ONSALE INC, 424B4, 1997-10-23

ONSALE INC
424B4, 1997-10-23
CATALOG & MAIL-ORDER HOUSES

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<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-37171

2,300,000 SHARES

[ONSALE LOGO APPEARS HERE]

COMMON STOCK

Of the 2,300,000 shares of Common Stock offered hereby, 1,709,300 shares are
being sold by ONSALE, Inc. ("ONSALE" or the "Company") and 590,700 shares are
being sold by the Selling Stockholders. The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. See
"Principal and Selling Stockholders." The Company's Common Stock is traded on
the Nasdaq National Market under the symbol "ONSL." On October 22, 1997, the
last reported sale price of the Common Stock on the Nasdaq National Market was
$28.56 per share. See "Price Range of Common Stock."

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>
================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $28.25 $1.55 $26.70 $26.70
Total (3)..................... $64,975,000 $3,565,000 $45,638,310 $15,771,690
================================================================================
</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
$500,000.

(3) The Company and three Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 345,000 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
$74,721,250, the Underwriting Discount will total $4,099,750, the Proceeds
to Company will total $48,060,000 and the Proceeds to Selling Stockholders
will total $22,561,500. 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 NationsBanc Montgomery Securities, Inc. on or about October 28,
1997.

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

NATIONSBANC MONTGOMERY SECURITIES, INC.
BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
HAMBRECHT & QUIST

October 23, 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 and describes several products that are being auctioned, with hypertext links to specific auctions for these
products as well as to Supersite auction locations for computer products and consumer electronics. The screen also
displays links for "How to Play," "About Us," "Bid Status," "Customer Service," "Investor Relations," "Job Openings,"
"Sell to ONSALE" and "Advertise Here!" Finally, the picture notes that "ONSL" is traded on Nasdaq.

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 THE ENTRY OF STABILIZING BIDS OR 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
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 simply purchase merchandise--they "WIN" it!
Graphic: A Web page button with the ONSALE logo and the word "HOME"
Caption: 8:49 AM--ONSALE customer CK of Jackson Heights, NY logs into ONSALE's Web site.
Graphic: A Web page button with an image of a gavel and the word "BID"
Caption: 8:54 AM--CK places a bid on the NEC Pentium Pro 2200, bumping MP of
Shreveport, LA off the Current High Bidders List.
Graphic: A Web page button with an image of a downward pointing arrow and the word
"OUTBID"
Caption: 8:54 AM--MP has been Outbid! His bid is now replaced by CK's bid and
comment, "My 486 is in pieces in my room."
Graphic: A Web page button with an image of an envelope and the word "E-MAIL"
Caption: 8:57 AM--MP 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: 9:36 AM--MP responds by increasing his bid, bumping CK off the Current High
Bidders List.
Graphic: A Web page button with an image of an envelope and the word "E-MAIL"
Caption: 9:46 AM--CK 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: 9:48 AM--CK increases his bid online adding the comment "Mine,"
bumping MP off the Current High Bidders List again.
Graphic: A Web page button with the ONSALE logo (the word, "SOLD" replaces "ONSALE" in
the logo)as if torn in half and the word "CLOSED"
Caption: 1:00 PM--After several rounds of bidding, Auction #104018 is automatically
closed by ONSALE's custom auction software. CK is a winner!
RIGHT SIDE OF GATEFOLD TO INSIDE FRONT COVER
Caption: The ONSALE interactive auctions process (caption is grouped at lower
middle left of page). URL:www.onsale.com
Caption: ONSALE Home Page
Picture: A picture of the first page a person might see when they visit ONSALE's Web site
on the World Wide Web.
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 is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that typically are unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the World Wide
Web (the "Web") to businesses, resellers and consumers. The Company sells a
wide variety of such merchandise, including computers, peripherals, consumer
electronics, housewares, power tools, sports and fitness equipment, and
vacation packages. ONSALE's online auctions provide an exciting sales format
that leverages the unique characteristics of the Web, such as interactivity and
a sense of community. The Company's auction format enables customers to bid
against one another in a freely competitive market liberated from the
constraints of less flexible pricing that typically characterize traditional
retailing. The Company believes that the customer enthusiasm generated by this
format, the emergence of the Internet as an effective new sales medium and the
Company's highly automated infrastructure combine to create a significant
retailing opportunity.

ONSALE has sold approximately $106 million of merchandise to more than
188,000 customer accounts from its first auction in May 1995 through September
30, 1997. 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 771,000 merchandise units, of which
over 201,000 were auctioned in the third quarter of 1997. Over 320,000 visitors
to the Company's Web site have registered as bidders with the Company, with
over 73,000 registering in the third quarter of 1997 alone.

The Company believes the Internet is well suited for selling certain types of
merchandise, particularly excess merchandise, because a large target market can
be reached quickly and inexpensively. The disposal of excess merchandise
represents a substantial burden on many vendors because such merchandise
rapidly declines in value making it difficult to establish a market price.
Vendors 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 dynamically change merchandise mix, prices and visual
presentations. In addition to prominently featured specials, the Company's
Auction Supersite organizes items into targeted merchandise stores
("Supersites") which are further categorized by product type. ONSALE presently
operates a Computer Products Supersite and a Consumer Electronics Supersite on
which it continually posts merchandise descriptions and images. Currently, the
Company auctions over 3,800 items each week. These items generally range in
price from $25 to $3,000 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 achieve its objective by increasing its brand
recognition, attracting new and repeat customers, continuing to provide a
compelling shopping experience, developing incremental revenue opportunities
and building on its leading technology. In order
to increase its brand recognition and attract new and repeat customers, the
Company will focus significant management and financial resources on sales and
marketing activities and partnership development efforts. The Company recently
announced relationships with America Online, Computer Shopper NetBuyer, Excite
and Netscape.

In addition, ONSALE believes that relationships with merchandise vendors are
critical to its long-term success. The Company employs a staff of buyers
experienced in particular merchandise categories 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, Casio,
Compaq, Dell, Fujitsu, Gateway, Hewlett-Packard, IBM, Intel, JVC, Kenwood,
Krups, Lexmark, Magnavox, NEC, Packard Bell, Panasonic, Phillips, Sanyo,
Seagate, Sharp, Toshiba, Uniden and Zenith.

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
<PAGE>

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company................ 1,709,300 shares
Common Stock offered by Selling Stockholders....... 590,700 shares
Common Stock to be outstanding after this offering. 18,582,991 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
INCEPTION YEAR NINE MONTHS
(JULY 1994) TO ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1995 1996 1996 1997
-------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue................ $ 140 $14,269 $ 5,963 $ 55,950
Gross profit................. 113 2,730 1,500 7,543
Income (loss) from
operations.................. (440) 367 243 (1,104)
Net income (loss)............ (440) 361 221 (757)
Net income (loss) per
share(2).................... $ (0.03) $ 0.02 $ 0.01 $ (0.05)
Shares used to compute net
income (loss) per share(2).. 15,326 15,326 15,326 16,155
SUPPLEMENTAL FINANCIAL DATA:
Gross merchandise sales(3)... $ 1,252 $30,727 $ 16,328 $ 74,785
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue.......... $ 577 $ 1,810 $ 3,576 $ 8,306 $12,314 $18,575 $25,061
Gross profit........... 159 430 911 1,230 1,788 2,429 3,326
Income (loss) from
operations............ 17 111 115 124 48 (402) (750)
Net income (loss)...... 15 100 106 140 52 (226) (583)
Net income (loss) per
share(2).............. $ 0.00 $ 0.00 $ 0.01 $ 0.01 $ 0.00 $ (0.01) $ (0.03)
Shares used to compute
net income (loss) per
share(2).............. 15,326 15,326 15,326 15,326 15,326 16,356 16,782
SUPPLEMENTAL FINANCIAL
DATA:
Gross merchandise
sales(3).............. $ 1,792 $ 5,290 $ 9,246 $14,399 $17,941 $24,543 $32,301
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------
AS
ACTUAL ADJUSTED(4)
------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents. $11,098 $56,236
Working capital........... 17,130 62,268
Total assets.............. 22,210 67,348
Long-term debt............ -- --
Total stockholders'
equity................... 18,530 63,668
</TABLE>
- -------
(1) Based on shares outstanding as of September 30, 1997. Includes 78,200
shares subject to options outstanding at such date that will be exercised
prior to the closing of this offering and sold in the offering. Does not
include 2,251,828 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 $3.24, 8,571 shares issuable
upon the exercise of a warrant outstanding as of such date, or an aggregate
of 1,367,541 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) Adjusted to reflect the sale by the Company of 1,709,300 shares of Common
Stock in this offering at a public offering price per share of $28.25 and
after deducting the underwriting discount and estimated offering expenses.

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

Unless otherwise indicated, all information in this Prospectus assumes the
Underwriters' over-allotment option will not be exercised. 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 customers of the
Company's Internet auctions and excess 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 historically has had relatively
low operating margins and plans to continue to increase its operating expenses
significantly in order to increase the size of its staff, expand its marketing
efforts to enhance its brand image, increase its visibility on other
companies' high traffic Web sites, 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 expects to experience
substantial quarterly net losses through at least the first two quarters of
1999. 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>

credit card processor, (xi) the level of merchandise returns experienced by
the Company and (xii) 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. In addition, the Company expects to experience
substantial quarterly net losses through at least the first two quarters of
1999. See "--Limited Operating History" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations. "

DEPENDENCE ON RELATIONSHIPS WITH OTHER ONLINE COMPANIES

The Company depends to some extent and is increasing its dependence on
relationships with other online companies. These relationships include but are
not limited to agreements for anchor tenancy, promotional placements,
sponsorships and banner advertisements. All of these agreements are short-term
and do not provide for guaranteed renewal. The risks included in this
dependence include (i) the uncertainty that significant spending on these
relationships will increase the Company's revenues substantially or at all,
(ii) the possibility that potential revenue increases resulting from such
spending will not occur within the time periods that the Company is expecting,
(iii) the possibility that space on other Web sites or the same sites may
increase in price or cease to be available on reasonable terms or at all, (iv)
the possibility that a competitor will purchase exclusive rights to attractive
space on one or more key sites and (v) the possibility that, if these
relationships are successful, the Company may not be able to obtain adequate
amounts of merchandise to meet the increased demand that is generated.

