<PAGE>
 
================================================================================

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q


/x/      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934



         FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998


                                       or


/_/      Transition report pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934



         COMMISSION FILE NUMBER 0-29244



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



         DELAWARE                                            77-0408319
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification Number)



                           1350 WILLOW ROAD, STE. 100
                          MENLO PARK, CALIFORNIA 94025
                    (Address of principal executive offices)
                             _____________________

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



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



As of July 31, 1998, there were 18,942,779 shares of the Registrant's Common
Stock outstanding.

================================================================================

                                       1
<PAGE>
 
                                     INDEX
<TABLE>
<CAPTION>

                                                              Page
                                                              Number
<S>             <C>                                           <C>
PART I  - FINANCIAL INFORMATION

ITEM 1:   FINANCIAL STATEMENTS

          Balance Sheets as of June 30, 1998
          and December 31, 1997 (Unaudited)                      3

          Statements of Operations for the Three and Six 
          Months Ended June 30, 1998 and 1997 (Unaudited)        4

          Statements of Cash Flows for the Six Months Ended
          June 30, 1998 and 1997 (Unaudited)                     5

          Notes to Financial Statements (Unaudited)              6

ITEM 2:   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                   10

ITEM 3:   Quantitative and Qualitative Disclosures About 
          Market Risk                                           19


PART II  -  OTHER INFORMATION

ITEM 1:   Legal Proceedings                                      20
 
ITEM 2:   Changes in Securities and Use of Proceeds              20
 
ITEM 3:   Defaults Upon Senior Securities                        20
 
ITEM 4:   Submission of Matters to a Vote of Security Holders    21

ITEM 5:   Other Information                                      22

ITEM 6:   Exhibits and Reports on Form 8-K                       22

</TABLE>

                                       2
<PAGE>
 
Part I  - FINANCIAL INFORMATION
ITEM 1:   FINANCIAL STATEMENTS


                                 ONSALE, INC.
                                 BALANCE SHEETS
                       (in thousands, except share data)
                                  (unaudited)



<TABLE>
<CAPTION>

                                                                                                June 30,              December 31,
                                                                                                  1998                    1997
ASSETS                                                                                     -----------------      ------------------

Current assets:
 <S>                                                                                          <C>                    <C>
 Cash and cash equivalents                                                                   $  34,840               $  56,566
 Short-term investments                                                                         17,149                       -
 Accounts receivable, net of allowances of $860 and $154, respectively                           2,705                   2,390
 Merchandise inventory                                                                           7,213                   5,632
 Prepaid expenses and other current assets                                                       1,406                     865
                                                                                             ---------               ---------
    Total current assets                                                                        63,313                  65,453

Property and equipment, net                                                                      3,416                   1,535
Other assets                                                                                       145                     155
     Total assets                                                                            ---------               ---------  
                                                                                             $  66,874               $  67,143
                                                                                             =========               =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                                                            $   7,441               $   2,408
 Accrued expenses                                                                                3,884                   1,963
 Deferred revenue                                                                                  761                     503
                                                                                             ---------               ---------
     Total current liabilities                                                                  12,086                   4,874

Stockholders' equity:
  Convertible preferred stock, $0.001 par value; 2,000,000 shares authorized;
    no shares designated, issued and outstanding                                                     -                       -
  Common stock, $0.001 par value; 30,000,000 shares authorized;
    18,866,721 and 18,642,015 shares issued and outstanding, respectively                           19                      19
    Additional paid-in capital                                                                  65,548                  64,801
    Accumulated deficit                                                                        (10,779)                 (2,551)
                                                                                             ---------               ---------
      Total stockholders' equity                                                                54,788                  62,269
                                                                                             ---------               ---------
      Total liabilities and stockholders' equity                                             $  66,874               $  67,143
                                                                                             =========               =========
</TABLE> 

      See notes to financial statements.

