<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                           ________________________

                                   FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ________.

                        COMMISSION FILE NUMBER: 0-29184

                                 ONSALE, INC.
            (Exact name of Registrant as specified in its charter)

          DELAWARE                                    77-0408319
(State or other jurisdiction                       (I.R.S. Employer
of incorporation or organization)                 Identification No.)


                          1350 WILLOW ROAD, SUITE 202
                         MENLO PARK, CALIFORNIA 94025
                   (Address of principal executive offices)

      Registrant's telephone number, including area code: (650) 470-2400

          Securities registered pursuant to Section 12(b) of the Act:
                                     NONE

          Securities registered pursuant to Section 12(g) of the Act:
                   COMMON STOCK, PAR VALUE $0.001 PER SHARE

          Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.         Yes      X      No
                                                          ---            ---

          Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

          The aggregate market value of the voting and nonvoting common equity
held by non-affiliates of the Registrant, as of the close of business on
February 26, 1998, was approximately $193,424,656.

          As of February 26, 1998, Registrant had outstanding 18,703,804 shares
of Common Stock, $0.001 par value.

                      DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Company's 1997 annual report to stockholders to be
furnished to the Securities and Exchange Commission pursuant to Rule 14a-3(b)
are incorporated by reference in Part II of this Annual Report on Form 10-K
(this "Report").  Portions of the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission relative to the Company's 1998
annual meeting of stockholders are incorporated by reference in Part III of this
Report.  With the exception of those portions that are specifically incorporated
by reference in this Report, such annual report to stockholders and proxy
statement shall not be deemed to be filed as part of this Report or incorporated
herein by reference.

                                       1
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                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
                                    PART I
<S>            <C>                                            <C>
Item 1.        Business.....................................     3
Item 2.        Properties...................................    22
Item 3.        Legal Proceedings............................    22
Item 4.        Submission of Matters to a Vote of Security
               Holders......................................    22

                                    PART II

Item 5.        Market for Registrant's Common Equity
               and Related Stockholder Matters..............    23
Item 6.        Selected Financial Data......................    23
Item 7.        Management's Discussion and Analysis of
               Financial Condition and Results
               of Operations................................    24
Item 7A.       Quantitative and Qualitative Disclosures
               About Market Risk............................    24
Item 8.        Financial Statements and Supplementary Data..    24
Item 9.        Changes in and Disagreements With
               Accountants on Accounting and Financial
               Disclosure...................................    24

                                   PART III

Item 10.       Directors and Executive Officers of the
               Registrant...................................    25
Item 11.       Executive Compensation.......................    25
Item 12.       Security Ownership of Certain Beneficial
               Owners and Management........................    25
Item 13.       Certain Relationships and Related
               Transactions.................................    25

                                    PART IV

Item 14.       Exhibits, Financial Statement Schedules and
               Reports on Form 8-K..........................    26
Signatures..................................................    29
</TABLE>
                              ___________________

          ONSALE was incorporated in California in July 1994 and reincorporated
in Delaware in March 1997.  As used in this Report, 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 Report.  The
Company's principal executive offices are located at 1350 Willow Road, Suite
202, Menlo Park, California 94025.  The Company's telephone number is (650) 470-
2400.

                              ___________________

          ONSALE(R), the ONSALE tag logo and Yankee Auction(R) are registered
trademarks, and Auction Supersite/TM/, Dutch Auction/TM/, Put your money where
your mouse is/TM/, Steals and Deals/TM/ and The ONSALE Exchange/TM/ are
trademarks of the Company. This Report also includes trade names and trademarks
of other companies.

                                       2
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                                    PART I
ITEM 1.  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,
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.

INDUSTRY BACKGROUND

     Electronic Commerce on the Internet

          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.

     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 is 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.  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 that 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

                                       3
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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 has sold approximately $148 million of merchandise to more than
251,000 customer accounts from its first auction in May 1995 through December
31, 1997. To date, the Company has auctioned over 1.4 million merchandise
units, of which over 329,000 were auctioned in the fourth quarter of 1997.
Over 507,000 visitors to the Company's Web site have registered as bidders
with the Company, with over 97,000 registering in the fourth quarter of 1997
alone.