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 and the first nine months of 1997,
approximately 30% and 48%, respectively, of the Company's gross merchandise
sales were derived from merchandise acquired from five and seven vendors,
respectively, 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

6
<PAGE>

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. The Company uses
United Parcel Service as its delivery service for substantially all of its
products. Should United Parcel Service be unable to deliver the Company's
products for a sustained time period as a result of a strike or other reason,
the Company's business, results of operations and financial condition would be
adversely affected. Wells Fargo Bank is the Company's sole processor of credit
card transactions. 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 PURCHASED INVENTORY MODEL

Through much of 1997, the Company had limited inventory and 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. By the third quarter of 1997, the Company was purchasing a
majority of its 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 much of the merchandise currently auctioned by
the Company (e.g., computers, peripherals and consumer electronics) is
characterized by rapid technological change, obsolescence and price erosion.
With the Company increasingly relying on purchased inventory, its success will
depend on its ability to liquidate its inventory rapidly through its auctions,
the ability of its buying staff to purchase inventory at attractive prices
relative to its resale value at auction, and its ability to manage customer
returns and the shrinkage resulting from theft, loss and misrecording of
inventory. Due to the inherently unpredictable nature of auctions, it is
impossible to determine with 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 Internet auction houses such as Z AUCTION, First Auction (the
auction site for Internet Shopping Network, a wholly owned subsidiary of Home
Shopping Network Inc.), Surplus Direct (a wholly owned subsidiary of Egghead,
Inc.) and eBay (in connection with the Company's newly introduced The ONSALE
Exchange), (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

7
<PAGE>

Network, 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., Insight Enterprises, Inc., Creative
Computers, Inc. and CDW Computer Centers, Inc., which may already operate
competitive auction sites or 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 is shared with America Online and America Online provides a
direct link for ILI's members to reach ILI's electronic commerce site on the
Web. Also, Micro Warehouse, Inc. introduced an online auction Web site in
September 1997. The Company believes 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.

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. 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 106 employees at September 30,
1997, and its sales increased from approximately 3,300 units per week at the
beginning of the third quarter of 1996 to over 15,000 units per week at the
end of the third quarter of 1997. 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 next
six months, 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
institutions to buy on an open account or purchase order basis up to a
predetermined credit limit and will allow VARs and other resellers and

8
<PAGE>

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 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 excess 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

9
<PAGE>

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; EVOLVING AND UNPREDICTABLE BUSINESS
MODEL

The Company believes that the importance of brand recognition will increase
as more companies engage in commerce over the Internet. Development and
awareness of the 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. Furthermore, in order to
attract and retain customers and to promote and maintain the ONSALE brand in
response to competitive pressures, the Company is finding it necessary to
increase its marketing and advertising budgets and otherwise to increase
substantially its financial commitment to creating and maintaining brand
loyalty among vendors and consumers. If the Company is unable to or incurs
significant expenses in an attempt to achieve or maintain a leading position
in Internet commerce or to promote and maintain its brand, the Company's
business, results of operations and financial condition will be materially
adversely affected. See "Business--Business Strategy" and "Business--Sales and
Marketing."

The Company's business model continues to evolve. The Company has expanded
the focus of its operations beyond the auction and sale of refurbished and
close-out computers, peripherals and consumer electronics to the auction and
sale of other excess merchandise. The Company expects to continue to develop
its business model and to explore other opportunities such as the use of the
Company's Web site as an advertising medium for services and products of other
companies. As its business model evolves, the Company risks diluting its
brand, confusing customers and decreasing interest from vendors. In addition,
the Company could be exposed to additional or new risks associated with these
new opportunities. If the Company were unable to address these risks, the
Company's business, results of operations and financial condition will be
materially adversely affected.

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.

10
<PAGE>

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 co-founder, President and Chief
Executive Officer, S. Jerrold Kaplan, and its co-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."

RISKS OF LAUNCHING THE ONSALE EXCHANGE

On October 20, 1997, the Company announced the commencement of The ONSALE
Exchange, a new Auction Supersite that will allow small businesses and
individuals to describe and sell their own merchandise over the Web using the
Company's auction management system. The Company has employed additional
engineers and devoted substantial engineering time to enhancing its software
for this purpose and will be required to continue to spend money to update and
improve this software. In addition, the Company has hired and may continue to
hire additional personnel who will monitor this new Auction Supersite and
perform customer service functions. Finally, the Company contemplates
significant monthly expenditures on advertising this new auction medium. The
Company plans initially to charge sellers a nominal listing fee for the
posting of each item and a small commission for its provision of the names of
the auction winner(s) and runners-up to the sellers. The Company anticipates
that the average sale on The ONSALE Exchange will be significantly smaller
than its historical average sale. Thus, for The ONSALE Exchange business to be
profitable, the Company will need to auction substantial volumes of
merchandise on behalf of such sellers. The Company has no direct experience in
running a private party to private party auction business and consequently is
unable to measure the attractiveness of The ONSALE Exchange to its target
audience. There can be no assurance that this business will be profitable or
that its operations will not have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, this
business entails the risks that there is an existing, more established
competitor in this new market, that sellers might post inappropriate or
illegal items on the Company's Web site, that portions of the Company's core
business may be cannibalized as a result of potential merchants electing to
sell products directly using The ONSALE Exchange rather than selling such
products to the Company to be resold by the Company on a principal basis, that
the Company's brand may be diluted by conducting an additional business under
the ONSALE name, that the Company's image may be harmed by the Company's role
in connecting buyers and sellers who then have an unsatisfactory experience
and that buyers, who are invited to comment on their impressions of sellers,
may include libelous material for which the Company could be held responsible.
See "Risk Factors--Competition" and "Business--The ONSALE Exchange."

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 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,
attempts by third parties deliberately to exceed the capacity of the

11
<PAGE>

Company's systems and similar disruptive problems. Computer viruses, break-ins
or other problems caused by third parties could lead to interruptions, delays,
loss of data or cessation in service to users of the Company's services and
products. The occurrence of any of these risks could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Facilities."

RISK OF FACILITIES MOVE

Over the course of the next six months, the Company anticipates a series of
moves from its existing space in four buildings in Mountain View, California
to new space in one or two adjacent buildings in Menlo Park, California.
During this period, the Company will have the additional burden of operating
multiple sites that are no longer contiguous. The Company will also incur
additional expenses related to the move itself. Finally, the Company will be
forced to take its auctions off-line over the course of the move, which could
result in reduced revenues if this extends for any significant time.

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

12
<PAGE>

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 has in the past received, and 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 69.9% of the Company's outstanding Common Stock
(68.5% 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 2,300,000 shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), the
2,875,000 shares of Common Stock sold by the Company in its initial public
offering and 17,598 shares sold under the Purchase Plan since the Company's
initial public offering, as of the date of this Prospectus, there will be
13,390,393 shares of Common Stock outstanding, all of which are restricted
shares ("Restricted Shares")

13
<PAGE>

under the Securities Act of 1933, as amended (the "Securities Act"). As of
such date, only 278,231 Restricted Shares will be eligible for sale in the
public market in addition to the shares offered hereby. Approximately
11,003,432 additional Restricted Shares will become available for sale in the
public market following the expiration of lock-up agreements with the
representatives of the Underwriters that extend for the longer of 90 days
after the date of this Prospectus or two days after the Company announces its
year-end financial results. Of the remaining 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 become eligible for
sale on March 13, 1998, when they have been held for a period of one year.
NationsBanc Montgomery Securities, Inc. 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, following this offering, the
holders of 13,236,803 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.

In April 1997, the Company registered 3,710,716 shares of Common Stock
reserved for issuance under its stock option, equity incentive and purchase
plans. As of September 30, 1997, options to purchase a total of 2,330,028
shares were outstanding (of which options to purchase 616,520 shares were
exercisable) and 1,367,541 shares of Common Stock were reserved for future
issuance under the Company's stock option, equity incentive 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 by the Company hereby at a public offering price of $28.25 per share,
after deducting the underwriting discount and estimated offering expenses, are
estimated to be approximately $45.1 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."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the shares of Common Stock has been, and 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, including
the Common Stock of the Company, 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, 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.

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 (650) 428-0600.

ONSALE(R) and Yankee Auction(R) are registered trademarks, and the ONSALE
tag logo, Auction Supersite(TM), Dutch 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.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,709,300 shares of
Common Stock offered by the Company hereby are estimated to be $45.1 million
at a public offering price of $28.25 per share and after deducting the
underwriting discount and estimated offering expenses ($47.6 million if the
Underwriters' over-allotment option is exercised in full). 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 increased expenditures on sales and marketing and expansion of the
Company's merchandise inventory and accounts receivable) 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.

The Company will not receive any proceeds from the sale of the Common Stock
by the Selling Stockholders. See "Principal and Selling Stockholders."

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.

PRICE RANGE OF COMMON STOCK

The Common Stock of the Company began trading publicly on the Nasdaq
National Market on April 17, 1997 under the symbol ONSL. Prior to that date,
there was no public market for the Common Stock. The following table sets
forth for the periods indicated the high and low sale prices of the Common
Stock.

<TABLE>
<S> <C> <C>
HIGH LOW
---- ---
1997
----
2nd Quarter (from April 17).................................. $ 9.38 $ 4.63
3rd Quarter.................................................. 34.00 8.38
4th Quarter (through October 22)............................. 35.25 27.00
</TABLE>

On October 22, 1997, the last reported sale price of the Common Stock was
$28.56 per share. As of September 30, 1997, there were approximately 37
holders of record of the Common Stock.

15
<PAGE>

CAPITALIZATION

The following table sets forth the actual capitalization of the Company as
of September 30, 1997, and the capitalization of the Company as adjusted to
give effect to the sale of the 1,709,300 shares of Common Stock offered by the
Company hereby (at a public offering price of $28.25 per share and after
deducting the underwriting discount and estimated offering expenses).

