. Kaplan is rendering substantial services to the
Company. At December 31, 1996, Messrs. Kaplan, Fisher and Mohiuddin
beneficially owned 3,625,000 shares, 2,291,716 shares and 1,333,284
shares, respectively, that were no longer subject to the Company's
repurchase rights.

(5) Represents 3,718,185 shares held of record by Mr. Fisher, 75,000 shares
held of record by the Kelly Elizabeth Fisher Irrevocable Trust and
2,206,815 shares held of record by Mr. Mohiuddin and the Mohiuddin
Children's Trust (as described in note (6) below), all of which are
subject to a voting trust

46
<PAGE>

agreement under which Software Partners, Inc. has the right to vote the
shares. Software Partners, Inc. is owned by Messrs. Fisher and Mohiuddin.
Mr. Fisher is a director, President and more than 50% shareholder of
Software Partners, Inc. The address of Software Partners, Inc. and Mr.
Fisher is 1953 Landings Drive, Mountain View, California 94043. Mr. Fisher
is Vice President of Development and Operations, Chief Technical Officer
and a director of the Company.

(6) Represents 2,056,815 shares held of record by Mr. Mohiuddin and 150,000
shares held of record by the Mohiuddin Children's Trust. The address of
Mr. Mohiuddin is c/o Software Partners, Inc., 1953 Landings Drive,
Mountain View, California 94043.

(7) Represents shares issuable upon the conversion of Series A Preferred
Stock and Series B Preferred Stock. Of the 1,704,303 shares beneficially
owned by KPCB, 1,661,694 shares are held of record by KPCB VIII and
42,609 shares are held of record by KPCB Information Sciences Zaibatsu
Fund II. The address of KPCB VIII and KPCB Information Sciences Zaibatsu
Fund II is 2750 Sand Hill Road, Menlo Park, California 94025.

(8) Mr. Harris is a director of the Company.

(9) Mr. Jackson is a director of the Company.

(10) Mr. Orton is a director of the Company.

(11) Represents the shares described in notes (3), (5) and (8) and 32,812
shares subject to an option held by Mr. Sauerland exercisable within 60
days of December 31, 1996.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $0.001 par value per share, and 2,000,000 shares of Preferred
Stock, $0.001 par value per share. As of December 31, 1996, and assuming the
exercise of all outstanding warrants and the conversion of all outstanding
Preferred Stock into Common Stock immediately prior to the closing of this
offering, there were outstanding 13,883,060 shares of Common Stock held of
record by 14 stockholders and options to purchase 1,612,910 shares of Common
Stock.

COMMON STOCK

Subject to preferences that may apply to any Preferred Stock outstanding at
the time, the holders of outstanding shares of Common Stock are entitled to
receive dividends out of assets legally available therefor at such times and
in such amounts as the Board of Directors may from time to time determine.
Each stockholder is entitled to one vote for each share of Common Stock held
on all matters submitted to a vote of stockholders. Stockholders are required
to act only at annual or special meetings and not by written consent.
Cumulative voting for the election of directors is not provided for in the
Company's Certificate of Incorporation, which means that the holders of a
majority of the shares voted can elect all of the directors then standing for
election. The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or winding-
up of the Company, the assets legally available for distribution to
stockholders are distributable ratably among the holders of the Common Stock
and any participating Preferred Stock outstanding at that time after payment
of liquidation preferences, if any, on any outstanding Preferred Stock and
payment of other claims of creditors. Each outstanding share of Common Stock
is, and all shares of Common Stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Preferred Stock
(the "Convertible Preferred") will be converted into shares of Common Stock.
See Note 4 of Notes to Financial Statements for a description of the
Convertible Preferred. The Board of Directors is authorized, subject to any
limitations prescribed by Delaware law, to provide for the issuance of
additional shares of Preferred Stock in one or more series, to establish from
time to time the number of shares to be included in each such series, to fix
the powers,

47
<PAGE>

designations, preferences and rights of the shares of each wholly unissued
series and any qualifications, limitations or restrictions thereon and to
increase or decrease the number of shares of any such series (but not below
the number of shares of such series then outstanding) without any further vote
or action by the stockholders. The Board of Directors may authorize the
issuance of Preferred Stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. Thus, the issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
current plan to issue any shares of Preferred Stock.

DELAWARE'S ANTI-TAKEOVER LAW

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Anti-Takeover Law") regulating corporate
takeovers. The Anti-Takeover Law prevents certain Delaware corporations,
including those whose securities are listed on The Nasdaq National Market,
from engaging, under certain circumstances, in a "business combination" (which
includes a merger or sale of more than 10% of the corporation's assets) with
any "interested stockholder" (a stockholder who owns 15% or more of the
corporation's outstanding voting stock) for three years following the date
that such stockholder became an "interested stockholder." The effect of the
Anti-Takeover Law may be to discourage takeover attempts, including attempts
that might result in a premium over the market price of the Common Stock. A
Delaware corporation may "opt out" of the Anti-Takeover Law with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from a stockholders'
amendment approved by at least a majority of the outstanding voting shares.
The Company has not "opted out" of the provisions of the Anti-Takeover Law.

REGISTRATION RIGHTS

Beginning six months after the date of this offering, the holders of
1,704,303 shares of Common Stock (the "Registrable Securities") will have
certain rights with respect to the registration of those shares under the
Securities Act. If requested by holders of at least 50% of the Registrable
Securities, the Company must file a registration statement under the
Securities Act covering all Registrable Securities requested to be included by
all holders of such Registrable Securities. The Company may be required to
effect up to two such registrations. The Company has the right to delay any
such registration for up to 90 days under certain circumstances. All expenses
incurred in connection with such registrations (other than underwriters'
discounts and commissions) will be borne by the Company. These demand
registration rights expire six years after the closing of this offering.