          ONSALE's Auction Supersites provide 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 Supersites
organize items into targeted merchandise stores ("Supersites"), which are
further categorized by product type. ONSALE presently operates a Computer
Products Supersite, Consumer Electronics Supersite and a Sports & Fitness
Supersite on which it continually posts merchandise descriptions and images.  In
addition, ONSALE operates a self-service "person-to-person" Supersite--The
ONSALE Exchange.  ONSALE operates auctions every day and generally offers over
900 different merchandise items at any given time. The Company sells quantities
from one to several hundred of each item, generally ranging in price from $25 to
$3,000 on which 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
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 through the auction
closing, 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 opportunity to obtain exceptional deals every time they visit the
          site. This compelling sales format has led to repeat customers who bid
          on average 7.2 times, and purchased on average 2.6 times, during the
          quarter ended December 31, 1997.

                                       4
<PAGE>

       .  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 frequently 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 on 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
          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 sells 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 are 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:

                                       5
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     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. The Company intends
to continue to build relationships with leading online content providers and
commerce companies to drive traffic to its Web site, 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 sports and fitness equipment, vacation packages
and specialty foods. The Company actively test markets new types of merchandise
and has successfully auctioned items as diverse as new automobiles and trucks,
high-end computer servers and autographed sports memorabilia.

     Provide Compelling Retailing Experience for Customers

          The Company believes auction buyers are attracted by the potential
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
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 Web site. To date, advertising revenue has not
been significant. In addition, the Company intends to expand its sales to
customers outside its current markets of the United States, Canada and Mexico.

     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

                                       6
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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, priority is given to bids for larger
quantities and bids with earlier initial bid times. This allows customers to
employ a variety of strategies that make bidding interesting. "Open reserve"
auctions are a variation on Yankee auctions, where instead of a "minimum bid,"
the seller posts a "reserve bid price." The buyers can place bids for any dollar
amount above or below the posted reserve bid price. However, the seller is not
obligated to accept bids and complete transactions below the posted reserve bid
price. The seller may choose to lower the reserve bid price to meet a buyer's
bid before the auction closes.

          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 via the Company's Web site to
increase the bid. In addition, customers can monitor their bid status on
ONSALE's Web site or via "Bidwatch," a free downloadable software module that
displays current auction status in real time.  Once an auction has closed, the
Company's auction software informs the winning bidders by email and creates an
order. For Principal Sales transactions, the customer's credit card is then
charged and the merchandise is shipped either by the Company or its vendor. For
Agent Sales and The ONSALE Exchange transactions, the vendor/seller is
responsible for collection of bid proceeds and shipment of merchandise. See
"Vendor Relationships."

MERCHANDISE

          The Company offers more than 900 different merchandise items in each
daily auction. This merchandise consists primarily of computers, peripherals,
consumer electronics, housewares, sports and fitness equipment, and vacation
packages.  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.

          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.

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

     Sports & Fitness Equipment. The Company sells golf clubs, tennis
     racquets, in-line skates and a variety of other equipment and
     memorabilia.

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

                                       7
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          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 1997, approximately 30% of the
Company's gross merchandise sales were derived from merchandise acquired from
the five most significant vendors in that year, 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 reimbursement from its vendors or
manufacturers. If the Company is unable to develop and maintain satisfactory
relationships with vendors on acceptable commercial terms, if the Company is
unable to obtain sufficient quantities of merchandise, if the quality of
service provided by such vendors falls below a satisfactory standard or if the
Company's level of returns exceeds its expectations, the Company's business,
results of operations and financial condition will be materially adversely
affected.

VENDOR RELATIONSHIPS

          The Company obtains merchandise directly from computer, electronics
and sporting goods manufacturers and  indirectly through other vendors.  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 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 have better control over its merchandise
          supply and achieve higher gross margins over time. 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 approximately 50%
          of the Company's gross merchandise sales in the fourth quarter of
          1997.

          For sales on consignment, the Company takes title to the merchandise
          upon completion of an auction, 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 approximately 28% of the Company's gross merchandise
          sales in the fourth quarter of 1997. See "Risk Factors--Risks of a
          Principal Sales Model."

        . Agent Sales and The ONSALE Exchange. 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

                                       8
<PAGE>

          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. Agent Sales and The
          ONSALE Exchange accounted for approximately 22% of the Company's gross
          merchandise sales in the fourth quarter of 1997. See "Risk Factors--
          Reliance on Merchandise Vendors."