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity(1):
Preferred Stock, $0.001 par value; 2,000,000 shares
authorized; no shares issued and outstanding actual or
as adjusted............................................. $ -- $ --
Common Stock, $0.001 par value; 30,000,000 shares
authorized: 16,795,491 shares issued and outstanding,
actual; 18,582,991 shares issued and outstanding, as
adjusted(2)............................................. 17 19
Additional paid-in capital............................... 19,349 64,485
Accumulated deficit...................................... (836) (836)
------- -------
Total stockholders' equity............................. 18,530 63,668
------- -------
Total capitalization.................................. $18,530 $63,668
======= =======
</TABLE>
- --------
(1) See Notes 4 and 5 of Notes to Financial Statements.
(2) Excludes (i) 2,330,028 shares of Common Stock issuable upon exercise of
stock options outstanding as of September 30, 1997 under the Company's
1995 Equity Incentive Plan, at a weighted average per share exercise price
of $3.24, (ii) 8,571 shares of Common Stock issuable upon exercise of a
warrant outstanding as of such date, (iii) 1,135,139 shares reserved for
future grants under its 1995 Equity Incentive Plan, (iv) 100,000 shares
reserved for future grants under its 1996 Directors Stock Option Plan and
(v) 132,402 shares reserved for future issuances under its 1996 Employee
Stock Purchase Plan, except that shares issued and outstanding as adjusted
includes 78,200 shares subject to options outstanding at September 30,
1997 that will be exercised prior to the closing of this offering and sold
in the offering. See "Management--Director Compensation," "Management--
Employee Benefit Plans" and Note 6 of Notes to Financial Statements.

16
<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 nine months ended September 30, 1996 and 1997 and the balance sheet data
as of September 30, 1997 are derived from unaudited financial statements of
the Company, also included elsewhere in this Prospectus, 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 and financial position for those periods. The historical results
are not necessarily indicative of future results.

<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
INCEPTION YEAR ENDED
(JULY 1994) TO ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, --------------------------
1995(1) 1996 1996 1997
-------------- ------------ ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Merchandise............ $ 30 $12,573 $ 4,951 $53,754
Commission............. 110 1,696 1,012 2,196
------ ------- ------- -------
Total revenue.......... 140 14,269 5,963 55,950
Cost of revenue......... 27 11,539 4,463 48,407
------ ------- ------- -------
Gross profit............ 113 2,730 1,500 7,543
------ ------- ------- -------
Operating expenses:
Sales and marketing.... 144 891 512 3,273
General and
administrative........ 227 758 396 3,459
Engineering............ 182 714 349 1,915
------ ------- ------- -------
Total operating
expenses.............. 553 2,363 1,257 8,647
------ ------- ------- -------
Income (loss) from
operations............. (440) 367 243 (1,104)
Interest and other
income................. -- 37 3 347
------ ------- ------- -------
Income (loss) before
income taxes........... (440) 404 246 (757)
Provision for income
taxes.................. -- (43) (25) --
------ ------- ------- -------
Net income (loss)....... $ (440) $ 361 $ 221 $ (757)
====== ======= ======= =======
Net income (loss) per
share(2)............... $(0.03) $ 0.02 $ 0.01 $ (0.05)
====== ======= ======= =======
Shares used to compute
net income (loss) per
share(2)............... 15,326 15,326 15,326 16,155
====== ======= ======= =======
SUPPLEMENTAL FINANCIAL
DATA:
Gross merchandise
sales(3)............... $1,252 $30,727 $16,328 $74,785
====== ======= ======= =======
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 20 $ 2,649 $11,098
Working capital (deficiency)............ (449) 1,731 17,130
Total assets............................ 73 5,680 22,210
Long-term obligations................... -- -- --
Total stockholders' equity (deficit).... (419) 2,328 18,530
</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.

17
<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 online auction--designed to serve as an efficient and entertaining
marketing channel for products that are typically unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the World Wide
Web to businesses, resellers and consumers. 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 increased its total
revenue and net income in each quarter of 1996. However, in early 1997 the
Company elected to increase its operating expenses significantly and therefore
has experienced net losses in the second and third quarters of 1997 and
expects to continue to experience substantial net losses through at least the
first two quarters of 1999.

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 next six months, the Company expects to begin offering credit
to certain of its Principal Sales customers that have been prequalified as
having appropriate credit ratings, and, accordingly, the Company 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 allows 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.

18
<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. For the
third quarter of 1997, Principal Sales transactions represented 74.9% 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 four 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 total revenue increased from $6.0 million in the first nine months
of 1996 to $56.0 million in the first nine months of 1997, and the Company's
gross merchandise sales increased from $16.3 million to $74.8 million. The
Company's growth in total revenue and gross merchandise sales in each of these
periods was due to significant growth in the Company's customer base and in
the amount of merchandise obtained from vendors, increases in the number of
auctions per week, technological advances in the Company's systems allowing
for a greater volume of sales and an overall increase in demand for the
Company's expanding array of merchandise, which the Company believes is
attributable in large part to its investments in marketing designed to promote
and maintain brand awareness of the Company. During the first nine months of
1997, the portion of the Company's gross merchandise sales derived from
Principal Sales increased to 71.9% from 30.3% during the comparable 1996
period.

19
<PAGE>

The Company has increased its purchasing of merchandise from vendors,
particularly from manufacturers, because the Company believes it has the
potential to achieve higher gross margins over time by controlling the
purchase of merchandise.

The reconciliation of total revenue to gross merchandise sales for the nine
months ended September 30, 1997 is as follows.

<TABLE>
<S> <C>
Total revenue................................................... $55,950,000
Plus: gross Agent Sales......................................... 21,031,000
Less: net Agent Sales........................................... (2,196,000)
-----------
Gross merchandise sales(1)...................................... $74,785,000
===========
</TABLE>

During the nine months ended September 30, 1997, gross merchandise sales
were comprised of the following:

<TABLE>
<S> <C>
Principal Sales model--purchased inventory...................... $30,092,000
Principal Sales model--consigned inventory...................... 23,662,000
Agent Sales model............................................... 21,031,000
-----------
Gross merchandise sales(1)...................................... $74,785,000
===========
</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.

Cost of Revenue

Cost of revenue consists principally of the costs of merchandise acquired
under the Principal Sales model and the costs of shipping (offset by customer
shipping revenue), product repackaging, 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 and by
approximately $43.9 million from the first nine months of 1996 to the first
nine months of 1997, 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, in 1996, 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, $2.7 million in 1996 and $1.5 million and $7.5 million
in the first nine months of 1996 and 1997, respectively. In 1996, 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 in 1996 was adversely
affected by a non-recurring charge 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 in 1996 ($1.6
million), which is attributable to Agent Sales, represented 8.7% of gross
merchandise sales made under the Agent Sales model. Gross profit on Principal
Sales increased from $488,000, or 9.9% of merchandise revenue made under the
Principal Sales model, in the first nine months of 1996 to $5.3 million, or
9.9% of merchandise revenue made under the Principal Sales model, in the first
nine months of 1997. The remainder of gross profit, which is attributable to
Agent Sales, increased from $1.0 million, or 8.9% of Agent Sales, for the
first nine months of 1996 to $2.2 million, or 10.4% of Agent Sales, for the
first nine months of 1997. The increase in gross margin on Agent Sales from
the first nine months of 1996 to the comparable period in 1997 was primarily
attributable to the Company's ability to negotiate more favorable terms with
vendors as it grew in size.

20
<PAGE>

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 the
Company's 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
advertising expenditures, payroll and related expenses for sales, marketing
and merchandise acquisition personnel, 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, and $512,000 and
$3.3 million in the first nine months of 1996 and 1997, 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, and 3.1% and 4.4% in the first nine months of 1996 and
1997, respectively. The dollar increases in sales and marketing expenses in
each of these periods were primarily attributable to expansion of the
Company's Internet 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
significantly in absolute dollars and as a percentage of gross merchandise
sales as it endeavors to enhance its brand recognition through marketing
alliances.

General and Administrative. General and administrative expenses consist
primarily of payroll and related expenses for customer service, provision for
doubtful accounts, facilities expenses, 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,
and $396,000 and $3.5 million for the first nine months of 1996 and 1997,
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, and 2.4% and 4.6% for
the first nine months of 1996 and 1997, respectively. The dollar increases in
general and administrative expenses were due to an increase in salaries and
benefits, primarily due to the hiring of additional officers and other
personnel, to the Company beginning to compensate its President, Mr. Kaplan
(see "Management--Executive Compensation"), and to facilities expenses. The
Company expects general and administrative expenses to increase in absolute
dollars for the remainder of 1997 and in 1998, and as a percentage of gross
merchandise sales at least through the first quarter of 1998, as the Company
expands its officer group, staff and facilities, incurs the additional costs
related to being a public company and expends approximately $75,000 in the
fourth quarter of 1997 and the first quarter of 1998 to move to new
facilities. In addition, the Company expects to incur incremental costs of
approximately $396,000 over the next year as the Company amortizes certain
purchased software.

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, and equipment costs.
Engineering expenses were $182,000 and $714,000 for the period from inception
(July 1994) to December 31, 1995 and for 1996, respectively, and $349,000 and
$1.9 million for the first nine months of 1996 and 1997, 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, and 2.1% and 2.6% for the first nine months of 1996 and
1997, respectively. The dollar increases in engineering expenses in each of
these periods were 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 begin compensating Mr. Fisher, its
Vice President of Development and Operations, until 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.

21
<PAGE>

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. For
the first nine months of 1997, the Company had a net loss of $757,000 and thus
no provision for income taxes was recorded for that period. 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 and the first three
quarters of 1997. 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.