Further, holders of Registrable Securities may require the Company to
register all or any portion of their Registrable Securities on Form S-3 when
such form becomes available to the Company, subject to certain conditions and
limitations. The Company may be required to effect up to two such
registrations per year. All expenses incurred in connection with such
registrations (other than underwriters' or brokers' discounts and commissions)
will be borne by the Company. These Form S-3 registration rights expire six
years after the closing of this offering.

In addition, if the Company proposes to register any of its shares of Common
Stock under the Securities Act other than in connection with a Company
employee benefit plan or a corporate reorganization, the holders of the
Registrable Securities and Messrs. Kaplan, Fisher and Mohiuddin, who together
hold 13,704,303 shares of Common Stock, may require the Company to include all
or a portion of their shares in such registration, although the managing
underwriter of any such offering has certain rights to limit the number of
shares in such registration. All expenses incurred in connection with such
registrations (other than underwriters' or brokers' discounts and commissions)
will be borne by the Company. These "piggy-back" registration rights expire
six years after the closing of this offering.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is The First
National Bank of Boston.

48
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company and there can be no assurance that a significant public market for the
Common Stock will develop or be sustained after this offering. Future sales of
substantial amounts of Common Stock in the public market could adversely
affect market prices prevailing from time to time and could impair the
Company's ability to raise capital through sale of its equity securities. As
described below, no shares outstanding prior to this offering will be
available for sale immediately after this offering due to certain contractual
restrictions on resale. Sales of substantial amounts of Common Stock of the
Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.

Upon completion of this offering, the Company will have outstanding
16,383,060 shares of Common Stock, assuming no exercise of outstanding
employee options. Of these shares, the 2,500,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. The remaining shares held by existing stockholders
are subject to lock-up agreements providing that, with certain limited
exceptions, the stockholder will not offer, sell, contract to sell, grant an
option to purchase, make a short sale or otherwise dispose of or engage in any
hedging or other transaction that is designed or reasonably expected to lead
to a disposition of any shares of Common Stock or any option or warrant to
purchase shares of Common Stock or any securities exchangeable for or
convertible into shares of Common Stock for a period of 180 days after the
date of this Prospectus without the prior written consent of Montgomery
Securities. As a result of these lock-up agreements, notwithstanding possible
earlier eligibility for sale under the provisions of Rules 144, 144(k) and
701, none of these shares will be salable until 180 days after the date of
this Prospectus. Beginning 180 days after the date of this Prospectus,
10,774,330 of these shares will be eligible for sale in the public market
although all but 151,257 shares will be subject to certain volume limitations.
Of the remaining Restricted Shares, an aggregate of 250,000 shares held by
Messrs. Kaplan, Fisher and Mohiuddin will become eligible each month
thereafter until July 21, 1998 as certain repurchase rights of the Company
with respect to those shares lapse and 608,730 shares will be eligible for
sale upon the achievement of a one-year holding period.

In general, under Rule 144 as in effect after April 29, 1997, beginning 90
days after the date of this Prospectus, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year
(including the holding period of any prior owner except an affiliate) would be
entitled to sell within any three-month period a number of shares that does
not exceed the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 164,000 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.

Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of or consultant
to the Company who purchased his or her shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders
of Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, all shares issued pursuant to
Rule 701 are subject to lock-up agreements and will only become eligible for
sale at

49
<PAGE>

the earlier of the expiration of the 180-day lock-up agreements or no sooner
than 90 days after the offering upon obtaining the prior written consent of
the representatives of the Underwriters.

Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the Company's 1995 Equity Incentive Plan or reserved
for issuance under the Company's stock option and stock purchase plans. Based
on the number of shares subject to outstanding options at December 31, 1996
and currently reserved for issuance under all such plans, such registration
statement would cover approximately 3,735,000 shares. Such registration
statement will automatically become effective upon filing. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market immediately after the 180-day lock-up agreements expire. Also
beginning six months after the date of this offering, certain holders of
shares of Common Stock will be entitled to certain rights with respect to
registration of such shares of Common Stock for offer and sale to the public.
See "Description of Capital Stock--Registration Rights."

50
<PAGE>

UNDERWRITING

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

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Montgomery Securities.............................................. 800,000
Alex. Brown & Sons Incorporated.................................... 800,000
Bear, Stearns & Co. Inc............................................ 90,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 90,000
Hambrecht & Quist LLC.............................................. 90,000
Morgan Stanley & Co. Incorporated.................................. 90,000
Robertson, Stephens & Company LLC.................................. 90,000
Smith Barney Inc................................................... 90,000
Adams, Harkness & Hill, Inc........................................ 45,000
Cruttenden Roth Incorporated....................................... 45,000
Gerard Klauer Mattison & Co., LLC.................................. 45,000
Hampshire Securities Corporation................................... 45,000
Soundview Financial Group.......................................... 45,000
Volpe, Welty & Company LLC......................................... 45,000
H.C. Wainwright & Co., Inc......................................... 45,000
Wessels, Arnold & Henderson........................................ 45,000
---------
Total............................................................ 2,500,000
=========
</TABLE>

The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $0.23 per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $0.10 per share to certain other dealers. After this offering, the price
and concessions and reallowances to dealers may be changed by the
Representatives. The Common Stock is offered subject to receipt and acceptance
by the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 375,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 2,500,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.