          The ONSALE Exchange allows individuals and small businesses to sell
          merchandise over the Web using the Company's auction management
          system. Beginning in November 1997, ONSALE permitted such sellers to
          list items for auction in specific merchandise categories such as:
          books, music and movies; memorabilia; toys; coins, stamps and
          currency; computers; software; home electronics; travel and tickets;
          household items; watches and jewelry; collectibles; and trading cards.
          The seller enters a description of each item and, if he or she
          chooses, posts a photo image. The seller also establishes the minimum
          bid level for each item. Bidders not already registered with the
          Company need to register and then can place bids on items on The
          ONSALE Exchange using their ONSALE customer number. If and when
          bidders are outbid, they receive an email notification and can
          increase their bids through the Company's Web site. At the end of the
          auction, the highest bidder(s) and the seller are both 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 charges the seller a commission of up to 4%
          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--Risks
          of Launching The ONSALE Exchange."

SALES AND MARKETING

          The Company sells to consumers, businesses and resellers.  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.  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 engages an
ongoing public relations campaign.  This campaign has resulted in the Company's
being featured in numerous television shows and newspaper and magazine articles.

          Links from Other Web Sites. Approximately 1,000 Web sites have links
to ONSALE's Web site.  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.

                                       9
<PAGE>

MERCHANDISE DISTRIBUTION

          The Company has a relationship with Gage Marketing Group to provide
most of its fulfillment and logistics requirements.  The Company also rents
warehouse space in northern California to handle a portion of its inventory and
distribution needs, and 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 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 staff.  The Company employs a staff of 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 has
introduced a software system that allows 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."

TECHNOLOGY AND OPERATIONS

          The Company uses a combination of its own proprietary technology and
commercially available licensed 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, and send a variety of email messages to customers informing them
     that they have been outbid or have won merchandise.

          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 requesting to be removed from the mailing list.

                                       10
<PAGE>

          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.

          Engineering

          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 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 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 Internet service providers to provide connectivity to the Internet,
Internet traffic and data routing services and 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" 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 Cendant Corporation, (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., that may already operate competitive
auction sites and 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.
Ingram Micro Inc., the largest worldwide distributor of corporate technology
products and services, has recently introduced a wholesale auction site
available only to its registered resellers.  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

                                       11
<PAGE>

can maintain its competitive position against current and potential
competitors, especially those with greater financial, marketing, service,
support, technical and other resources than the Company.

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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

          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), the ONSALE
tag logo 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 is also 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.

          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

                                       12
<PAGE>

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 December 31, 1997, the Company employed 129 people. 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" and "Risk Factors--Dependence on Key
Personnel; Need For Additional Personnel."

                                 RISK FACTORS

          This Report (including without limitation the following Risk Factors)
contains forward-looking statements (within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934) regarding the Company and its business, financial condition, results of
operations and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates" and similar expressions or variations
of such words are intended to identify forward-looking statements, but are not
the exclusive means of identifying forward-looking statements in this Report.
Additionally, statements concerning future matters such as the development of
new services, technology enhancements, purchase of equipment, credit
arrangements, possible changes in legislation and other statements regarding
matters that are not historical are forward-looking statements.

          Although forward-looking statements in this Report reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company.  Consequently, forward-looking
statements are inherently subject to risks and uncertainties, and actual results
and outcomes may differ materially from results and outcomes discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences in results and outcomes include without limitation those discussed
below as well as those discussed elsewhere in this Report.  Readers are urged
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Report. The Company undertakes no obligation to
revise or update any forward-looking statements in order to reflect any event
or circumstance that may arise after the date of this Report. Readers are
urged to carefully review and consider the various disclosures made by the
Company in this Report, which attempts to advise interested parties of the
risks and factors that may affect the Company's business, financial condition,
results of operations and prospects.

LIMITED OPERATING HISTORY

          The Company was founded in July 1994 and began conducting auctions on
the Internet in May 1995. Accordingly, there is a 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

                                       13
<PAGE>

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 half of
1999. There can be no assurance that increases in such operating expenses will
be offset by increased revenues; accordingly, the Company's business, results of
operations and financial condition could be materially adversely affected.
Further, in view of the rapidly evolving nature of the Company's business and
its 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 "Item 7. -
Management's Discussion and Analysis of Financial Condition and Results of
Operations."