<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 (1) 1995 1995 1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Merchandise.... $ -- $ -- $ -- $ 30 $ 468 $1,493 $2,990 $7,622 $11,696 $17,860 $24,198
Commission..... -- 17 23 70 109 317 586 684 618 715 863
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Total revenue. -- 17 23 100 577 1,810 3,576 8,306 12,314 18,575 25,061
Cost of revenue. -- -- -- 27 418 1,380 2,665 7,076 10,526 16,146 21,735
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Gross profit.... -- 17 23 73 159 430 911 1,230 1,788 2,429 3,326
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Operating ex-
penses:
Sales and
marketing..... 1 30 44 69 58 115 339 379 390 948 1,935
General and
administrative. 54 49 61 63 32 89 275 362 789 1,294 1,376
Engineering.... 31 25 49 77 52 115 182 365 561 589 765
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Total
operating
expenses..... 86 104 154 209 142 319 796 1,106 1,740 2,831 4,076
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Income (loss)
from opera-
tions.......... (86) (87) (131) (136) 17 111 115 124 48 (402) (750)
Interest and
other income... -- -- -- -- -- -- 3 34 32 148 167
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Income (loss)
before income
taxes.......... (86) (87) (131) (136) 17 111 118 158 80 (254) (583)
(Provision)
benefit for
income taxes... -- -- -- -- (2) (11) (12) (18) (28) 28 --
---- ---- ----- ----- ------ ------ ------ ------- ------- ------- -------
Net income
(loss)......... $(86) $(87) $(131) $(136) $ 15 $ 100 $ 106 $ 140 $ 52 $ (226) $ (583)
==== ==== ===== ===== ====== ====== ====== ======= ======= ======= =======
SUPPLEMENTAL
FINANCIAL DATA:
Gross merchandise sales (2). $ -- $226 $ 199 $ 827 $1,792 $5,290 $9,246 $14,399 $17,941 $24,543 $32,301
==== ==== ===== ===== ====== ====== ====== ======= ======= ======= =======
</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 with GAAP.

22
<PAGE>

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, with the exception that
commission revenue decreased in the first quarter of 1997 as the Company
emphasized its Principal Sales model over the Agent Sales model. 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%, 52.9%,
65.2%, 72.8% and 74.9% of such sales in the quarters ended December 31, 1995,
March 31, 1996, June 30, 1996, September 30, 1996, December 31, 1996, March
31, 1997, June 30, 1997 and September 30, 1997, respectively. The Company does
not expect that its merchandise revenue as a percentage of gross merchandise
sales will continue to increase significantly.

The reconciliation of total revenue to gross merchandise sales for the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 is as
follows.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------
SEPTEMBER
MARCH 31, 1997 JUNE 30, 1997 30, 1997
-------------- ------------- -----------
<S> <C> <C> <C>
Total revenue...................... $12,314,000 $18,575,000 $25,061,000
Plus: gross Agent Sales............ 6,245,000 6,683,000 8,103,000
Less: net Agent Sales.............. (618,000) (715,000) (863,000)
----------- ----------- -----------
Gross merchandise sales(1)......... $17,941,000 $24,543,000 $32,301,000
=========== =========== ===========
</TABLE>

During the quarters ended March 31, 1997, June 30, 1997 and September 30,
1997, gross merchandise sales were comprised of the following:

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------
SEPTEMBER
MARCH 31, 1997 JUNE 30, 1997 30, 1997
-------------- ------------- -----------
<S> <C> <C> <C>
Principal Sales model--purchased
inventory........................ $ 4,561,000 $ 9,359,000 $16,172,000
Principal Sales model--consigned
inventory........................ 7,135,000 8,501,000 8,026,000
Agent Sales model................. 6,245,000 6,683,000 8,103,000
----------- ----------- -----------
Gross merchandise sales(1)........ $17,941,000 $24,543,000 $32,301,000
=========== =========== ===========
</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.

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, decreased
to 90.0% in the first quarter of 1997 and remained relatively flat at 90.4% in
the second quarter of 1997 and 89.8% in the third quarter of 1997. The
corresponding gross margins for these periods were 10.9%, 8.6%, 10.0%, 9.6%
and 10.2%, respectively. The gross margin in the third quarter of 1997
benefitted from a volume discount given by the Company's major shipper offset
in part by the additional costs of shipping during the United Parcel Service
strike and the margin effects of seasonal demand. The gross margin for the
fourth quarter of 1996 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, gross margin
for the fourth quarter of 1996 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, and increased to 10.7% in the third quarter of 1997 as the Company
focused its Agent Sales efforts on higher-quality vendors.

In the second and third quarters of 1997, the Company accelerated its sales
and marketing spending in order to enhance its brand recognition. These
increases in sales and marketing expenditures significantly contributed to the
Company's recognizing a net loss for these periods. Because the Company
intends to continue to increase its sales and marketing expenditures through
at least the first two quarters of 1999, the Company expects to continue to
experience substantial net losses.

In the first quarter of 1997, the Company significantly increased its
headcount in the general and administrative area. The Company continued to
increase this headcount in the second and third quarters of 1997. In addition,
in the third quarter of 1997, the Company wrote off approximately $285,000 of
bad debts that resulted from fraudulent use of credit cards.

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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 timing, cost and availability of advertising on other Web sites, (vi) the
amount and timing of costs relating to expansion of the Company's operations,
(vii) the announcement or introduction of new types of merchandise, service
offerings or customer services by the Company or its competitors, (viii)
technical difficulties with respect to consumer use of the auction format on
the Company's Web site, (ix) delays in revenue recognition at the end of a
fiscal period as a result of shipping or logistical problems, (x) delays in
shipments as a result of strikes or other problems with the Company's delivery
service providers or the loss of the Company's credit card processor, (xi) the
level of merchandise returns experienced by the Company and (xii) 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 not meet or exceed
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 sale of Common Stock in the Company's initial public offering for
approximately $14.8 million and the private sale of convertible preferred
stock for approximately $2.3 million. Net cash used in operating activities
for the period from inception (July 1994) to December 31, 1995 was $210,000,
net cash provided by operating activities for 1996 was $1.1 million and net
cash used in operating activities for the nine months ended September 30, 1997
was approximately $7.5 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.
The net cash used in operating activities in the first nine months of 1997 was
primarily attributable to increases in merchandise inventory of $5.7 million
resulting from the Company's decision to expand its Principal Sales model and
in accounts receivable of $1.8 million as the Company changed the timing of
settlement of cash receipts for a certain major credit card.

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 a portion of these funds to repay the advances to the founders.
Net cash of $17.0 million provided by financing activities in the first nine
months of 1997 resulted almost entirely from proceeds received from the
Company's initial public offering, which occurred in the second quarter of
1997 and the exercise of warrants. Net cash used in investing activities
comprised purchases of property and equipment of $40,000, $606,000 and $1.0
million for the period from inception (July 1994) to December 31, 1995, 1996
and the first nine months of 1997, respectively.

As of September 30, 1997, the Company had approximately $11.1 million of
cash and cash equivalents. The Company also had available a $4.0 million line
of credit from Silicon Valley Bank that expires on April 17, 1998. Borrowings
under the line bear interest at an annual rate of 0.75% over the bank's prime
rate. Pursuant to

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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) and is prohibited from incurring a
monthly pretax loss of more than $400,000 or cumulative monthly pretax losses
on a rolling three-month basis of more than $750,000. The Company anticipates
that it will be in violation of the pretax loss condition in the fourth
quarter of 1997 and would need to seek a waiver if it wishes to borrow under
the line of credit. The Company has also 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 September 30, 1997, the Company's principal commitments consisted of
obligations of approximately $2.8 million under its operating leases,
including $2.6 million under a series of leases for its new corporate
headquarters. Although the Company has no material commitments for capital
expenditures, it anticipates purchasing approximately $420,000 of property and
equipment during the last quarter of 1997, primarily for computer equipment,
furniture and fixtures, and expenditures associated with the Company's
relocation to new facilities. In addition, the Company has recently entered
into a series of relationships requiring minimum payments of $1.3 million
through the third quarter of 1998 and, under certain conditions, incremental
fees based on the volume of traffic to its Web site. 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 in
the next six months, the Company may require additional cash to support the
anticipated 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 substantial quarterly net losses through at least the
first two quarters of 1999. 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.

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BUSINESS

OVERVIEW

ONSALE is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that typically are unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the Web to
businesses, resellers and consumers. The Company sells a wide variety of such
merchandise, including computers, peripherals, consumer electronics,
housewares, power tools, sports and fitness equipment, and vacation packages.
ONSALE's online auctions provide an exciting sales format that leverages the
unique characteristics of the Web, such as interactivity and a sense of
community. The Company's auction format enables customers to bid against one
another in a freely competitive market liberated from the constraints of less
flexible pricing that typically characterize traditional retailing. The
Company believes that the customer enthusiasm generated by this format, the
emergence of the Internet as an effective new sales medium and the Company's
highly automated infrastructure combine to create a significant retailing
opportunity.

ONSALE has sold approximately $106 million of merchandise to more than
188,000 customer accounts from its first auction in May 1995 through September
30, 1997. To date, the Company has auctioned over 771,000 merchandise units,
of which over 201,000 were auctioned in the third quarter of 1997. Over
320,000 visitors to the Company's Web site have registered as bidders with the
Company, with over 73,000 registering in the third quarter of 1997 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 28 million at the end of
1996 to approximately 175 million by the end of the year 2001. 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 increased from $296 million
in 1995 to $2.6 billion in 1996 and will increase to $223 billion in the year
2001.

The Internet has evolved 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.

As the number of Internet retailers has expanded, however, the importance of
strong brand recognition has become critical to the success of these
companies. Brand development is especially important for online retailers to
establish trust and loyalty with consumers in the absence of face-to-face
interaction. As a result, online retailers have begun to establish long-term
strategic partnerships and alliances with content, commerce and service
providers to build brand recognition, stimulate traffic, enhance their
offerings, take advantage of cross-marketing opportunities and build barriers
to entry.

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Market for Excess Merchandise

Each year, manufacturers dispose of significant volumes of excess
merchandise, including 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 billion 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
alone 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. In addition, many other markets
are characterized by significant supplies of excess merchandise. For example,
the travel industry is beset by a continual supply of excess inventory which
faces time-imposed obsolescence.