                                       3
<PAGE>
 
                                  ONSALE, INC.
                            STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (unaudited)


<TABLE> 
<CAPTION> 
                                                                                 
                                                                Three Months Ended              Six Months Ended
                                                                     June 30,                        June 30, 
                                                          -----------------------------    ---------------------------
 <S>                                                         <C>          <C>                 <C>          <C> 
                                                    
                                                              1998           1997               1998           1997
                                                              ----           ----               ----           ----
Revenue:                                                                                                         
  Merchandise                                              $  50,138      $  17,860          $  89,450      $  29,556
  Commission and other revenue                                   658            715              1,515          1,333
                                                           ---------      ---------          ---------      ---------
     Total revenue                                            50,796         18,575             90,965         30,889

Cost of revenue:
  Cost of goods sold                                          46,138          16,146             82,027         26,672
  Accounting reserves                                              -               -                789              -
                                                          ----------      ----------         ----------     ----------
     Total cost of revenue                                    46,138          16,146             82,816         26,672
                                                          ----------      ----------         ----------     ----------

Gross profit                                                   4,658           2,429              8,149          4,217
                                                          ----------      ----------         ----------     ----------

Operating expenses:
  Sales and marketing                                          4,802              948             8,776          1,338
  General and administrative                                   3,357            1,294             6,661          2,083
  Engineering                                                  1,252              589             2,383          1,150
                                                          ----------       ----------        ----------     ----------    
     Total operating expenses                                  9,411            2,831            17,820          4,571
                                                          ----------       ----------        ----------     ----------
  
Loss from operations                                          (4,753)            (402)           (9,671)          (354)

Interest and other income, net                                   716              148             1,443            180
                                                          ----------       ----------        ----------     ----------

Loss before income taxes                                      (4,037)            (254)           (8,228)          (174)

Income tax benefit                                                 -               28                 -              -
                                                          ----------       ----------        ----------     ----------

Net loss                                                   $  (4,037)     $     (226)         $  (8,228)    $     (174)
                                                           =========      ==========          =========     ==========

Net loss per share:
     Basic and Diluted                                     $   (0.21)      $   (0.01)         $   (0.44)     $   (0.01)
                                                           =========      ==========          =========     ==========

Shares used in net loss per share calculations:
     Basic and Diluted                                        18,808          16,638             18,753         14,421
                                                           =========      ==========          =========     ==========


     See notes to financial statements.
</TABLE> 
 

                                       4
<PAGE>
 
                                  ONSALE, INC.
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (unaudited)

 
<TABLE> 
<CAPTION> 
                                                                      Six Months Ended
                                                                          June 30,
                                                           -------------------------------------
                                                                1998                   1997
                                                           --------------          -------------
Cash flows from operating activities:
<S>                                                        <C>                      <C> 
                  
   Net loss                                                     $(8,228)                $  (174)
   Adjustments to reconcile net loss to net cash used
   in operating activities:
     Depreciation and amortization                                  728                     122
     Changes in assets and liabilities:
       Accounts receivable, net                                    (314)                   (218)
       Merchandise inventory                                     (1,581)                 (5,188)
       Prepaid expenses and other assets                           (531)                    255
       Accounts payable                                           5,033                  (1,735)
       Accrued expenses                                           1,923                     424
       Deferred revenue                                             258                     413
                                                                --------                -------
       Net cash used in operating activities                     (2,712)                (6,101)
                                                                --------                -------


Cash flows from investing activities:
   Purchase of short-term, available-for-sale investments        (17,149)                    -
   Purchase of property and equipment                             (2,609)                  (768)
                                                                --------                -------
       Net cash used in investing activities                     (19,758)                  (768)
                                                                            

Cash flows from financing activities:
                                                                                                     
  Payment of promissory note issued for common stock                  -                     100
  Proceeds from issuance of common stock                             744                 16,709
                                                                --------                -------
       Net cash provided by financing activities                     744                 16,809                  
                                                                --------                -------
                                                                      
Net increase (decrease) in cash and cash equivalents             (21,726)                 9,940
                                                                                           
Cash and cash equivalents at beginning of period                  56,566                  2,729
                                                                --------                -------
                                                                                           
Cash and cash equivalents at end of period                      $ 34,840                $12,669
                                                                ========                =======
</TABLE> 


See notes to financial statements.                                              

                                       5
<PAGE>
 
                                  ONSALE, Inc.
                         Notes to Financial Statements
                                 June 30, 1998
                                  (unaudited)



1.   BASIS OF PRESENTATION


     The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles and, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) considered necessary to fairly present ONSALE, Inc.'s ("ONSALE" or
the "Company") financial position, results of operations and cash flows for the
periods presented.  These financial statements should be read in conjunction
with the Company's audited financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
The results of operations for the three and six month periods ended June 30,
1998 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the year ending December 31, 1998.  Certain prior
years' balances have been reclassified to conform to the current year's
presentation.