FLUCTUATIONS 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) the Company's ability to manage customer
returns and shrinkage resulting from theft, loss, and misrecording of
inventory, (iv) product obsolescence and pricing erosion, (v) consumer
confidence in encrypted transactions in the Internet environment, (vi) the
timing, cost and availability of advertising on other entities' Web sites,
(vii) the amount and timing of costs relating to expansion of the Company's
operations, (viii) the announcement or introduction of new types of
merchandise, service offerings or customer services by the Company or its
competitors, (ix) technical difficulties with respect to consumer use of the
auction format on the Company's Web site, (x) delays in revenue recognition at
the end of a fiscal period as a result of shipping or logistical problems,
(xi) delays in shipments as a result of strikes or other problems with the
Company's delivery service providers, the loss of the Company's credit card
processor, or the loss of the Company's Internet service providers, 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. For example, like other Internet
retailers, the Company experiences lower revenues in the month of August. Due
to all of the foregoing factors, in some future quarter the Company's
operating results may not meet 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 half of 1999. See "--Limited Operating History" and "Item 7.-
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 none provides for guaranteed renewal. The risks of 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.

                                       14
<PAGE>

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 1997, approximately
30% of the Company's gross merchandise sales were derived from merchandise
acquired from the five most significant vendors for that year, 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 to 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 ship merchandise to customers.
The Company has limited control over the shipping procedures of its vendors, and
shipments by these vendors have often been subject to delays. Although most
merchandise sold by the Company carries a warranty supplied either by the
manufacturer or the vendor and the Company is not obligated to accept
merchandise returns, the Company in fact has accepted returns from customers for
which the Company did not receive reimbursements from its vendors or
manufacturers. If the Company is unable to develop and maintain satisfactory
relationships with vendors on acceptable commercial terms, if the Company is
unable to obtain sufficient quantities of merchandise, if the quality of service
provided by such vendors falls below a satisfactory standard or if the Company's
level of returns exceeds its expectations, the Company's business, results of
operations and financial condition will be materially adversely affected. See
"Business--Merchandise," "Business--Vendor Relationships" and "Business--
Customer Support and Service."

RELIANCE ON OTHER THIRD PARTIES

          In addition to its merchandise vendors, the Company's operations
depend on a number of third parties.  The Company has limited control over these
third parties and no long-term relationships with any of them.  The Company does
not own a gateway onto the Internet, but instead relies on an Internet service
provider to connect the Company's Web site to the Internet.  From time to time,
the Company has experienced temporary interruptions in its Web site connection
and also its telecommunications access. Continuous or prolonged interruptions in
the Company's Web site connection or in its telecommunications access would have
a material adverse effect on the Company's business, results of operations and
financial condition. The Company's internally-developed auction software depends
on operating system, database and server software that was developed and
produced by and licensed from third parties. The Company has from time to time
discovered errors and defects in the software from these third parties and, in
part, relies, on these third parties to correct these errors and defects in a
timely manner. Approximately 85% of the sales for which the Company is
responsible for shipment is fulfilled by its contract warehouse, 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, through its relationship with First Data
Corporation, 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."


MANAGEMENT OF GROWTH

          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 129 employees at December 31, 1997, and
its sales increased from approximately 3,300 units per week at the beginning of
the third quarter of 1996 to over 24,000 units per week at the end of the fourth
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, including a Chief Financial Officer.

                                       15
<PAGE>

There can be no assurance that the Company will be able to identify appropriate
candidates for its management needs, successfully recruit such persons, or
retain the agencies of such persons. 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
intends to replace its existing finance and accounting system in the second
quarter of 1998. 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
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" above
and "Item 10. - Directors and Executive Officers of the Registrant."

RISKS OF A PRINCIPAL SALES 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 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

                                       16
<PAGE>

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 Cendant Corporation, (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. Some or all of these
competitors may already operate competitive auction sites and 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. Ingram Micro Inc., the largest worldwide
distributor of computer technology products and services, has recently
introduced a wholesale auction site available only to its registered resellers.
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."


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."