The disposal of excess goods represents a substantial burden on many
vendors. Excess 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 vendors 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. Vendors 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

ONSALE is an electronic retailer pioneering a new sales format--the
interactive online auction--designed to serve as an efficient and entertaining
marketing channel for products that typically are unavailable through
conventional distribution. The Company currently specializes in selling excess
merchandise, such as refurbished and close-out products, over the Web to
businesses, resellers and consumers. The Company sells a wide variety of such
merchandise, including computers, peripherals, consumer electronics,
housewares, power tools, sports and fitness equipment, and vacation packages.
ONSALE's online auctions provide an exciting sales format that leverages the
unique characteristics of the Web, such as interactivity and a sense of
community. The Company's auction format enables customers to bid against one
another in a freely competitive market liberated from the constraints of less
flexible pricing that typically characterize traditional retailing. The
Company believes that the customer enthusiasm generated by this format, the
emergence of the Internet as an effective new sales medium and the Company's
highly automated infrastructure combine to create a significant retailing
opportunity.

ONSALE's Auction Supersite provides customers a compelling format to
purchase a wide variety of merchandise through interactive online auctions. In
addition to prominently featured specials, the Company's Auction Supersite
organizes items into targeted merchandise stores ("Supersites"), which are
further categorized by product type. ONSALE presently operates a Computer
Products Supersite and a Consumer Electronics Supersite on which it
continually posts merchandise descriptions and images. ONSALE operates
auctions every weekday and generally offers over 750 different merchandise
items at any given time. The Company sells quantities from one to several
hundred of each item, ranging in price from $25 to $3,000 each.

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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 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.

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 a
wide variety of merchandise ideal for this sales format and that excess
merchandise is 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
encourages 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 excess 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 5.2 times, and purchased on average 2.3 times, during the
quarter ended September 30, 1997.

. 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.
Further, the Company constantly changes the presentation of its Web site
to enhance customer interest.

. 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 customers'
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 excess
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 frequent auctions provide
manufacturers a distribution channel designed to accommodate
unpredictable, odd lot quantities and to reach a geographically broad

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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 excess merchandise.

. Resolution of Channel Conflict. Sales of excess 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 excess
merchandise can have on the distribution of new products in a limited
local area.

. Superior Inventory Liquidation. Manufacturers and vendors in the process
of liquidating excess 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. The frequency of
the Company's auctions and its ability to add new items continuously
allow the Company to post items for auction immediately upon receipt of
the merchandise and increases the vendors' ability to dispose of
inventory quickly. By selling inventory quickly, vendors are able to
avoid some of the inventory price erosion and obsolescence 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 excess merchandise by pursuing the following key strategies:

Increase Market Awareness and Brand Recognition

The Company believes that ONSALE is a leading brand name in online 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 forming relationships with and advertising on leading Web sites and
conducting an ongoing public relations campaign. In particular, the Company
has established relationships with America Online, Computer Shopper NetBuyer,
Excite and Netscape, among others. The Company intends to continue to build
relationships with leading online content providers and commerce companies to
drive traffic to its sites, secure merchandise supply and build barriers to
entry.

Expand Lines of Merchandise

The Company believes a broad array of merchandise can be sold effectively
through its online auction format. The Company recently expanded its lines of
merchandise to include housewares, power tools, sports and fitness equipment,
and vacation packages. The Company actively test markets new types of
merchandise and has successfully auctioned items as diverse as new automobiles
and trucks, gourmet meats, high-end computer servers and autographed sports
memorabilia.

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 and
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 continues to build its merchandise buying staff to facilitate securing

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long-term relationships with a variety of merchandise vendors. The Company
seeks to be its vendors' preferred choice for liquidating excess 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.

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 the third
quarter of 1997, the Company began selling banner advertising and promotional
placements on its sites. In addition, the Company intends to expand 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.

MERCHANDISE

The Company offers more than 750 different merchandise items in each daily
auction. This merchandise consists primarily of computers, peripherals,
consumer electronics, housewares, power tools, sports and fitness equipment,
and vacation travel. The Company believes that rotating its merchandise 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.

Housewares. The Company sells microwave ovens, coffee makers, food
steamers, shower massage units and breadmakers.

Power Tools. The Company sells electric saws, drills and hammers.

Sports and Fitness Equipment. The Company sells golf clubs, tennis
racquets and in-line skates.

Vacation Packages. The Company sells stays of varying lengths at
vacation properties.

The Company's merchandise has included brands such as AST, AT&T, Aiwa,
Apple, Canon, Casio, Compaq, Dell, Fujitsu, Gateway, Hewlett-Packard, IBM,
Intel, JVC, Kenwood, Lexmark, Magnavox, NEC, Packard Bell, Panasonic,
Phillips, Sanyo, Seagate, Sharp, Toshiba, Uniden and Zenith. 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 and the first nine
months of 1997, approximately 30% and 48%, respectively, of the Company's
gross merchandise sales were derived from merchandise acquired from five and
seven vendors, respectively, 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.

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AGREEMENTS AND RELATIONSHIPS WITH OTHER ONLINE COMPANIES

ONSALE has established relationships to increase its access to online
customers, to build brand recognition and to broaden and deepen its
merchandise assortment. The Company intends to complement its existing
relationships and build barriers to entry by pursuing additional agreements.
See "Risk Factors--Reliance on Relationships with Other Online Companies." To
date, ONSALE has formed the following relationships:

America Online

In September 1997, ONSALE announced a new commerce agreement with America
Online. ONSALE will appear in the Electronics & Photo department and in the
Computer Hardware department on America Online's newly designed Shopping
channel. In addition to the listings, ONSALE has also purchased additional
advertising space in the Shopping Channel and AOL NetFind, America Online's
Web search engine powered by Excite, Inc. ("Excite"), to support the
initiative.

Computer Shopper NetBuyer

In September 1997, ONSALE entered into a promotional agreement with Computer
Shopper NetBuyer, an online marketplace of computer vendors and products from
Computer Shopper and ZDNet. ONSALE will be the exclusive auction-based sponsor
of Computer Shopper NetBuyer, appearing on the NetBuyer homepage, the Basement
homepage and the Marketplace homepage. ONSALE has also purchased additional
advertising space on Computer Shopper NetBuyer to support the initiative.

Excite

The Company and Excite formed a strategic marketing agreement under which
ONSALE appears as a primary anchor tenant in the Auctions and Bargains
department of Excite's Shopping Channel. ONSALE also appears on the main page
of Excite's Shopping Channel under the Auctions and Bargains category. ONSALE
receives promotional and banner placements throughout Excite as part of this
agreement.

Netscape Guide By Yahoo!

ONSALE is a Featured Site on Netscape Guide by Yahoo!, a personalized
Internet navigation service directly linked to the Netscape browser. As a
Featured Site within the Computers and Electronics subcategories, ONSALE
receives a prominently displayed hypertext link on the Guide's Shopping
Channel.

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 in
1996 or the first nine months of 1997, although five and seven of the
Company's vendors, respectively, collectively accounted for over 30% and 48%,
respectively, of its gross merchandise sales during such periods. 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.

. Principal Sales Model. The Company acts as a direct purchaser of
merchandise or as 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

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<PAGE>

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 50.1% of the Company's gross merchandise sales in the third quarter of
1997.

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 24.8%
of the Company's gross merchandise sales in the third quarter of 1997. 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 third quarter of 1997, Agent Sales accounted
for 25.1% 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
resellers. During the quarter ended September 30, 1997, the Company believes
that, on average, more than 94,000 unique customers submitted more than 38,000
unique bids each week, that approximately 10% of new visitors became bidders,
and that the average winning bid was approximately $229. See "Risk Factors--
Developing Market; Uncertain Acceptance of the Internet as a Medium for
Commerce" and "Risk Factors--Uncertain Acceptance of the ONSALE Brand;
Evolving and Unpredictable Business Model."

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.
In addition to forming relationships of the types described above, 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 America Online, c|net,
Excite, Infoseek, Lycos and Yahoo!. These advertisements usually take the form
of banners that encourage readers to click through directly to the Company's
Web site.

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 "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.

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<PAGE>

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 208,000 registrants. The Company currently sends
more than 500,000 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 14 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."

THE ONSALE EXCHANGE

On October 20, 1997, the Company announced the commencement of The ONSALE
Exchange. The ONSALE Exchange will allow small businesses and individuals to
sell merchandise over the Web using the Company's auction management system.
Beginning on approximately October 29, 1997, ONSALE will permit such sellers
to list items for auction in specific merchandise categories such as: Barbies,
dolls and bears; books, magazines and comics; toys; clothing and apparel;
coins, stamps and currencies; computer hardware; computer software; computer
electronics; entertainment and travel; food and beverage; gifts; household
items; jewelry and watches; sports and automotive; specialty collectibles; and
trading cards. The seller will enter a description of each item and, if he or
she chooses, post a photo image. The seller also will establish the minimum
bid level for each item. The ONSALE Exchange will begin accepting bids on
approximately October 31, 1997. Bidders not already registered with the
Company will need to register and then will be able to place bids on items on
The ONSALE Exchange using their ONSALE customer number. If and when bidders
are outbid, they will receive an

34
<PAGE>

e-mail notification and will be able to increase their bids through the
Company's Web site or via e-mail. At the end of the auction, the highest
bidder(s) and the seller will both be notified that the auction has closed.
The seller may then obtain from The ONSALE Exchange the names of the auction
winner(s) and runners up. The buyer and seller can consummate their
transaction directly with each other using cash, check or credit card or
through the services of an independent online escrow service using one of a
variety of major credit cards. The Company anticipates charging a nominal fee
for each item that a seller posts and a small commission shortly after the
Company provides to the seller the names of the auction winner(s) and runners
up. The Company has already expended substantial funds in preparing for and
initiating this new Auction Supersite and expects significant continuing
expenditures. As a consequence, it will take substantial incremental volumes
of auction business in order for the Company to recoup its expenditures to
date and operate The ONSALE Exchange profitably. See "Risk Factors--Risk of
Launching The ONSALE Exchange."

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 "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 Enterprise 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.

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<PAGE>

Engineering

The Company's engineering staff consisted of 23 software development
engineers as of September 30, 1997. 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 seven 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 and Epoch, Internet service providers, to
provide connectivity to the Internet over three dedicated T-1 lines and one
dedicated T-3 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."