2.   REVENUE RECOGNITION

     The Company obtains merchandise from vendors in either of two primary
arrangements: the Principal Sales model (merchandise revenue) and the Agent
Sales model (commission revenue). Under the Principal Sales model, the Company
either purchases the merchandise or sells merchandise under consignment
relationships with vendors.

Principal Sales - purchases

     For sales of merchandise owned by ONSALE, the Company is responsible for
conducting the auction, billing the customer, shipping the merchandise to the
customer and processing merchandise returns. The Company recognizes the full
sales amount as revenue upon verification of the credit card transaction
authorization and shipment of the merchandise. In this type of transaction, the
Company bears both inventory and credit risk with respect to sales of its
inventory. In instances where the credit card authorization has been received
but the merchandise has not been shipped, the Company defers revenue recognition
until the merchandise is shipped.

Principal Sales - consignment

     For sales on consignment, the Company either takes physical possession of
the merchandise or the vendor retains physical possession of the merchandise. In
either case, the Company is not obligated to take title to the merchandise
unless it successfully sells the merchandise at auction. Upon completion of an
auction, the Company takes title to the merchandise, charges the customer's
credit card and either ships the merchandise directly or arranges for a third
party to complete delivery to the customer. Subsequently, the Company pays the
vendor any amounts due for the purchase of the related merchandise. The Company
records the full sales amount as revenue upon the verification of the credit
card authorization and shipment of the merchandise. In consignment transactions,
the Company is at risk of loss for collecting all of the auction proceeds,
delivery of the 

                                       6
<PAGE>
 
merchandise and returns from customers. In instances where credit card
authorization has been received but the merchandise has not been shipped, the
Company defers revenue recognition until the merchandise is shipped.

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

Agent Sales

     Agent Sales revenue includes revenue from Agent Sales transactions and
revenue generated from transactions on The ONSALE Exchange.  In Agent Sales
transactions, the Company conducts electronic auctions and processes orders in
exchange for a commission on the sale of the vendor's merchandise.  Under this
arrangement, at the conclusion of an auction the Company forwards the order
information to the vendor, which then charges the customer's credit card for the
merchandise and ships the merchandise to the customer.  In an Agent Sales
transaction, the Company does not take title to or possession of the
merchandise, and the vendor bears all of the risk of credit card chargebacks.
The ONSALE Exchange allows small businesses and individuals to sell merchandise
using its online auction site.  The seller is responsible for setting up the
auction and consummating the sales transaction, including collection of the
sales price and shipment of merchandise.  The Company charges a commission to
the seller for facilitating the auction.  For Agent Sales and The ONSALE
Exchange transactions, the Company recognizes the commissions as revenue upon
completion of the auction process and the forwarding of the auction sales
information to the vendor or the seller.  The vendor or the seller is typically
responsible for merchandise returns.

Supplemental financial data

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

     The reconciliation of total revenue in the Statements of Operations to
gross merchandise sales is as follows:

<TABLE> 
<CAPTION> 
                                                                            
                                                  Three Months Ended                Six Months Ended      
(in thousands)                                         June 30,                         June 30,          
                                                      ---------                        --------- 
                                                1998            1997               1998         1997
                                              --------        -------            --------       ------- 
<S>                                          <C>             <C>                 <C>          <C>   
Total revenue                                 $50,796         $18,575             $90,965      $30,889
Plus: gross Agent Sales                         8,438           6,683              19,389       12,928
Less: net Agent Sales                            (658)           (715)             (1,515)      (1,333)
                                             --------         -------             -------     --------           
Gross merchandise sales                       $58,576         $24,543            $108,839      $42,484
                                              =======         =======            ========      =======
</TABLE> 

                                       7
<PAGE>
 
3.   NET LOSS PER SHARE


     Net loss per share is calculated in accordance with the provisions of SFAS
No.128, "Earnings Per Share" ("SFAS 128").  SFAS 128 requires the Company to
report both basic earnings per share and diluted earnings per share.  Basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period.  Diluted earnings per share is computed
using the weighted average number of common and potentially dilutive common
equivalent shares outstanding during the period.  Common equivalent shares are
excluded from the computation if their effect is antidilutive.  SFAS 128 also
requires a reconciliation of the numerators and denominators used in basic and
diluted net loss per share calculations as follows:

<TABLE> 
<CAPTION> 
                                                                          
                                                        Three Months Ended                         Six Months Ended      
                                                              June 30,                                 June 30,          
                                                              --------                                 --------           
<S>                                                  <C>                <C>                     <C>              <C>     
(in thousands, except per share data)                   1998            1997                      1998             1997
                                                       -------         -------                   -------          ------- 
Net loss                                               $(4,037)        $  (226)                  $(8,228)         $ (174)
                                                       =======         =======                   =======          ======
Weighted average common shares outstanding (basic)      18,808          16,638                    18,753           14,421 
Weighted average common stock equivalents                    -               -                        -                -
Weighted average common shares outstanding (diluted)    18,808          16,638                    18,753           14,421
                                                       =======         =======                   =======          =======
Net loss per share:                                   
     Basic and Diluted                                  $(0.21)        $ (0.01)                  $ (0.44)         $ (0.01)      
                                                       =======         =======                   =======          =======
</TABLE> 
         
During the quarter ended June 30, 1998, options to purchase 2,186,758 shares
were outstanding but were not included in the computation because they were
antidilutive.

4.   LOANS TO OFFICERS

     In the first and second quarters of 1998, the Company entered into secured
loan agreements with two officers of the Company for housing assistance, under
which the Company loaned each of the officers $350,000. The loans, which are
secured by real estate and stock options, are due and payable in the third and
fourth quarters of 1998 with interest at rates ranging from 5.6% to 6.0%.

5.   NEW ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133").  SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards.  SFAS 133 requires that all derivative
gains and losses be either reported in the statement of operations or as a
deferred item depending on the type of hedge relationship that exists with
respect to such a derivative. Adopting the provisions of SFAS 133 is not
expected to have a material effect on the Company's financial statements. The
standard is effective for the Company in 2000.

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards
for disclosing information about operating segments for public business
enterprises and supersedes FASB Statement No. 14.  

                                       8
<PAGE>
 
SFAS 131 is effective for fiscal years beginning after December 15, 1997; the
adoption of this pronouncement will not have a significant effect on the
Company's financial statements or related disclosures.

     The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") in the quarter
ended March 31, 1998.

     SFAS 130 requires the Company to report in its financial statements, in
addition to its net income (loss), comprehensive income (loss), which includes
all changes in equity during a period from non-owner sources including, as
applicable, foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities.  During the quarter ended June 30, 1998, such items were not
significant, and the Company's comprehensive loss approximated its net loss.

     In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1").  SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the public.
It also provides guidance on capitalization of the costs incurred for computer
software developed or obtained for internal use.  The Company does not believe
that SOP 98-1 will have a significant effect on the Company's financial
statements.

                                       9
<PAGE>
 
ITEM 2:   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     This Quarterly Report on Form 10-Q 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 Form 10-Q.  Additionally, statements
concerning future matters, such as technology enhancements, equipment purchases,
credit arrangements, and other statements regarding matters that are not
historical are forward-looking statements.

     This Form 10-Q contains forward-looking statements regarding the Company
and future expectations, which involve certain risks and uncertainties.  Factors
that could cause the Company's results to differ materially from management's
projections, estimates and expectations include, but are not limited to:
problems related to the first quarter of 1998 charge for unreconciled
merchandise adjustments (accounting reserves), including the risk that some or
all of the charge may not be reconciled and recovered in future periods; the
risk that similar problems might recur in subsequent periods; the likely
expenses related to reconciling the merchandise adjustments retrospectively and
implementing corrective procedures; problems related to managing the Company's
continued growth, including management of inventory shrinkage resulting from
theft, loss and misrecording of inventory related transactions; dependence on
its relationship with other online companies to drive traffic to the Company's
site; continued reliance on merchandise vendors; the inventory and price risks
of the Company's purchasing merchandise in principal transactions; management of
customer returns; uncertainties of introducing new categories of merchandise and
businesses; actual and potential competition; dependence on the Internet;
uncertain acceptance of the ONSALE brand and reliance on automated technology.
These risks and uncertainties are described in more detail in the Company's 1997
Annual Report on Form 10-K under "Risk Factors."  See also "Risk Factors" below.