                                       17
<PAGE>

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

          The market for the Company's services has only recently begun to
develop and is rapidly changing. As is typical for a new and rapidly evolving
industry, demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty and there
exist few proven services and products. Moreover, since the market for the
Company's Internet auctions is new and evolving, it is difficult to predict the
size of this market or its future growth rate, if any. The success of the
Company's Internet auctions will depend upon the adoption of the Internet as a
medium for commerce by a broad base of consumers and vendors. There can be no
assurance that widespread acceptance of Internet commerce in general, or of the
Company's Internet auctions in particular, will occur. The Company has
historically relied on consumers and vendors who have historically used
traditional means of commerce to purchase and sell merchandise. For the Company
to be successful, these consumers and vendors must accept and utilize novel ways
of conducting business and exchanging information. In addition, vendors must be
persuaded to adopt new selling models. Moreover, critical issues concerning the
commercial use of the Internet, such as ease of access, security, reliability,
cost and quality of service, remain unresolved and may affect the growth of
Internet use or the attractiveness of conducting commerce online. There can be
no assurance that there will be broad acceptance of the Internet as an effective
medium for commerce by consumers and vendors or that the market for the
Company's Internet auctions will develop successfully or achieve widespread
acceptance. If the market for Internet-based online auctions fails to develop,
develops more slowly than expected or becomes saturated with competitors, or if
the Company's Internet auctions do not achieve market acceptance, the Company's
business, results of operations and financial condition will be materially
adversely affected. See "Item 7. - 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 would 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

                                       18
<PAGE>

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. Any such new
legislation or regulation, or the application of laws or regulations from
jurisdictions whose laws do not currently apply to the Company's business, could
have a material adverse effect on the Company's business, results of operations
and financial condition.

DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL

          The Company's future performance depends to a significant degree upon
the continued contributions of members of the Company's senior management and
other key personnel, particularly its 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 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 "Item 10. - Directors and Executive Officers
of the Registrant."

RISKS OF LAUNCHING THE ONSALE EXCHANGE

         In November 1997, the Company launched The ONSALE Exchange, a new
Auction Supersite that allows individuals and small businesses 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 expenditures to purchase advertising for this
new auction medium. The Company charges sellers a small commission for providing
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 Sales 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--Agent Sales and The ONSALE Exchange."

                                       19
<PAGE>

RISK OF SYSTEM FAILURE; SINGLE SITE

          The Company's success is largely dependent upon its communications
hardware and computer hardware, substantially all of which is 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 fully redundant systems and has not yet completed implementing 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 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 "Item 2. - Properties."

RISK OF FACILITIES MOVE

          Over the course of the next few months, the Company anticipates moving
its accounting, engineering and Web site operations from their existing space in
four buildings in Mountain View, California, to additional space in the
Company's corporate office space 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

          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), the ONSALE
tag logo and Yankee Auction(R) trademarks in the United States and claims
trademark rights in, and has

                                       20
<PAGE>

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.

           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.

CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS

          The Company's officers, directors and greater than 5% stockholders
(and their affiliates), in the aggregate, beneficially own approximately 74% of
the Company's outstanding Common Stock. 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 "Item 10. -Directors and Executive
Officers of the Registrant" and "Item 12. - Security Ownership of Certain
Beneficial Owners and Management."

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

                                       21
<PAGE>

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.

ITEM 2.  PROPERTIES.

         The Company currently is in the process of relocating its accounting,
engineering and Web site operations facilities from an office complex in
Mountain View, California, comprised of four separate buildings totaling
approximately 14,950 square feet, under leases that expire in October 1997
through July 1999, to a new principal building in Menlo Park, California,
consisting of approximately 46,875 square feet, under leases that expire in July
1998 to November 2002. The Company anticipates that the relocation will be
completed by May 31, 1998, at which time all space in the Mountain View office
complex will have been subleased or the lease concerning such space will have
been terminated. 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 continues to
rely on a contract warehouse for the significant majority of its fulfillment and
logistics requirements.

ITEM 3.  LEGAL PROCEEDINGS.

         Not applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         Not applicable.

                                       22
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

PRICE RANGE AND NUMBER OF HOLDERS OF RECORD OF COMMON STOCK

         The information regarding market prices and numbers of holders of
record of the Company's Common Stock, which is set forth on page 29 of the
Company's 1997 annual report to stockholders furnished to the Securities and
Exchange Commission pursuant to Rule 14a-3(b) (the "Company's 1997 Annual Report
to Stockholders"), is incorporated herein by reference and is filed herewith as
a portion of Exhibit 13.01 hereto.

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.

USE OF PROCEEDS

         On April 17, 1997, the Company had an initial public offering (the
"Offering") of its Common Stock, $0.001 par value. The Company registered
3,220,000 shares of Common Stock on a Form S-1 Registration Statement
(Registration No. 333-18489), which was declared effective by the Securities and
Exchange Commission on April 17, 1997. The Company ultimately sold 2,875,000
shares of Common Stock (including 375,000 shares pursuant to the exercise of the
over-allotment option for the Offering). The aggregate price to the public was
$17,250,000; the underwriting discount aggregated $1,207,500; and the proceeds
to the Company before deducting offering expenses aggregated $16,042,500. No
shares were sold by stockholders of the Company.