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 Internet auction houses such as Z AUCTION, First Auction (the
auction site for Internet Shopping Network, a wholly owned subsidiary of Home
Shopping Network Inc.), Surplus Direct (a wholly owned subsidiary of Egghead,
Inc.) and eBay (in connection with the Company's newly introduced The ONSALE
Exchange), (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, 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., Insight
Enterprises, Inc., Creative Computers, Inc., and CDW Computer Centers, Inc.,
which may already operate competitive auction sites or 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 is shared with
America Online and America Online provides a direct link for ILI's members to
reach ILI's electronic commerce site on the Web. Also, Micro Warehouse, Inc.
introduced an online auction site in September 1997. The Company believes 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.

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<PAGE>

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

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)
and Yankee Auction(R) trademarks 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 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 has in the past received, and 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.

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<PAGE>

The Company also relies on a variety of technologies that it licenses from
third parties, including its database and Internet server software, which is
used in the Company's 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.

EMPLOYEES

As of September 30, 1997, the Company employed 106 people, including 30 in
engineering, support and operations, quality assurance, and technical
documentation, 32 in merchandise acquisition and marketing, 14 in customer
support and service, 11 in logistics, and 19 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 14,950 square feet, and are located
in four separate buildings within an office complex in Mountain View,
California under leases that expire in October 1997 through July 1999. The
Company has entered into leases for new space totalling approximately 30,000
square feet and intends to move into the new space during the next six months.
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.

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<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............... 47 Chief Financial Officer and Secretary
Dennis J. Shepard............... 49 Vice President of Operations
Michael T. Weller............... 30 Vice President of Vendor Relations
Peter L. Harris(1).............. 53 Director
Peter H. Jackson(2)............. 39 Director
Kenneth J. Orton(1)(2).......... 46 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 serves as a director of Infodata Systems Inc., an Internet document
publishing software company. He 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

39
<PAGE>

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.

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.

Dennis J. Shepard has been Vice President of Operations of the Company since
April 1997. From May 1996 to April 1997, he served as Vice President of
Logistics with Creative Computers, Inc. From August 1993 to May 1996, Mr.
Shepard was as a partner with Aldrich Shepard Associates, Inc., a consulting
firm. From 1991 to August 1993, he served as Senior Vice President of
Operations with JWP Information Services, a computer reseller. From 1967 to
1991, Mr. Shepard served in various positions with Wang Laboratories Inc.,
including Vice President of Worldwide Logistics, Vice President of
Manufacturing, Vice President, Technical Operations and Vice President of
European Operations. Mr. Shepard studied Electrical Engineering at Lowell
Technology Institute and attended the Harvard Business School Executive
Management Program.

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 Hollywood Park, 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.

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<PAGE>

Kenneth J. Orton has been a director of the Company since October 1996. Mr.
Orton has been President and Chief Executive Officer of Preview Travel, Inc.,
an online travel service, since June 1997. From April 1994 to June 1997, Mr.
Orton served as President and Chief Operating Officer of Preview Travel. 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 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 the
registration statement for the Company's initial public offering was declared
effective by the Securities and Exchange Commission ("Effective Date") will
initially be granted an option for 15,000 shares ("Initial Grant") on 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.

41
<PAGE>

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. Dennis J. Shepard, who was appointed the
Company's Vice President of Operations in April 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.

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. 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 vested as
to 28,125 shares on February 1, 1997, 4,687.5 shares on each of March 1 and
April 1, 1997 and 37,500 shares on April 17, 1997 and continued and continues
to vest as to 3,750 shares on the first day of each month thereafter.
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 vested as to 18,750 shares on June 1, 1997 and
continued and continues to vest 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

42
<PAGE>

purchase 150,000 shares of Common Stock with an exercise price of $7.00 per
share. The option vested as to 18,750 shares on September 12, 1997 and
continued and continues to vest 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.

Mr. Shepard's offer letter of April 1997 provides for an initial annual
salary of $175,000 commencing on April 28, 1997. The letter also provides for
reimbursement of up to $5,000 of actual moving expenses. At the commencement
of his employment, Mr. Shepard also received an option to purchase 120,000
shares of Common Stock with an exercise price of $5.10 per share. The option
will vest as to 15,000 shares on November 12, 1997 and as to 2,500 shares each
month thereafter.

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 to increase the number of shares reserved for issuance thereunder from
1,500,000 to 3,032,250. In December 1996, the Board further amended and
restated the 1995 Equity Incentive Plan to become effective upon the Company's
initial public offering. 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. As of September 30, 1997,
options to purchase an aggregate of 2,330,028 shares of Common Stock were
outstanding under the 1995 Equity Incentive Plan with exercise prices ranging
from $0.033 to $15.50 per share, and options to purchase 1,135,139 shares were
available for grant.

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

43
<PAGE>

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 became effective on April 17, 1997, the first business day on
which price quotations for the Company's Common Stock were 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 began
on April 17, 1997, 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 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
minimal contributions to the 401(k) Plan in each of 1996 and the first nine
months of 1997.

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.

44
<PAGE>

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 has entered 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.

45
<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, for 1996 and for the first
nine months of 1997, the Company paid rent of $18,000, $28,000 and $42,000,
respectively, for use of these facilities. The lease costs for these
facilities approximate the actual cost incurred by SPI.

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 are each 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 ("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). Both entities exercised their warrants in total for cash in March
1997. Each share of Preferred Stock converted automatically into three shares
of Common Stock upon the closing of the Company's initial public offering.

46
<PAGE>

PRINCIPAL AND SELLING 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 September
30, 1997 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,
(iii) each Selling Stockholder and (iv) all executive officers and directors
as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)(2)
------------------------------- -----------------------
INCLUDING NUMBER OF
ALL UNVESTED SHARES
NAME OF BENEFICIAL OWNER NUMBER PERCENT OPTIONS OFFERED NUMBER PERCENT
- ------------------------ ---------- ------- ------------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Alan S. Fisher(3)(4).... 6,000,000 35.7% 6,000,000 40,000 5,960,000 32.1%
Software Partners, Inc.
S. Jerrold Kaplan(4)(5). 5,700,000 33.9 5,700,000 427,500 5,272,500 28.4
Razi Mohiuddin(4)(6).... 2,206,815 13.1 2,206,815 40,000 2,166,815 11.7
Kleiner Perkins Caufield
& Byers(7)............. 1,704,303 10.1 1,704,303 -- 1,704,303 9.2
Victor Hanna(8)......... 303,260 1.8 600,000 28,200 275,060 1.5
Layne Kaplan............ 300,000 1.8 300,000 -- 300,000 1.6
John F. Sauerland(9).... 105,000 * 225,000 10,000 95,000 *
Fenwick & West LLP(10).. 100,359 * 100,359 25,000 75,359 *
Richard J. Dorin(11).... 50,710 * 105,000 10,000 40,710 *
Martha D. Greer(12)..... 35,625 * 160,000 10,000 25,625 *
Merle W. McIntosh(13)... 29,375 * 160,000 10,000 19,375 *
Peter L. Harris(14)..... 24,125 * 38,000 20,000 4,125 *
Michael T. Weller(15)... 20,833 * 100,000 10,000 10,833 *
Kenneth J. Orton(16).... 6,362 * 20,800 -- 6,362 *
Peter H. Jackson(17).... 4,125 * 18,000 -- 4,125 *
All executive officers
and directors as
a group (9
persons)(18)........... 11,919,612 70.1 12,441,800 517,500 11,402,112 60.8
</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 that are currently
exercisable or exercisable within 60 days of September 30, 1997 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) Based on 16,795,491 shares of Common Stock outstanding prior to the
offering and 18,582,991 shares outstanding after the offering. The latter
number includes 78,200 shares subject to options outstanding at September
30, 1997 that will be exercised prior to the closing of this offering and
sold in the offering. Assumes that the Underwriters' over-allotment
option to purchase up to 90,700 shares from the Company, 142,500 shares
from S. Jerrold Kaplan, 80,000 shares from Razi Mohiuddin and 31,800
shares from Victor Hanna is not exercised.

(3) 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 agreement under which Software Partners, Inc.
has the right to vote the shares. The 40,000 shares shown as being sold
in this offering are owned of record by Mr. Mohiuddin. 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. 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. The
address of Mr. Fisher is c/o ONSALE, Inc., 1861 Landings Drive, Mountain
View, California 94043.

47
<PAGE>

(4) The Company has the right to repurchase at their original cost the shares
owned by Messrs. Fisher, Kaplan 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 September 30, 1997, Messrs. Fisher, Kaplan and Mohiuddin
beneficially owned 4,750,000 shares, 4,512,500 shares and 1,747,062
shares, respectively, that were no longer subject to the Company's
repurchase rights.

(5) Represents 5,677,000 shares held of record by Mr. Kaplan, 16,500 shares
held of record by Amy Kaplan Eckman, trustee of the Lily Layne Kaplan
Irrevocable Trust and 6,500 shares held of record by the Kaplan Family
Trust. Mr. Kaplan disclaims beneficial ownership of the shares held by
the trusts. 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.

(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) 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) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Hanna is an employee of the Company.

(9) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Sauerland is the Chief Financial Officer and
Secretary of the Company.

(10) Fenwick & West LLP is the general counsel to the Company.

(11) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Dorin is an employee of the Company.

(12) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Ms. Greer is Vice President of Merchandise Management
of the Company.

(13) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. McIntosh is Vice President of Merchandise
Acquisition of the Company.

(14) Includes 4,125 shares subject to an option exercisable within 60 days of
September 30, 1997. Mr. Harris is a director of the Company.

(15) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Weller is an employee of the Company.

(16) Includes 5,362 shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Orton is a director of the Company.

(17) Represents shares subject to options exercisable within 60 days of
September 30, 1997. Mr. Jackson is a director of the Company.