RESULTS OF OPERATIONS

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.

                                       10
<PAGE>
 
REVENUE

     Revenue consists of merchandise revenues (Principal Sales on a purchase and
consignment basis) and commission and other revenue (comprised of Agent Sales,
commissions on The ONSALE Exchange transactions, and advertising revenue).
Total revenue for the quarters ended June 30, 1998 and June 30, 1997 was $50.8
million and $18.6 million, respectively, representing an increase of 173%, while
total revenue for the six months ended June 30, 1998 and 1997 was $91.0 million
and $30.9 million, respectively, representing an increase of 194%.  Gross
merchandise sales for the quarters ended June 30, 1998 and 1997 was $58.6
million and $24.5 million, respectively, representing an increase of 139%, while
gross merchandise sales for the six months ended June 30, 1998 and 1997 was
$108.8 million and $42.5 million, respectively, representing an increase of
156%.  The increase in total revenue and gross merchandise sales in the quarter
and six months ended June 30, 1998 as compared to June 30, 1997 was due to
significant investments in marketing programs, initiated in the third quarter of
1997, designed to promote and maintain brand awareness of the Company;
significant growth in its customer base; increases in the amount of merchandise
obtained from vendors; an increase in the number of auctions per week from 3 to
5 per week during the first and second quarters of 1997 to 7 auctions per week
during the first and second quarters of 1998; continued technological advances
in the Company's systems allowing for a greater volume of sales and an overall
increase in demand for the Company's expanding array of merchandise.  In
addition, the Company began selling sports and fitness equipment, charging
commissions for The ONSALE Exchange and charging for advertising on its Web site
in the fourth quarter of 1997.  Revenue from advertising and The ONSALE Exchange
was not significant for the three and six months ended June 30, 1998.  See "Risk
Factors" below.

     The following tables (i) reconcile total revenue to gross merchandise and
(ii) set forth the composition of gross merchandise sales for the three and six
months ended June 30, 1998 and 1997:

<TABLE> 
<CAPTION> 
                                                 Three Months Ended               Six Months Ended
(in thousands)                                        June 30,                        June 30,
                                                      --------                        --------       
                                                 1998          1997              1998           1997
                                               ---------    ---------         ---------      ---------
<S>                                            <C>         <C>                <C>          <C>  
Total revenue                                  $  50,796    $  18,575         $  90,965     $   30,889
Plus: gross Agent Sales                            8,438        6,683            19,389         12,928  
Less: net Agent Sales                               (658)        (715)           (1,515)        (1,333) 
                                               ---------    ---------         ---------      ---------
Gross merchandise sales                        $  58,576    $  24,543         $ 108,839      $  42,484
                                               =========    =========         =========      =========
                                                                       
</TABLE> 
         
<TABLE> 
<CAPTION> 
                                                 Three Months Ended               Six Months Ended
(in thousands)                                        June 30,                        June 30,
                                                      --------                        --------       
                                                 1998          1997              1998           1997
                                               ---------    ---------         ---------      ---------
<S>                                            <C>         <C>                <C>          <C>  
                                                                                
Principal Sales model-purchased inventory       $25,232      $ 9,359            $ 44,959       $13,920
Principal Sales model-consigned inventory        24,906        8,501              44,491        15,636      
Agent Sales model                                 8,438        6,683              19,389        12,928      
                                                -------      -------            --------       -------                
Gross merchandise sales                         $58,576      $24,543            $108,839       $42,484       
                                                =======      =======            ========       =======
</TABLE> 

                                       11
<PAGE>
 
       The Company's gross merchandise sales derived from Principal Sales were
85.6% and 72.8% of total gross merchandise sales for the quarters ended June 30,
1998 and 1997, and 82.2% and 69.6% for the six months ended June 30, 1998 and
June 30, 1997, respectively. The Company continued to increase its purchasing of
merchandise from vendors, particularly from manufacturers, because the Company
believed it had the potential to provide better customer service and to achieve
higher gross margins over time by controlling the purchase of merchandise. The
Company has been working with its Principal consignment and Agent suppliers to
establish standard customer service terms. Due to the risk factors involved in
owning its own merchandise and the customer service terms agreed to by its
suppliers, the Company will be balancing its sales between purchased inventory
and fixed margin (Principal consignment and Agent Sales transactions)
arrangements over time. See "Risk Factors" below.