         From April 17, 1997 to December 31, 1997, the aggregate amount of
expenses incurred for the Company's account in connection with the Offering
(other than the underwriting discount set forth above) was $1.2 million,
including $403,000 paid to the underwriters' counsel.  None of the expenses
was a direct or indirect payment to directors, officers or their associates,
persons owning 10% or more of the Common Stock of the Company or affiliates of
the Company; all expenses were direct or indirect payments to independent third
parties.  The net offering proceeds to the Company after deducting both the
underwriting discount and the aggregate offering expenses were $14.8 million.

         From April 17, 1997 to December 31, 1997, the amount of the net
proceeds applied to various categories of expenditures were as follows (in
thousands):

<TABLE>
<S>                                                                 <C>
Purchase of property and equipment................................. $1,171
Working capital....................................................  5,327
---------------
</TABLE>


          All expenditures were direct or indirect payments to independent
third parties and none of the payments was a direct or indirect payment to
directors, officers or their associates, persons owning 10% or more of the
Common Stock of the Company, or affiliates of the Company, except payment of
salaries to employees owning 10% or more of the Company's Common Stock.

ITEM 6.  SELECTED FINANCIAL DATA.

         The information required by this Item, which is set forth under the
caption "Selected Financial Data" on page 8 of the Company's Annual Report to
Stockholders, is incorporated herein by reference and is filed herewith as a
portion of Exhibit 13.01 hereto.

                                       23
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

         The information required by this Item, which is set forth in the
section titled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 9-17 of the Company's 1997 Annual Report to
Stockholders, is incorporated herein by reference and is filed herewith as a
portion of Exhibit 13.01 hereto.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         Not applicable.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         The information required by this Item, which is set forth on pages
18-28 of the Company's 1997 Annual Report to Stockholders, is incorporated
herein by reference and is filed herewith as a portion of Exhibit 13.01 hereto.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

         Not applicable.

                                       24
<PAGE>

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information required by this Item, which is set forth in the
sections titled "Nominees" under "Proposal No. 1 - Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the definitive proxy statement to be filed with the Securities
and Exchange Commission relative to the Company's annual meeting of stockholders
to be held May 18, 1998 (the "Definitive Proxy Statement") is incorporated
herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

         The information required by this Item, which is set forth in the
sections titled "Director Compensation" under "Proposal No. 1 - Election of
Directors" and "Executive Compensation" and "Employment Agreements" in the
Definitive Proxy Statement, is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          The information required by this Item, which is set forth in the
section titled "Security Ownership of Certain Beneficial Owners and Management"
in the Definitive Proxy Statement, is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

          The information required by this Item, which is set forth in the
section titled "Certain Relationships and Related Transactions" in the
Definitive Proxy Statement, is incorporated herein by reference.



                                      25
<PAGE>

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

          (a) The following financial statements and financial statement
schedule are filed or incorporated by reference as part of this Report.

              (1)  Financial Statements.

                   The following financial statements and report thereon are
     incorporated by reference to the Company's 1997 Annual Report to
     Stockholders.

                   Report of Independent Accountants
                   Balance Sheets as of December 31, 1997 and 1996
                   Statements of Operations for the Years Ended December 31,
                       1997 and 1996 and for the Period from Inception (July
                       1994) to December 31, 1995
                   Statements of Cash Flows for the Years Ended December 31,
                       1997 and 1996 and for the Period from Inception (July
                       1994) to December 31, 1995
                   Statements of Stockholders' Equity (Deficit) for the Years
                       Ended December 31, 1997 and 1996 and for the Period from
                       Inception (July 1994) to December 31, 1995
                   Notes to Financial Statements

              (2)  Financial Statement Schedule.

                   Schedule    Description                             Page
                   --------    -----------                             ----
                      II       Valuation and Qualifying Accounts       S-1


                      --       Report of Independent Accountants
                               on Financial Statement Schedule         S-2

                   All other financial statement schedules are omitted because
         the information called for is not required or is shown either in the
         financial statements or the notes thereto.


                                      26
<PAGE>

(3)    Exhibits.