(18) Represents the shares described in notes (3), (5), (9), (12)-(14), (16)
and (17) and 15,000 shares subject to an option held by Mr. Shepard
exercisable within 60 days of September 30, 1997 and, in the case of Mr.
Shepard's total holdings including unvested options, an additional
105,000 shares subject to unvested options.

48
<PAGE>

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 September 30, 1997, there were
outstanding 16,795,491 shares of Common Stock held of record by 37
stockholders, options to purchase 2,330,028, shares of Common Stock and a
warrant to purchase 8,571 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

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, 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.

49
<PAGE>

REGISTRATION RIGHTS

Following this offering, the holders of 1,704,303 shares of Common Stock
(the "Registrable Securities") will have certain demand 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 on April
17, 2003.

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 on
April 17, 2003.

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, Messrs. Kaplan, Fisher and Mohiuddin and their
transferees, who following this offering will hold an aggregate of 13,236,803
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 on April 17,
2003.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is
BankBoston, N.A.

50
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

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, only 3,170,829 shares outstanding prior to
this offering will be available for sale immediately after this offering due
to certain contractual restrictions on resale on the remaining Restricted
Shares. 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
18,582,991 shares of Common Stock, assuming no exercise of outstanding
employee options. Of these shares, the 2,875,000 shares sold in the Company's
initial public offering, the 2,300,000 shares sold in this offering (assuming
no exercise of the over-allotment option) and 17,598 shares sold since the
Company's initial public offering under the Purchase Plan 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. Of the remaining shares, 13,112,162 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 equal to the
longer of 90 days after the date of this Prospectus or two business days after
the Company announces its year-end financial results without the prior written
consent of NationsBanc Montgomery Securities, Inc. As a result of these lock-
up agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 701, 144 and 144(k) 278,231 shares will be salable
beginning on October 15, 1997, an additional 11,003,432 shares will be salable
beginning on the later of 90 days after the date of this Prospectus or two
business days after the Company announces its year-end results in the public
market (although all but 175,389 shares will be subject to certain volume
limitations), 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 in March 1998 upon the
achievement of a one-year holding period.

In general, under Rule 144, 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 186,000 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. However, all
shares issued pursuant to Rule 701 are subject to lock-up agreements and will
only become eligible for sale at the earlier of the expiration of the lock-up
agreements.

51
<PAGE>

In April 1997, the Company filed a registration statement under the
Securities Act covering 3,710,716 shares of Common Stock subject to options
outstanding as of that date under the Company's 1995 Equity Incentive Plan or
reserved for issuance under the Company's stock option, equity incentive and
stock purchase plans. Such registration statement automatically became
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 any applicable lock-up agreements expire. At September 30,
1997, options to purchase a total of 2,330,028 shares were outstanding, of
which options to purchase 616,520 shares were exercisable. Also, certain
holders of shares of Common Stock, who will own in the aggregate 13,236,803
shares of Common Stock after this offering, are 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."

52
<PAGE>

UNDERWRITING

The Underwriters named below, represented by NationsBanc Montgomery
Securities, Inc., BT Alex. Brown Incorporated, BancAmerica Robertson Stephens
and Hambrecht & Quist LLC (the "Representatives"), have severally agreed,
subject to the terms and conditions set forth in the Underwriting Agreement,
to purchase from the Company and the Selling Stockholders the number of shares
of Common Stock indicated below opposite their respective names at the 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>
NationsBanc Montgomery Securities, Inc............................. 1,035,000
BT Alex. Brown Incorporated........................................ 575,000
BancAmerica Robertson Stephens..................................... 345,000
Hambrecht & Quist LLC.............................................. 345,000
---------
Total............................................................ 2,300,000
=========
</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 $0.86 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 and three of the Selling Stockholders have 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 345,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial 2,300,000 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.

Certain stockholders of the Company, holding in the aggregate 13,112,162
shares of Common Stock after this offering, have agreed that, for a period
ending on the later of 90 days after the date of this Prospectus or two
business days after the Company announces its year-end financial results, they
will not, without the prior written consent of NationsBanc Montgomery
Securities, Inc. , 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 90 days
after the date of this Prospectus, it will not, without the prior written
consent of NationsBanc Montgomery Securities, Inc., 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 purchase plans and the issuance of shares of
Common Stock pursuant to the exercise of outstanding options and warrants.

53
<PAGE>

The Underwriting Agreement provides that the Company and the Selling
Stockholders 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.

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 prior to this offering.

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.

54
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and
Exchange Commission (the "Commission"). The Registration Statement, the
exhibits and the schedule forming a part thereof and the reports and other
information filed by the Company with the Commission in accordance with the
Exchange Act may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission locate at Seven World Trade
Center, 13th Floor, New York, New York 10048 and at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.

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.

55
<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, December 31, 1996 and September
30, 1997 (unaudited).................................................... F-3
Statement of Operations for the Period from Inception (July 1994) to
December 31, 1995, the Year Ended December 31, 1996 and the nine months
ended September 30, 1996 and 1997 (unaudited)........................... F-4
Statement of Cash Flows for the Period from Inception (July 1994) to
December 31, 1995, the Year Ended December 31, 1996 and the nine months
ended September 30, 1996 and 1997 (unaudited)........................... F-5
Statement of Stockholders' Equity (Deficit) for the Period from Inception
(July 1994) to December 31, 1995, the Year Ended December 31, 1996 and
the nine months ended September 30, 1997 (unaudited).................... 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, except as to Notes 9 and 10
which are as of October 2, 1997

F-2
<PAGE>

ONSALE, INC.

BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 20,000 $2,649,000 $11,098,000
Restricted cash....................... -- 80,000 84,000
Accounts receivable, net of allowances
of $16,000, $66,000, and $174,000
(unaudited).......................... 22,000 395,000 2,224,000
Merchandise inventory................. 1,000 1,520,000 7,183,000
Prepaid expenses and other current
assets............................... -- 439,000 221,000
-------- ---------- -----------
Total current assets............. 43,000 5,083,000 20,810,000
-------- ---------- -----------
Property and equipment, net............ 30,000 578,000 1,304,000
Other assets........................... -- 19,000 96,000
-------- ---------- -----------
Total assets..................... $ 73,000 $5,680,000 $22,210,000
======== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...................... $103,000 $2,268,000 $ 1,721,000
Accrued expenses...................... 117,000 480,000 1,519,000
Deferred revenue...................... 2,000 604,000 440,000
Advances due related parties.......... 270,000 -- --
-------- ---------- -----------
Total current liabilities........ 492,000 3,352,000 3,680,000
-------- ---------- -----------
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;
none, 365,191 and none (unaudited)
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, 12,178,757 and 16,795,491
(unaudited) shares issued and
outstanding.......................... 12,000 12,000 17,000
Additional paid-in capital............ 9,000 2,494,000 19,349,000
Accumulated deficit................... (440,000) (79,000) (836,000)
Less: note receivable from
stockholder.......................... -- (100,000) --
-------- ---------- -----------
Total stockholders' equity
(deficit)....................... (419,000) 2,328,000 18,530,000
-------- ---------- -----------
Total liabilities and
stockholders' equity (deficit).. $ 73,000 $5,680,000 $22,210,000
======== ========== ===========
</TABLE>

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

F-3
<PAGE>

ONSALE, INC.

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR NINE MONTHS ENDED
(JULY 1994) TO ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Merchandise.............. $ 30,000 $12,573,000 $4,951,000 $53,754,000
Commission............... 110,000 1,696,000 1,012,000 2,196,000
----------- ----------- ---------- -----------
Total revenue.......... 140,000 14,269,000 5,963,000 55,950,000
Cost of revenue........... 27,000 11,539,000 4,463,000 48,407,000
----------- ----------- ---------- -----------
Gross profit.............. 113,000 2,730,000 1,500,000 7,543,000
----------- ----------- ---------- -----------
Operating expenses:
Sales and marketing...... 144,000 891,000 512,000 3,273,000
General and
administrative.......... 227,000 758,000 396,000 3,459,000
Engineering.............. 182,000 714,000 349,000 1,915,000
----------- ----------- ---------- -----------
Total operating
expenses.............. 553,000 2,363,000 1,257,000 8,647,000
----------- ----------- ---------- -----------
Income (loss) from
operations............... (440,000) 367,000 243,000 (1,104,000)
Interest and other income. -- 37,000 3,000 347,000
----------- ----------- ---------- -----------
Income (loss) before
income taxes............. (440,000) 404,000 246,000 (757,000)
Provision for income
taxes.................... -- (43,000) (25,000) --
----------- ----------- ---------- -----------
Net income (loss)......... $ (440,000) $ 361,000 $ 221,000 $ (757,000)
=========== =========== ========== ===========
Net income (loss) per
share.................... $ (0.03) $ 0.02 $ 0.01 $ (0.05)
=========== =========== ========== ===========
Shares used to compute net
income (loss) per share.. 15,326,000 15,326,000 15,326,000 16,155,000
=========== =========== ========== ===========
</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 NINE MONTHS ENDED
(JULY 1994) TO ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1995 1996 1996 1997
-------------- ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........ $(440,000) $ 361,000 $ 221,000 $ (757,000)
Adjustments to reconcile
net income (loss) to net
cash provided by (used
in) operating
activities:
Depreciation............ 10,000 58,000 26,000 281,000
Issuance of common
stock.................. 21,000 -- -- --
Changes in assets and
liabilities:
Restricted cash........ -- (80,000) (80,000) (4,000)
Accounts receivable,
net................... (22,000) (373,000) (329,000) (1,829,000)
Merchandise inventory.. (1,000) (1,519,000) (273,000) (5,663,000)
Prepaid expenses and
other current assets.. -- (439,000) (81,000) 218,000
Other assets........... -- (19,000) (12,000) (77,000)
Accounts payable....... 103,000 2,165,000 711,000 (547,000)
Accrued expenses....... 117,000 363,000 319,000 1,039,000
Deferred revenue....... 2,000 602,000 371,000 (164,000)
--------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities........... (210,000) 1,119,000 873,000 (7,503,000)
--------- ----------- ---------- -----------
Cash flows from investing
activities:
Purchase of property and
equipment............... (40,000) (606,000) (273,000) (1,007,000)
--------- ----------- ---------- -----------
Cash flows from financing
activities:
Proceeds from issuance of
preferred stock and
warrants................ -- 2,345,000 2,345,000 --
Proceeds from note
receivable from
stockholder, net........ -- -- -- 100,000
Proceeds from issuance of
common stock and
exercise of warrants,
net..................... -- 41,000 25,000 16,859,000
Advances due related
parties, net............ 270,000 (270,000) 226,000 --
--------- ----------- ---------- -----------
Net cash provided by
financing activities.. 270,000 2,116,000 2,596,000 16,959,000
--------- ----------- ---------- -----------
Net increase in cash...... 20,000 2,629,000 3,196,000 8,449,000
Cash and cash equivalents
at beginning of period... -- 20,000 20,000 2,649,000
--------- ----------- ---------- -----------
Cash and cash equivalents
at end of period......... $ 20,000 $ 2,649,000 $3,216,000 $11,098,000
========= =========== ========== ===========
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>
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
Issuance of Series B
convertible preferred
stock pursuant to
exercise of warrants
(unaudited)............ 202,910 1,000 -- -- -- 1,945,000 -- 1,946,000
Issuance of common stock
upon initial public
offering, net of
issuance costs
(unaudited)............ -- -- 2,875,000 3,000 -- 14,805,000 -- 14,808,000
Conversion of Series A
and B convertible
preferred stock into
common stock upon
initial public offering
(unaudited)............ (568,101) (2,000) 1,704,303 2,000 -- -- -- --
Issuance of common stock
pursuant to exercise of
options (unaudited).... -- -- 19,833 -- -- 15,000 -- 15,000
Issuance of common stock
pursuant to the
employee stock purchase
plan (unaudited)....... -- -- 17,598 -- -- 90,000 -- 90,000
Repayment of note
receivable from
stockholder
(unaudited)............ -- -- -- -- 100,000 -- 100,000
Net loss (unaudited).... -- -- -- -- -- -- (757,000) (757,000)
-------- ------ ---------- ------- -------- ----------- --------- -----------
Balance at September 30,
1997 (unaudited)....... -- $ -- 16,795,491 $17,000 $ -- $19,349,000 $(836,000) $18,530,000
======== ====== ========== ======= ======== =========== ========= ===========
</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 online auction--designed to
serve as an efficient and entertaining marketing channel for products that
typically are unavailable through conventional distribution. 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 March 1997, the Company reincorporated in Delaware
and exchanged 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 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)