All of the Company's stockholders have agreed that, for a period of 180 days
after the date of this Prospectus, they will not, without the prior written
consent of Montgomery Securities, directly or indirectly sell, offer to sell
or otherwise dispose of any such shares of Common Stock or any right to
acquire such shares. In addition, the Company has agreed that, for a period of
180 days after the date of this Prospectus, it will not, without the prior
written consent of Montgomery Securities, issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or any
other securities convertible into or exchangeable for the Common Stock or
other equity security, other than the grant of options to purchase Common
Stock or the issuance of shares of Common Stock under the Company's stock
option and stock

51
<PAGE>

purchase plans and the issuance of shares of Common Stock pursuant to the
exercise of outstanding options and warrants.

The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may
be required to make in respect thereof.

Prior to this offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the history of, and the prospects for, the
Company and the industry in which it competes, an assessment of the Company's
management, the Company's past and present operations, its past and present
financial performance, the prospects for future earnings of the Company, the
present state of the Company's development, the general condition of the
securities markets at the time of the offering and the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock. If the Underwriters create a short
position in the Common Stock in connection with the offering, i.e., if they
sell more shares of Common Stock than are set forth on the cover page of this
Prospectus, the Representatives may reduce that short position by purchasing
Common Stock in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above. The Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that, if the Representatives
purchase shares of Common Stock in the open market to reduce the Underwriters'
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members that sold those shares as part of the offering. In general, purchases
of a security for the purpose of stabilization or to reduce a short position
could cause the price of the security to be higher than it might be in the
absence of such purchases. The imposition of a penalty bid might also have an
effect on the price of a security to the extent that it were to discourage
resales of the security. Neither the Company nor any of the Underwriters makes
any representation or predictions as to the direction or magnitude of any
effect that the transactions described above may have on the price of the
Common Stock. In addition, neither the Company nor any of the Underwriters
makes any representation that the Representatives will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.

LEGAL MATTERS

The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. Fenwick & West LLP owns an aggregate of 100,359 shares of Common
Stock of the Company.

EXPERTS

The financial statements of the Company as of December 31, 1995 and 1996, for
the period from inception (July 1994) to December 31, 1995, and for the year
ended December 31, 1996 included in this Prospectus have been so included in
reliance on the report of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.

52
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedule thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to the Registration Statement and the exhibits and schedule filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or any other document to which reference is made are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement and the exhibits and schedule thereto may be inspected
without charge at the offices of the Commission at Judiciary Plaza, 450 Fifth
Street, Washington, D.C. 20549, and copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of
the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed
by the Commission. The Commission maintains a Web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. Information concerning the Company is also available for
inspection at the offices of the Nasdaq National Market, Reports Section, 1735
K Street, N.W., Washington, D.C. 20006.

53
<PAGE>

ONSALE, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheet as of December 31, 1995 and December 31, 1996............... F-3
Statement of Operations for the Period from Inception (July 1994) to
December 31, 1995 and the Year Ended December 31, 1996................... F-4
Statement of Cash Flows for the Period from Inception (July 1994) to
December 31, 1995 and the Year Ended December 31, 1996................... F-5
Statement of Stockholders' Equity (Deficit) for the Period from Inception
(July 1994) to December 31, 1995 and the Year Ended December 31, 1996.... F-6
Notes to Financial Statements............................................. F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of ONSALE, Inc.

In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of stockholders' equity (deficit) present
fairly, in all material respects, the financial position of ONSALE, Inc. at
December 31, 1995 and 1996, and the results of its operations and its cash
flows for the period from inception (July 1994) to December 31, 1995, and for
the year ended December 31, 1996, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

Price Waterhouse LLP

San Jose, California
March 13, 1997

F-2
<PAGE>

ONSALE, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 20,000 $2,649,000
Restricted cash..................................... -- 80,000
Accounts receivable, net of allowances of $16,000
and $66,000........................................ 22,000 395,000
Merchandise inventory............................... 1,000 1,520,000
Prepaid expenses and other current assets........... -- 439,000
-------- ----------
Total current assets........................... 43,000 5,083,000
-------- ----------
Property and equipment, net.......................... 30,000 578,000
Other assets......................................... -- 19,000
-------- ----------
Total assets................................... $ 73,000 $5,680,000
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $103,000 $2,268,000
Accrued expenses.................................... 117,000 480,000
Deferred revenue.................................... 2,000 604,000
Advances due related parties........................ 270,000 --
-------- ----------
Total current liabilities...................... 492,000 3,352,000
-------- ----------
Commitments and contingencies (Notes 8, 9 and 10)
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value;
2,000,000 shares authorized:
Series A; 600,000 shares designated; no and 365,191
shares issued and outstanding..................... -- 1,000
Series B; 204,521 shares designated; no shares
issued and outstanding............................ -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized; 12,043,398 and 12,178,757 shares issued
and outstanding.................................... 12,000 12,000
Additional paid-in capital.......................... 9,000 2,494,000
Accumulated deficit................................. (440,000) (79,000)
Less: note receivable from stockholder.............. -- (100,000)
-------- ----------
Total stockholders' equity (deficit)........... (419,000) 2,328,000
-------- ----------
Total liabilities and stockholders' equity
(deficit)..................................... $ 73,000 $5,680,000
======== ==========
</TABLE>

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

F-3
<PAGE>

ONSALE, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM YEAR
INCEPTION ENDED
(JULY 1994) TO DECEMBER
DECEMBER 31, 31,
1995 1996
-------------- -----------
<S> <C> <C>
Revenue:
Merchandise............... $ 30,000 $12,573,000
Commission................ 110,000 1,696,000
----------- -----------
Total revenue........... 140,000 14,269,000
Cost of revenue............ 27,000 11,539,000
----------- -----------
Gross profit............... 113,000 2,730,000
----------- -----------
Operating expenses:
Sales and marketing....... 144,000 891,000
General and
administrative........... 227,000 758,000
Engineering............... 182,000 714,000
----------- -----------
Total operating
expenses............... 553,000 2,363,000
----------- -----------
Income (loss) from
operations................ (440,000) 367,000
Interest and other income.. -- 37,000
----------- -----------
Income (loss) before income
taxes..................... (440,000) 404,000
Provision for income taxes. -- (43,000)
----------- -----------
Net income (loss).......... $ (440,000) $ 361,000
=========== ===========
Net income (loss) per
share..................... $ (0.03) $ 0.02
=========== ===========
Shares used to compute net
income (loss) per share... 15,326,000 15,326,000
=========== ===========
</TABLE>

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

F-4
<PAGE>

ONSALE, INC.

STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
(JULY 1994) TO ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(440,000) $ 361,000
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation...................................... 10,000 58,000
Issuance of common stock.......................... 21,000 --
Changes in assets and liabilities:
Restricted cash.................................. -- (80,000)
Accounts receivable, net......................... (22,000) (373,000)
Merchandise inventory............................ (1,000) (1,519,000)
Prepaid expenses and other current assets........ -- (439,000)
Other assets..................................... -- (19,000)
Accounts payable................................. 103,000 2,165,000
Accrued expenses................................. 117,000 363,000
Deferred revenue................................. 2,000 602,000
--------- -----------
Net cash provided by (used in) operating
activities..................................... (210,000) 1,119,000
--------- -----------
Cash flows from investing activities:
Purchase of property and equipment................. (40,000) (606,000)
--------- -----------
Cash flows from financing activities:
Proceeds from issuance of preferred stock and
warrants.......................................... -- 2,345,000
Common stock issued for cash....................... -- 41,000
Advances due related parties, net.................. 270,000 (270,000)
--------- -----------
Net cash provided by financing activities........ 270,000 2,116,000
--------- -----------
Net increase in cash................................ 20,000 2,629,000
Cash and cash equivalents at beginning of period.... -- 20,000
--------- -----------
Cash and cash equivalents at end of period.......... $ 20,000 $ 2,649,000
========= ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Common stock issued for promissory note............. $ -- $ 100,000
========= ===========
</TABLE>

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

F-5
<PAGE>

ONSALE, INC.

STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- ------------------ NOTE PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL DEFICIT TOTAL
-------- ------- ---------- ------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ -- $ -- 12,000,000 $12,000 $ -- $ 8,000 $ -- $ 20,000
Issuance of common
stock.................. -- -- 43,398 -- -- 1,000 -- 1,000
Net loss................ -- -- -- -- -- -- (440,000) (440,000)
-------- ------- ---------- ------- --------- ---------- --------- ----------
Balance at December 31,
1995................... -- -- 12,043,398 12,000 -- 9,000 (440,000) (419,000)
Issuance of common
stock.................. -- -- 20,000 -- (100,000) 100,000 -- --
Issuance of common stock
pursuant to exercise of
options................ -- -- 15,000 -- -- 16,000 -- 16,000
Issuance of common stock
upon the exercise of
warrants............... -- -- 100,359 -- -- 25,000 -- 25,000
Issuance of Series A
convertible preferred
stock at $6.39 per
share and warrants for
cash................... 365,191 1,000 -- -- -- 2,344,000 -- 2,345,000
Net income.............. -- -- -- -- -- -- 361,000 361,000
-------- ------- ---------- ------- --------- ---------- --------- ----------
Balance at December 31,
1996................... 365,191 $ 1,000 12,178,757 $12,000 $(100,000) $2,494,000 $ (79,000) $2,328,000
======== ======= ========== ======= ========= ========== ========= ==========
</TABLE>

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

F-6
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1--THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:

The Company

ONSALE, Inc. (the "Company" or "ONSALE") is a leading electronic retailer
pioneering a new sales format, the interactive 24-hour online auction,
designed to serve as an efficient and entertaining marketing channel for
refurbished and close-out merchandise. The Company conducts its business
within one industry segment.

The Company was incorporated in California in July 1994 and commenced
operations in May 1995. In December 1996, the Company's Board of Directors
authorized the reincorporation of the Company in Delaware and the associated
exchange of each share of each series of stock of the predecessor company into
one share of each corresponding series of stock of the Delaware successor. The
reincorporation occurred in March 1997. These financial statements have been
prepared giving effect to the reincorporation in all periods presented.

The Company's results of operations from inception (July 1994) to December
31, 1994 have been combined with the results of operations for the year ended
December 31, 1995 due to the Company's limited activity during such period.
During 1994, the Company incurred expenses and reported a net loss of $41,000.

SIGNIFICANT ACCOUNTING POLICIES

Revenue recognition

The Company obtains merchandise from vendors in one of two primary
arrangements, either the Principal Sales model (merchandise revenue) or the
Agent Sales model (commission revenue). Under the Principal Sales model, the
Company either purchases the merchandise or acquires the rights to sell
merchandise under consignment relationships with vendors.

Principal sales - purchases

For sales of merchandise owned by ONSALE, the Company is responsible for
conducting the auction, billing the customer, shipping the merchandise to the
customer and processing merchandise returns. The Company recognizes the full
sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction,
the Company bears both inventory and credit risk with respect to sales of its
inventory. 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.

Principal sales - consignment

For sales on consignment, the Company will either take physical possession
of the merchandise or the vendor will retain physical possession of the
merchandise. In either case, the Company is not obligated to take title to the
merchandise unless it successfully sells the merchandise at auction. Upon
completion of an auction, the Company 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. Subsequently,
the Company pays the vendor any amounts due for the purchase of the related
merchandise. The Company records the full sales amount as revenue upon the
verification of the credit card authorization and shipment of the merchandise.
In consignment transactions, the Company is at risk of loss for collecting all
of the auction proceeds, delivery of the merchandise and returns from
customers. 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.