<TABLE>
<CAPTION>

EXHIBIT NUMBER          EXHIBIT TITLE
--------------          -------------
<S>             <C>
 2.01           Form of Agreement and Plan of Reorganization between the
                Registrant and ONSALE.*

 3.01           Registrant's Certificate of Incorporation.*

 3.02           Registrant's Bylaws.*

 4.01           Investors Rights Agreement, dated as of September 12, 1996.*

 4.02           Registrant's Certificate of Incorporation (see Exhibit 3.01).*

 4.03           Registrant's Bylaws (See Exhibit 3.02).*

 9.01           Voting Trust Agreement, dated as of July 21, 1994, by and among
                Software Partners, Inc., Alan Fisher and Razi Mohiuddin.*

10.01           Registrant's 1995 Equity Incentive Plan and related
                documents.*(1)

10.02           Registrant's 1996 Directors Stock Option Plan and related
                documents.*(1)

10.03           Registrant's 1996 Employee Stock Purchase Plan and related
                documents.*(1)

10.04           Form of Indemnity Agreement entered into by Registrant with each
                of its directors and executive officers.*(1)

10.05           Offer letter to John F. Sauerland, dated as of June 28,
                1996.*(1)

10.06           Offer letter to Martha Greer, dated December 18, 1996.*(1)

10.07           Lease Agreement between The Landmark and Registrant, dated as of
                May 20, 1996.*

10.08           Sublease Agreement between RogueWave, Inc. and Registrant, dated
                as of October 19, 1996.*

10.09           Sublease Agreement between Software Partners, Inc. and the
                Registrant, dated as of November 18, 1996.*

10.10           Service Agreement between Gage Marketing Group and the
                Registrant, dated as of December 4, 1996.*/**

10.11           Hewlett-Packard and ONSALE Agreement between Hewlett-Packard
                Company and the Registrant, dated as of July 31, 1995.*/**

10.12           Credit Card Processing Services Agreement between First USA
                Merchant Services, Inc. and the Registrant, dated as of June 16,
                1996.*

10.13           Merchant Card Services Agreement between Wells Fargo Bank and
                the Registrant, dated as of March 6, 1996.*

10.14           Founder's Restricted Stock Purchase Agreement between S. Jerrold
                Kaplan and the Registrant, dated as of July 21, 1994.*(1)

10.15           Founder's Restricted Stock Purchase Agreement between Software
                Partners, Inc. and the Registrant, dated as of July 21, 1994*(1)

10.16           Assignment Agreement between Software Partners, Inc. and the
                Registrant, dated as of July 21, 1994.*
</TABLE>

                                       27

<PAGE>

<TABLE>
<CAPTION>

<C>             <S>
10.17           Offer letter to Merle McIntosh, dated February 25, 1997.*(1)

10.18           Restricted Stock Purchase Agreement between the Company and
                Peter Harris, dated as of December 6, 1996 and related
                documents.*(1)

10.19           Loan and Security Agreement between the Registrant and Silicon
                Valley Bank and related warrant to purchase Common Stock dated
                March 12, 1997.*

10.20           Employment Agreement between the Registrant and Dennis Shepard
                dated April 28, 1997.***(1)

10.21           Lease Agreement between Lincoln Menlo VI and Registrant, dated
                August 9, 1997.****

10.22           Sublease Agreement between Nuance Communications, Inc. and
                Registrant, dated as of August 1997.****

10.23           Loan Agreement and related agreements between Dennis Shepard and
                the Registrant, dated February 19, 1998.(1)

13.01           Pages 8, 9-17, 18-28 and 29 of Registrant's 1997 Annual
                Report to Stockholders.

23.01           Consent of Price Waterhouse LLP, independent accountants.

24.01           Power of Attorney (see "Signatures" on Page 29 of this Report).

27.01           Financial Data Schedule for year ended December 31, 1997.

27.02           Restated Financial Data Schedule for the quarters ended March
                31, 1997, June 30, 1997 and September 30, 1997, and for the year
                ended December 31, 1996.
--------------
</TABLE>
*       Incorporated by reference to the exhibit with the same number to the
        Registrant's Form S-1 Registration Statement (Registration No. 333-
        18489) filed on December 20, 1996.
**      Confidential treatment has been granted with respect to certain portions
        of this Agreement.
***     Incorporated by reference to Exhibit 10.20 to the Registrant's Form 10-Q
        for the quarter ended June 30, 1997.
****    Incorporated by reference to the exhibit with the same number to the
        Registrant's Form S-1 Registration Statement (Registration No. 333-
        37171) filed on October 3, 1997.
(1)     Indicates a management contract or compensatory plan or arrangement.