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 NINE MONTHS ENDED
(JULY 1994) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1995 1996 1996 1997
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Total revenue........... $ 140,000 $14,269,000 $ 5,963,000 $55,950,000
Plus: gross Agent Sales. 1,222,000 18,154,000 11,377,000 21,031,000
Less: net Agent Sales... (110,000) (1,696,000) (1,012,000) (2,196,000)
---------- ----------- ----------- -----------
Gross Merchandise Sales. $1,252,000 $30,727,000 $16,328,000 $74,785,000
========== =========== =========== ===========
</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 and $84,000 at September 30, 1997 (unaudited)
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 Web site. 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.

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

F-9
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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.

For periods subsequent to the Company's initial public offering, net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. For such periods,
common equivalent shares consisting of stock options and stock warrants were
antidilutive and have been excluded from the weighted average share
computation.

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.

Recent accounting pronouncements

In February 1997, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No.
128"), and No. 129, "Disclosure of Information about Capital Structure" ("SFAS
No. 129"). SFAS No. 128 establishes financial accounting and reporting
standards for calculation of basic earnings per share and diluted earnings per
share. SFAS No. 128 supersedes APB No. 15 and is effective for the periods
ending after December 15, 1997, including interim periods. SFAS No. 129
establishes standards for disclosing information about an entity's capital
structure. SFAS No. 129 is effective for financial statements for periods
ending after December 15, 1997. The Company will adopt the standards in the
year ending December 31, 1997. The effect of adopting SFAS No. 128 and SFAS
No. 129 will not have a material impact on the financial statements.

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), and No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 130 establishes standards for
reporting and display of comprehensive income. SFAS 131 establishes standards
for disclosing information about operating segments for public business
enterprises and supersedes FASB Statement No. 14. Both SFAS 130 and SFAS 131
are effective for fiscal years beginning after December 15, 1997.

F-10
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Interim results (unaudited)

The accompanying balance sheet at September 30, 1997, the statements of
operations and cash flows for the nine months ended September 30, 1996 and
1997 and the statement of stockholders' equity (deficit) for the nine months
ended September 30, 1997 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the results for the
interim periods. The data disclosed in the Notes to Financial Statements for
these periods are unaudited. The results of operations for such periods are
not necessarily indicative of the results expected for the full fiscal year or
for any future period. Certain prior period balances have been reclassified to
conform with the current period presentation.

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.

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.

F-11
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 by their terms expired 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.
The Company reserved 202,910 shares of Series B convertible preferred stock
common stock for issuance upon the exercise of the warrants (see Note 10). The
shares of convertible preferred stock are subject to a three-for-one
conversion ratio. On an as if converted basis the Series A shares would be
convertible into 1,095,573 shares of common stock.

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 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,
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.

In April 1997, all outstanding shares of the Series A and Series B preferred
stock were automatically converted into 1,704,303 shares of common stock in
connection with the Company's initial public offering (see Note 10).

F-12
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 and September 30, 1997, 4,750,000 and 2,250,000 (unaudited)
shares of common stock, respectively, 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.

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.

F-13
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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
Granted (unaudited)............................... 795,150 $ 5.50-15.50
Exercised (unaudited)............................. (19,833) $ 0.067-2.00
Canceled (unaudited).............................. (58,199) $ 0.067-7.00
--------- -------------
Balance at September 30, 1997 (unaudited).......... 2,330,028 $ 0.033-15.50
========= =============
</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. At
September 30, 1997, 616,520 options (unaudited) were fully vested and
exercisable at prices ranging from $0.033 (unaudited) to $7.00 (unaudited),
and 1,135,139 options (unaudited) were reserved for future grant.

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-14
<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-15
<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-16
<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, the year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997 was approximately $18,000, $86,000, $31,000 (unaudited) and
$244,000 (unaudited), respectively.

F-17
<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 (the "Claims"). 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 was
seeking damages in excess of $1,750,000 from all the defendants collectively.
Tredex was 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. On June 10, 1997, ONSALE and Tredex entered
into a settlement agreement (the "Settlement Agreement") pursuant to which
Tredex released the Claims. The Settlement Agreement did not have a material
adverse effect on ONSALE's results of operations or financial condition.

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 "March Claims"). The Company
alleged 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
believed 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 sought unspecified
compensatory damages as well as injunctive relief against both the Tredex
employee and Tredex. On June 10, 1997, ONSALE and Tredex entered into the
Settlement Agreement, pursuant to which the Company released the March Claims.
The Settlement Agreement did not have a material adverse effect on ONSALE's
results of operations or its financial condition.

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. In April 1997, upon the closing of the Company's initial public
offering, these shares converted automatically into 608,730 shares of Common
Stock.

Bank line of credit

On March 12, 1997, the Company entered into a loan and security agreement,
as amended on August 14, 1997, (the "Agreement") with a bank that provides for
borrowings of up to $4,000,000. Borrowings bear interest at an annual rate of
0.75% over the bank's prime rate. The Agreement expires on April 17, 1998.
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), and is prohibited from incurring a
monthly pretax loss of more than $400,000 or cumulative monthly pretax losses
on a rolling three-month basis of more than $750,000. The Company anticipates
that it will be in violation of the pretax loss condition in the fourth

F-18
<PAGE>

ONSALE, INC.

NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)

quarter of 1997 and would need to seek a waiver if it wishes to borrow under
the line of credit. The Company also 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.

Initial public offering

In April 1997, the Company completed its initial public offering and issued
2,500,000 shares of its common stock to the public at a price of $6.00 per
share. The Company received approximately $12.7 million of cash, net of the
underwriting discount and offering expenses. Upon the closing of the initial
public offering, all outstanding shares of the Company's then outstanding
Series A and B convertible preferred stock were automatically converted into
shares of common stock. On May 21, 1997, the Company's underwriters exercised
an option to purchase an additional 375,000 shares of common stock, to cover
over-allotments, at a price of $6.00 per share. The Company received
approximately $2.1 million of cash, net of the underwriting discount and
offering expenses.

Corporate relationships

During the third quarter of 1997, the Company entered into a series of
relationships requiring minimum payments of $1.3 million and, under certain
conditions, incremental fees based on the volume of traffic to its Web site.

Lease agreements

During the third quarter of 1997, the Company entered into a series of
agreements to lease office space for its corporate headquarters. The
agreements are noncancellable operating leases that commence at various times
from August 1997 through November 1997 and expire at various times from July
1998 to November 2002. The future minimum lease payments under these leases
are $184,000 in 1997, $791,000 in 1998, $621,000 in 1999, $329,000 in 2000,
$329,000 in 2001 and $315,000 in 2002.

F-19
<PAGE>

GRAPHIC: ONSALE LOGO
<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, the Selling Stockholders 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.

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TABLE OF CONTENTS

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<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 5
The Company............................................................... 15
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Price Range of Common Stock............................................... 15
Capitalization............................................................ 16
Selected Financial Data................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 26
Management................................................................ 39
Certain Transactions...................................................... 46
Principal and Selling Stockholders........................................ 47
Description of Capital Stock.............................................. 49
Shares Eligible for Future Sale........................................... 51
Underwriting.............................................................. 53
Legal Matters............................................................. 54
Experts................................................................... 54
Available Information..................................................... 55
Additional Information.................................................... 55
Index to Financial Statements............................................. F-1
</TABLE>

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2,300,000 SHARES

[LOGO OF ONSALE(TM)]

ONSALE, INC.

COMMON STOCK

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

PROSPECTUS

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

NATIONSBANC MONTGOMERY SECURITIES, INC.

BT ALEX. BROWN

BANCAMERICA
ROBERTSON STEPHENS

HAMBRECHT & QUIST

October 23, 1997

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