F-7
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

In the second half of 1997, the Company expects to begin offering credit to
certain of its customers that have been prequalified as having appropriate
credit ratings and, accordingly, will be required to manage the associated
risks of accounts receivable expansion and collection.

Agent sales

In Agent Sales transactions, the Company conducts electronic auctions and
processes orders in exchange for a commission on the sale of the vendor's
merchandise. Under this arrangement, at the conclusion of an auction the
Company forwards the order information to the vendor, which then charges the
customer's credit card and ships the merchandise to the customer. In an Agent
Sales transaction, the Company does not take title to or possession of the
merchandise, and the vendor bears all of the risk of credit card chargebacks.
For Agent Sales transactions, the Company recognizes the commissions as
revenue upon completion of the auction process and the forwarding of the
auction sales information to the vendor. The vendor is typically responsible
for merchandise returns.

Under primarily the Principal Sales model, the Company will allow customers
to return products, in certain circumstances. Accordingly, the Company
provides for allowances for estimated future returns at the time of shipment
based on historical data.

Supplemental financial data

The Company's relationships with its vendors have evolved from a purely
Agent Sales business at the Company's inception to a business that now
includes a significant percentage of Principal Sales transactions. Gross
Merchandise Sales represent what the Company's total revenue would have been
if all Agent Sales had been made as Principal Sales. Due to the ongoing
evolution in the Company's operations toward the Principal Sales model,
management believes that the information on gross merchandise sales is
relevant to a reader of the Company's financial statements since it provides a
more consistent comparison between historical periods and a more accurate
comparison to future periods than does total revenue. Gross merchandise sales
should not be considered in isolation or as a substitute for other information
prepared in accordance with generally accepted accounting principles.

The reconciliation of total revenue in the Statement of Operations to Gross
Merchandise Sales is as follows:

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 1994) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
<S> <C> <C>
Total revenue................................ $ 140,000 $14,269,000
Plus: gross Agent Sales...................... 1,222,000 18,154,000
Less: net Agent Sales........................ (110,000) (1,696,000)
---------- -----------
Gross Merchandise Sales...................... $1,252,000 $30,727,000
========== ===========
</TABLE>

F-8
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Cash, cash equivalents and restricted cash

All highly liquid investments with a maturity of three months or less from
the date of purchase are considered cash equivalents. Restricted cash of
$80,000 at December 31, 1996 relates to a deposit with a bank to establish
electronic credit card services for processing of transactions with customers.

The Company has adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" and,
accordingly, classifies investment securities as either held-to-maturity,
trading or available-for-sale. At December 31, 1995 and 1996 the Company did
not hold any investment securities.

Merchandise inventory

Inventory is stated at the lower of cost or market, cost being determined on
a first-in, first-out basis.

Property and equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets, generally 3 to 5 years.

Engineering expenses

Engineering expenses include expenses incurred by the Company to develop,
enhance, manage, monitor and operate the Company's Website. Engineering costs
are expensed as incurred.

Income taxes

The Company provides for income taxes using an asset and liability approach
that recognizes deferred tax assets and liabilities for expected future tax
consequences of temporary differences between the book and tax bases of assets
and liabilities.

Dependence on merchandise vendors

The Company does not manufacture any of the merchandise that it auctions.
The Company's strategy has been to develop and maintain relationships with
brokers and original equipment manufacturers to secure a continuing supply of
merchandise to be auctioned.

Concentration of credit risk

The Company's accounts receivable are derived from Agent Sales earned from
merchants located in the United States and Canada. Principal Sales made
through credit cards are preapproved. The Company maintains reserves for
potential credit losses, which historically have been immaterial.

Stock split

On November 1, 1996, the Board of Directors declared a three-for-one split
of the outstanding shares of the Company's common stock. All common share and
per share data have been retroactively adjusted to reflect the stock split.

F-9
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Net income (loss) per share

Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of convertible preferred stock and warrants (using
the "if converted" method) and stock options (using the "treasury stock"
method). Common equivalent shares are excluded from the computation if their
effect is antidilutive, except that, pursuant to a Securities and Exchange
Commission Staff Accounting Bulletin, convertible preferred stock and warrants
(using the "if converted" method) and common equivalent shares (using the
"treasury stock" method and the assumed initial public offering price) issued
subsequent to December 1995 have been included in the computation as if they
were outstanding for all periods presented.

Stock-based compensation

The Company applies Accounting Principles Board Opinion 25 "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock-based compensation plans, as permitted by the Financial Accounting
Standards Board's Statement No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." SFAS 123 defines a "fair value" based method of accounting for
an employee stock option or similar equity instrument and encourages, but does
not require, entities to adopt that method of accounting for their employee
stock compensation plans. The pro forma disclosures of the difference between
compensation cost included in net income (loss) and the related cost measured
by the fair value method are presented in Note 6.

Management estimates and assumptions

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

Proposed public offering of common stock (unaudited)

If the offering contemplated by this Prospectus (the "Offering") is
consummated, all of the convertible preferred stock outstanding as of the
closing date will automatically be converted on a three-for-one basis into an
aggregate of 1,095,573 shares of common stock (based on the shares of
convertible preferred stock outstanding as of December 31, 1996) and 608,730
shares of common stock will be issued upon the exercise of the warrants that
were issued in connection with the sale of the Series A convertible preferred
stock (see Notes 4 and 10). Unaudited pro forma stockholders' equity at
December 31, 1996, adjusted for the conversion of the preferred stock and the
anticipated exercise of the outstanding warrants, is as follows:

<TABLE>
<S> <C>
Convertible preferred stock, $0.001 par value; 2,000,000 shares
authorized:
Series A; 600,000 shares designated; no shares outstanding..... $ --
Series B; 204,521 shares designated; no shares outstanding..... --
Common stock, $0.001 par value; 30,000,000 shares authorized;
13,883,060 shares issued and outstanding....................... 14,000
Additional paid-in capital...................................... 4,439,000
Accumulated deficit............................................. (79,000)
Less: note receivable from stockholder.......................... (100,000)
----------
$4,274,000
==========
</TABLE>

F-10
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 2--DETAILS OF BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Property and equipment:
Computer equipment................................ $ 40,000 $523,000
Furniture and fixtures............................ -- 123,000
-------- --------
40,000 646,000
Less: accumulated depreciation..................... (10,000) (68,000)
-------- --------
$ 30,000 578,000
======== ========
Accrued expenses:
Accrued sales taxes............................... $ 22,000 $133,000
Other accrued expenses............................ 95,000 347,000
-------- --------
$117,000 $480,000
======== ========
</TABLE>

NOTE 3--RELATED PARTY TRANSACTIONS:

From inception (July 1994) through mid-1996, two of the Company's
significant stockholders provided certain advances to the Company for working
capital and property and equipment purchases. At December 31, 1995, the
Company owed $270,000 to such stockholders. During 1996, such stockholders
advanced an additional $226,000. The advances did not bear interest. The
Company repaid these advances in December 1996.

Since July 1994, the Company has leased certain of its facilities from a
significant stockholder. From inception (July 1994) to December 31, 1995 and
for the year ended December 31, 1996, the Company paid rent of $18,000 and
$28,000, respectively, for use of these facilities. The lease costs for these
facilities approximates the actual cost incurred by the significant
stockholder.

In June 1996, two of the Company's significant stockholders agreed to act as
guarantors of the Company's obligations under the Company's agreement with
First USA Merchant Services, Inc. ("First USA") to have First USA process
credit card transactions for the Company. The two stockholders are each liable
to First USA for any liability or indebtedness the Company owes to First USA.

NOTE 4--CONVERTIBLE PREFERRED STOCK AND WARRANTS:

The certificate of incorporation of the Company, as amended, authorizes
2,000,000 shares of convertible preferred stock, of which 600,000 and 204,521
shares have been designated as Series A and Series B, respectively. In
September 1996, the Company issued 365,191 shares of its Series A convertible
preferred stock (Series A shares) at a purchase price of $6.39 per share for
aggregate proceeds of $2,353,000. In connection with the issuance of the
Series A shares, the Company issued warrants to two investors to purchase an
aggregate of up to 202,910 shares of the Company's Series B convertible
preferred stock at $9.59 per share. The warrants expire on the earlier of
September 1998 or the consummation of an initial public offering of at least
$7,500,000 and a per share price equal to at least $5.32 per share, after
giving effect to the three-for-one split of the Company's common stock (see
Note 1). The Company has reserved 202,910 shares of Series B convertible

F-11
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

preferred stock common stock for issuance upon the exercise of the warrants
(see Note 10). The shares of convertible preferred stock and the related
purchase price per share have not been adjusted to reflect the three-for-one
split (see Note 1). On an as if converted basis the Series A shares would be
convertible into 1,095,573 shares of common stock and the initial purchase
price would have been $2.13.

The Series A and Series B shares have certain rights with respect to voting,
dividends, liquidation and conversion, as follows:

Voting

Series A and Series B shares have voting rights equal to the shares of
common stock into which they may be converted.

Dividends

Holders of Series A and Series B shares are entitled to receive
noncumulative dividends at the rate of $0.5112 and $0.7672 per share,
respectively, per annum, when and if declared by the Company's Board of
Directors, prior to and in preference to any declaration or payment of any
dividend on the Company's common stock.

Liquidation

In the event of liquidation and to the extent assets are available, the
holders of Series A and Series B shares are entitled to receive, prior to and
in preference to any distribution to the holders of common stock, the amount
of $6.39 and $9.59 per share, respectively, plus any accrued but unpaid
dividends.

Conversion

Each Series A and Series B share is convertible into three shares of common
stock as a result of the common stock split (see Note 1), and the conversion
ratio is subject to further adjustments in the case of certain dilutive
events. Each Series A share will automatically convert into common stock upon
(i) the affirmative vote of a majority of the holders of Series A shares
outstanding at the time of such vote or (ii) the closing of an underwritten
public offering in which the aggregate offering price is not less than
$7,500,000 and the per share price is not less than $5.32 per share, after
giving effect to the three-for-one split of the Company's common stock (see
Note 1), subject to further adjustment for dilution.

At December 31, 1996, 1,704,303 shares of common stock were reserved for
issuance upon conversion of the convertible preferred stock and warrants.

NOTE 5--COMMON STOCK:

The Company has the right to repurchase, at the original issue price, a
declining percentage of certain of the shares of common stock issued to the
founders under written agreements with such individuals. The Company's right
to repurchase such stock lapses in 48 equal monthly increments commencing in
July 1994 as long as the employee is continuously employed by the Company. At
December 31, 1996, 4,750,000 shares of common stock were subject to repurchase
by the Company.

In July 1994, the Company issued a warrant to purchase 100,359 shares of
common stock at $0.25 per share in exchange for legal services. No value was
ascribed to the warrant as its fair value at the time of issuance was
considered nominal. The warrant was exercised in July 1996, resulting in
aggregate proceeds to the Company of $25,000.