GROSS PROFIT

     For the quarters ended June 30, 1998 and 1997, gross profit was 9.2% and
13.1% of total revenue, respectively.  For these same periods, gross profit as
a percentage of gross merchandise sales was 8.0% and 9.9%, respectively.  Gross
margin percentages were lower in the second quarter of 1998 as compared with the
second quarter of 1997, due to lower gross margin percentages on purchased
inventory. The Company chose to sell its purchased inventory at a lower margin
to decrease the risk of loss in future quarters and to continue its sales growth
with current and new customers. The Company was able to reduce its inventory
balance by 9% as compared with the March 31, 1998 balance of $7.9 million, while
increasing total revenue by 26% over the quarter ended March 31, 1998.

     For the six months ended June 30, 1998 and 1997, gross profit was 9.0% and
13.7% of total revenue, respectively.  Gross profit for these same periods as a
percentage of gross merchandise sales was 7.5% and 9.9%, respectively.  Gross
margin was lower in 1998 due to lower gross margins on purchased inventory in
the second quarter of 1998, additional reserves related to customer returns in
the first quarter, and a first quarter charge to cost of revenue of $789,000
related to certain unreconciled merchandise adjustments arising in the quarter.
Excluding the charge, gross profit represented 9.8% and 8.2% of total revenue
and gross merchandise sales, respectively, for the six months ended June 30,
1998.  The Company believes that this charge was prudent to reserve against
certain exposures and will recognize any recoveries of these reserves if
identified through future investigations.

     Gross profit on Principal Sales represented 8.0% and 9.6% of Principal
Sales for the quarters ended June 30, 1998 and 1997, respectively, and for the
six months ended June 30, 1998 and 1997 were 7.4% and 9.8%, respectively.
Excluding the charge for accounting reserve, gross profit on Principal Sales was
8.3% for the six months ended June 30, 1998.  The decrease in the Company's
gross margin on Principal Sales for the quarter and six months ended June 30,
1998 as compared to the quarter and six months ended June 30, 1997, was due to
lower gross margins on purchased inventory in the second quarter of 1998 and
establishing additional reserves related to customer returns in the first
quarter of 1998.

     Gross profit on Agent Sales (including The ONSALE Exchange transactions)
represented 7.8% and 10.7% for the quarters ended June 30, 1998 and June 30,
1997, respectively. For the six months ended June 30, 1998 and 1997, gross
profit on Agent Sales (including The ONSALE Exchange transactions) was 7.8% and
10.3%, respectively. The decrease in gross margin on Agent Sales was primarily
due to the Company launching The ONSALE Exchange at the end of 1997. The

                                       12
<PAGE>
 
ONSALE Exchange generates lower gross margins than the other sales models.
Because commissions from The ONSALE Exchange transactions are generally lower
than commissions on Agent Sales, overall margins on Agent Sales may continue to
decline if The ONSALE Exchange volume grows more rapidly than sales under the
Agent Sales model. See "Risk Factors" below.

OPERATING EXPENSES

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

Sales and Marketing. Sales and marketing expenses consist of advertising
expenditures, payroll and related expenses for sales, marketing and merchandise
acquisition personnel, and promotional material. As a percentage of gross
merchandise sales, these expenses represented 8.2% and 3.9% for the quarters
ended June 30, 1998 and 1997, respectively and 8.1% and 3.1% for the six months
ended June 30, 1998 and 1997, respectively. In the third quarter of 1997, the
Company initiated its Internet advertising program. The increase in sales and
marketing expense is related to the expansion of this advertising program in
addition to increases in the Company's marketing staff and increased expenses
associated with promotion and marketing of the Company's services. The Company
expects sales and marketing expenses to increase as it continues to enhance its
brand recognition through marketing alliances. However, there can be no
assurance that the increase in such expenses will actually result in enhanced
brand recognition. See "Risk Factors" below.