        (b)  Reports on Form 8-K.

              A report on Form 8-K was filed by the Company on October 22, 1997.
Under Item 5 of the Form, the Company identified the press release of the
Company on the previous day announcing its results of operations for the three
and nine months ended September 30, 1997, and, under Item 7 of the Form, the
Company identified that the financial statements attached to that press release
were filed as Exhibit 99.1 to the Form.

                                       28

<PAGE>

                                  SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.

                                                ONSALE, INC.

Date:  March 31, 1998                           By: /s/ S. Jerrold Kaplan
                                                   -----------------------------
                                                        S. Jerrold Kaplan
                                                        President and Chief
                                                        Executive Officer


                               POWER OF ATTORNEY

        Each person whose signature appears below constitutes and appoints S.
Jerrold Kaplan and Alan S. Fisher, and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution, for him or her,
and in his or her name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he or she might do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
his, her or their substitute or substitutes, may lawfully do or cause to be done
by virtue thereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, this Report has been signed below by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>

           NAME                             TITLE                      DATE
---------------------------  -----------------------------------  --------------
<S>                          <C>                                  <C>
PRINCIPAL EXECUTIVE OFFICER:

/s/ S. Jerrold Kaplan        President and Chief Executive        March 31, 1998
---------------------------  Officer
S. Jerrold Kaplan            and a Director

PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER:

/s/ Leslie S. Benson         Vice President, Controller           March 31, 1998
---------------------------  and Acting Chief Financial
Leslie S. Benson             Officer

ADDITIONAL DIRECTORS:

/s/ Alan S. Fisher           Director                             March 31, 1998
---------------------------
Alan S. Fisher

/s/ Peter L. Harris          Director                             March 31, 1998
---------------------------
Peter L. Harris

/s/ Peter H. Jackson         Director                             March 31, 1998
---------------------------
Peter H. Jackson

/s/ Kenneth J. Orton         Director                             March 31, 1998
---------------------------
Kenneth J. Orton
</TABLE>


                                      29
<PAGE>

                                                                     SCHEDULE II

                                 ONSALE, INC.

                      VALUATION AND QUALIFYING ACCOUNTS
                            (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               ADDITIONS
                                                               ----------
                                                BALANCE AT     CHARGED TO                    BALANCE
                                                BEGINNING      COSTS AND                    AT END OF
                                                OF PERIOD       EXPENSES     DEDUCTIONS      PERIOD
                                                ----------     ----------    ----------     ---------
<S>                                             <C>            <C>           <C>            <C>

Year Ended December 31, 1997
  Allowance for doubtful accounts..............    $66            $154          $ 66           $154
                                                   ===            ====          ====           ====
Year Ended December 31, 1996
  Allowance for doubtful accounts..............    $16            $130          $ 80           $ 66
                                                   ===            ====          ====           ====
Period from Inception (July 1994) to
  December 31, 1995
  Allowance for doubtful accounts..............    $--            $ 16          $ --           $ 16
                                                   ===            ====          ====           ====
</TABLE>

                                      S-1

<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS
                       ON FINANCIAL STATEMENT SCHEDULE


To the Board of Directors of ONSALE, Inc.

Our audits of the financial statements referred to in our report
dated February 12, 1998 appearing on page 28 of the 1997 Annual Report to
Stockholders of ONSALE, Inc. (which report and financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the Financial Statement Schedule listed in Item 14(a)(2) of this Form
10-K. In our opinion, this Financial Statement Schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related financial statements.


/s/ Price Waterhouse LLP


San Jose, California
February 12, 1998




                                      S-2

<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT NUMBER          EXHIBIT TITLE
--------------          -------------
<C>             <S>
10.23           Loan Agreement and related agreements between Dennis Shepard
                and the Registrant, dated February 19, 1998.

13.01           Pages 8, 9-17, 18-28 and 29 of Registrant's 1997 Annual
                Report to Stockholders.

23.01           Consent of Price Waterhouse LLP, independent accountants.

24.01           Power of Attorney (see "Signatures" on Page 29 of this Report).

27.01           Financial Data Schedule.

27.02           Restated Financial Data Schedule for the quarters ended March
                31, 1997, June 30, 1997 and September 30, 1997, and for the year
                ended December 31, 1996.
</TABLE>
---------------