F-12
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 6--EMPLOYEE BENEFIT PLANS:

Under the Company's 1995 Equity Incentive Plan (the "1995 Plan"), 3,032,250
shares of common stock have been reserved for issuance pursuant to stock
options, restricted stock and stock bonuses that may be granted to employees,
directors and consultants. This reserve was increased to 3,500,000 shares in
December 1996. Incentive stock options must be granted with exercise prices of
at least the fair market value of the Company's common stock on the date of
grant (at least 110% of the fair market value of the Company's common stock in
the case of holders of more than 10% of the Company's voting stock), and
nonqualified stock options must be granted at not less than 85% of fair market
value of the Company's common stock on the date of grant. Options generally
vest over a 48-month period and expire over terms not exceeding ten years from
the date of grant.

A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
NUMBER OF EXERCISE
OPTIONS PRICE
--------- -----------
<S> <C> <C>
Balance at December 31, 1994......................... -- --
Granted............................................. 776,250 $ 0.033
Exercised........................................... -- --
Canceled............................................ -- --
--------- -----------
Balance at December 31, 1995......................... 776,250 $ 0.033
Granted............................................. 927,410 $0.067-7.00
Exercised........................................... (15,000) $0.067-2.00
Canceled............................................ (75,750) $0.033-1.50
--------- -----------
Balance at December 31, 1996......................... 1,612,910 $0.033-7.00
========= ===========
</TABLE>

At December 31, 1996, 260,341 options were fully vested and exercisable at
prices ranging from $0.033 to $2.00, and 1,872,090 options were reserved for
future grant, which includes the increase in shares reserved to 3,500,000.

Subsequent to December 31, 1996, the Company granted options to purchase an
aggregate of 269,500 shares of common stock at an exercise price of $7.00 per
share.

The following table summarizes information about employee stock options
outstanding at December 31, 1996:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OUTSTANDING REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE
------------------------ -------------------- ---------------- ----------------
<S> <C> <C> <C>
$0.033.................. 772,500 8.9 $0.033
0.067.................. 42,000 9.3 0.067
0.667.................. 260,250 9.5 0.667
1.50 - 2.00............ 347,160 9.8 1.619
3.50 - 5.00............ 22,000 9.9 4.932
7.00 .................. 169,000 10.0 7.000
---------
1,612,910
=========
</TABLE>

F-13
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Fair Value Disclosures

Had compensation cost for the 1995 Plan been determined based on the fair
value of each stock option grant on its grant date, as prescribed in SFAS 123,
the Company's net income (loss) and net income (loss) per share would have
been as follows:

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 1994) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
<S> <C> <C>
Net income (loss):
As reported..................................... $(440,000) $361,000
Pro forma....................................... $(448,000) $349,000
Net income (loss) per share:
As reported..................................... $ (0.03) $ 0.02
Pro forma....................................... $ (0.03) $ 0.02
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following assumptions used for grants during
the applicable period: dividend yield of 0% for both periods; risk-free
interest rate of 5.51% for options granted during the period from inception
(July 1994) through December 31, 1995 and 6.00% to 6.64% for options granted
during the year ended December 31, 1996; and a weighted average expected
option term of five years for both periods.

Because the determination of the fair value of all options granted after the
Company becomes a public entity will include an expected volatility factor in
addition to the factors described in the preceding paragraph and, because
additional option grants are expected to be made each year, the above pro
forma disclosures are not representative of the pro forma effects of option
grants on reported net income for future years.

Employee stock purchase plan

In December 1996, the Company's Board of Directors adopted the 1996 Employee
Stock Purchase Plan (the "Purchase Plan") and reserved 150,000 shares of
common stock for issuance thereunder. The Company's stockholders approved the
Purchase Plan in January 1997. The Purchase Plan permits eligible employees to
acquire shares of the Company's common stock through periodic payroll
deductions of up to 15% of their annual compensation not to exceed $21,250.
Eligible employees may purchase up to 1,500 shares in any calendar year. The
price at which the common stock is purchased under the Purchase Plan is 85% of
the lesser of the fair market value of the Company's common stock on the first
day of the applicable offering period or on the last day of the respective
purchase period. Each offering period will have a maximum duration of 24
months and shares of common stock will be purchased for each participant at
semi-annual intervals during each offering period. The initial offering period
will commence on the effectiveness of the Offering and will end on July 31,
1997.

Directors stock option plan

In December 1996, the Company's Board of Directors adopted the 1996
Directors Stock Option Plan (the "Directors Plan") and reserved 100,000 shares
of common stock for issuance thereunder. The Company's stockholders approved
the Directors Plan in January 1997. Only outside directors may be granted
options under the Directors Plan. The Directors Plan provides for an initial
grant to outside directors of 15,000 shares. In addition, the Directors Plan
provides for automatic annual grants of 5,000 shares thereafter. The exercise
price must be 100% of the fair market value of the Company's common stock on
the date of grant.

F-14
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

401(k) plan

Effective November 1996, the Company adopted the ONSALE 401(k) Plan (the
"401(k) Plan") that qualifies as a deferred salary arrangement under Section
401 of the Internal Revenue Code. Under the 401(k) Plan, participating
employees may defer a portion of their pretax earnings not to exceed 15% of
their total compensation. The Company, at its discretion, may make
contributions for the benefit of eligible employees.

NOTE 7--INCOME TAXES:

No provision for income taxes was recorded from inception (July 1994)
through December 31, 1995 as the Company incurred net operating losses during
the period. The provision for income taxes for the year ended December 31,
1996 consists of the following:

<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
1996
------------
<S> <C>
Current
Federal........................................................ $ 117,000
State.......................................................... 32,000
---------
149,000
---------
Deferred
Federal........................................................ (95,000)
State.......................................................... (11,000)
---------
(106,000)
---------
$ 43,000
=========
</TABLE>

The provision for income taxes differs from the amount determined by
applying the U.S. statutory income tax rate to income before income taxes as
summarized below.

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR
(JULY 1994) TO ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- ------------
<S> <C> <C>
Tax provision at statutory rate.................. $(150,000) $ 137,000
State income taxes, net of federal benefit....... (26,000) 25,000
Nonrecognition (recognition) of tax benefits..... 176,000 (120,000)
Other............................................ -- 1,000
--------- ---------
$ -- $ 43,000
========= =========
</TABLE>

F-15
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Deferred income taxes reflect the tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting and
income tax purposes. The Company provides a valuation allowance for deferred
tax assets when it is more likely than not, based on currently available
evidence, that some portion of all of the deferred tax assets will not be
realized. The Company has reversed a portion of the previously established
valuation allowance during the year ended December 31, 1996.

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

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................... $ 90,000 $ --
Reserves and accruals.............................. 82,000 162,000
Other.............................................. 4,000 --
--------- --------
176,000 162,000
Valuation allowance................................ (176,000) (56,000)
--------- --------
Net deferred tax asset............................. $ -- $106,000
========= ========
</TABLE>

The amounts of and benefits from net operating losses may be impaired in the
event of a cumulative ownership change of more than 50%. Such a change would
not have a material financial impact on the Company.

NOTE 8--COMMITMENTS:

The Company leases office space for its corporate headquarters.

Future annual minimum lease payments under all noncancellable operating
leases as of December 31, 1996 were as follows:

<TABLE>
<S> <C>
Year Ending December 31,
------------------------
1997.............................................................. $277,000
1998.............................................................. 97,000
1999.............................................................. 43,000
--------
$417,000
========
</TABLE>

Total rent expense for the period from inception (July 1994) to December 31,
1995 and the year ended December 31, 1996 was approximately $18,000 and
$86,000, respectively.

F-16
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

NOTE 9--LITIGATION:

On October 17, 1996, Tredex California, Inc. ("Tredex") filed a complaint in
the Superior Court of the State of California in and for the County of Los
Angeles against a former Tredex employee for, among other claims,
misappropriation of trade secrets, intentional interference with contractual
relations, fraud and deceit, breach of fiduciary duty, unfair competition,
conspiracy, unjust enrichment and conversion. Tredex subsequently amended its
complaint to name ONSALE, among others, as a defendant and served ONSALE with
a summons and complaint on January 6, 1997. Tredex alleges that ONSALE
wrongfully obtained customer and vendor lists and other proprietary
information of Tredex from such former employee. Tredex is seeking damages in
excess of $1,750,000 from all the defendants collectively. Tredex is also
seeking injunctive relief to stop the defendants from using the customer and
vendor lists and other proprietary information of Tredex. ONSALE has filed a
general denial and is currently investigating Tredex's allegations. Although
there can be no assurance, the Company does not expect the outcome of this
litigation to have a material adverse effect on its results of operations or
financial condition, but the Company could incur significant expenses in
defending this action.

NOTE 10--SUBSEQUENT EVENTS:

Exercise of Warrants

On March 12, 1997, two investors exercised their warrants to purchase
202,910 shares of the Company's Series B convertible preferred stock at $9.59
per share. The aggregate proceeds to the Company were approximately
$1,946,000.

Bank line of credit

On March 12, 1997, the Company entered into a loan and security agreement
(the "Agreement") with a bank that provides for borrowings of up to
$2,000,000. Borrowings under the Agreement may not exceed the Company's
monthly earnings before interest, taxes, depreciation and amortization,
annualized. Borrowings bear interest at an annual rate of 1.5% over the bank's
prime rate. The Agreement expires on September 30, 1997, unless the Company
completes a public offering of $10,000,000 or more on or before April 30,
1997, which then extends the maturity date to one year beyond the public
offering. Pursuant to the Agreement, the bank has been granted a continuing
security interest in substantially all assets of the Company, now owned or
hereafter acquired, including intellectual property. In addition, the Company
is required to maintain certain financial ratios (including a ratio of "quick
assets" (cash, cash equivalents, accounts receivable and investments, with
maturities not to exceed 90 days) to current liabilities (less deferred
revenue) of at least 2.5 to 1, and a ratio of total liabilities to tangible
net worth of not more than 0.5 to 1), is prohibited from incurring a loss of
more than $250,000 in any month or a loss

F-17
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)

in each of two consecutive months and has agreed to certain negative
covenants, including a prohibition, with limited exceptions, on incurring
additional indebtedness other than debt that is subordinated to the debt owing
under the Agreement, and a prohibition, with limited exceptions, on creating
additional security interests in the assets of the Company. In connection with
the Agreement, the Company issued a five-year warrant to purchase 8,571 shares
of its common stock with an exercise price of $7.00.

F-18
<PAGE>

Caption
ONSALE'S ROTATING MERCHANDISE MIX GIVES CUSTOMERS THE OPPORTUNITY TO
BID AND BUY OFTEN

Pictures
A series of pictures showing some of the various types of computers,
peripherals and consumer electronics that the Company auctions online.
<PAGE>

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

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

TABLE OF CONTENTS

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

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 15
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Financial Data................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 19
Business.................................................................. 26
Management................................................................ 38
Certain Transactions...................................................... 44
Principal Stockholders.................................................... 46
Description of Capital Stock.............................................. 47
Shares Eligible for Future Sale........................................... 49
Underwriting.............................................................. 51
Legal Matters............................................................. 52
Experts................................................................... 52
Additional Information.................................................... 53
Index to Financial Statements............................................. F-1
</TABLE>

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

Until May 12, 1997 (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 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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2,500,000 SHARES

LOGO

[LOGO OF ONSALE(TM)]

ONSALE, INC.

COMMON STOCK

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

PROSPECTUS

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

MONTGOMERY SECURITIES

ALEX. BROWN & SONS
INCORPORATED

April 17, 1997

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