General and Administrative.  General and administrative expenses consist
primarily of payroll and related expenses for customer service, bad debt
expense, facilities expenses, executive, accounting and logistical personnel,
recruiting and other general corporate expenses. As a percentage of gross
merchandise sales, these expenses represented 5.7% and 5.3% for the quarters
ended June 30, 1998 and 1997, respectively, and 6.1% and 4.9% of gross
merchandise sales for the six months ended June 30, 1998 and 1997, respectively.
The dollar increases in general and administrative expenses for the quarter
ended June 30, 1998 as compared to June 30, 1997 were primarily attributable to
the hiring of additional key executives and other personnel, increases in bad
debt, facilities expenses, and other professional services costs.  The Company
expects general and administrative expenses to increase in absolute dollars for
the remainder of 1998, as the Company expands its officer group, staff and
facilities, and incurs additional costs related to being a public company.
However, due to the extremely competitive market for highly-qualified officers
and staff, there can be no assurance that ONSALE will be able to satisfy its
current expansion objective. See "Risk Factors" below.

Engineering.  Engineering expenses consist primarily of payroll and related
expenses for engineering personnel and consultants who develop, operate and
monitor the Company's Web site and related systems, and equipment costs.  These
expenses represented 2.1% and 2.4% of gross merchandise sales for the quarters
ended June 30, 1998 and 1997, respectively, and 2.2% and 2.7% of gross
merchandise sales for the six months ended June 30, 1998 and 1997, respectively.
The dollar increases in the Company's engineering expenses were primarily
attributable to increased staffing and associated costs relating to enhancing
the features and functionality of the Company's Web site and related systems.
To date, all engineering costs have been expensed as incurred.  The Company

                                       13
<PAGE>
 
expects engineering expenses to increase in absolute dollars in the future.  See
"Risk Factors" below.

Interest and Other Income, Net.  The Company's interest and other income, net,
was $716,000, and $148,000 for the quarters ended June 30, 1998 and 1997,
respectively.  For the six months ended June 30, 1998 and 1997 the Company's
interest and other income, net, was $1,443,000, and $180,000 respectively.  The
increases in interest and other income were due to increased cash balances
resulting almost entirely from the proceeds from the Company's initial and
secondary public offerings, which netted proceeds of approximately $14.8 million
in April 1997 and $45.1 million in October 1997, respectively.  See "Risk
Factors" below.

Income Taxes.  The Company had net losses for the six months ended June 30, 1998
and for the year ended December 31, 1997, and thus no provision for income taxes
was recorded for these periods. The Company expects to continue to experience
net losses through at least the first two quarters of 1999, and the Company does
not expect to record a provision for income taxes in any period in which it
experiences a net loss.

LIQUIDITY AND CAPITAL RESOURCES

     Since inception, the Company has financed its operations primarily through
the sale of Common Stock in the Company's initial public offering for
approximately $14.8 million in April 1997, its secondary offering, which netted
proceeds of approximately $45.1 million in October 1997, the private sale of
Series A Preferred Stock and warrants for approximately $2.3 million in
September 1996 and the sale of $1.9 million of Series B Preferred Stock pursuant
to the exercise of warrants in March 1997.  Net cash used in operating
activities for the six months ended June 30, 1998 was $2.7 million, primarily
attributable to the Company's net loss of $8.2 million, an increase in
merchandise inventory of $1.6 million, partially offset by an increase in
accounts payable and accrued expenses of $7.0 million. The net cash used in
operating activities in the six months ended June 30, 1997, was $6.1 million.
The funds were used primarily to increase merchandise inventory by $5.2 million
as the Company began to shift to the Principal Sales model.

     Net cash used in investing activities represented $19.8 million and
$768,000 for the six months ended June 30, 1998 and 1997, respectively.  This
cash was used primarily for the purchase of short-term available-for-sale
investments and for purchases of property and equipment.

     Net cash provided by financing activities of approximately $744,000 during
the six months ended June 30, 1998 resulted from the issuance of common stock
upon the exercise of a warrant by a financial institution. During the six months
ended June 30, 1997 the $16.8 million of net cash provided by financing
activities was primarily attributable to the Company's initial public offering
of approximately $14.8 million in April 1997, and the issuance of preferred
stock upon the exercise of warrants by two investors.

     As of June 30, 1998, the Company had approximately $34.8 million of cash
and cash equivalents and $17.2 million of short-term investments.

     As of June 30, 1998, the Company's principal commitments consisted of
obligations of approximately $5.2 million under operating leases for its
corporate headquarters, which expire in 2002.  Although the Company has no
material commitments for capital expenditures, it anticipates purchasing
approximately $1.1 million of property and equipment during the remainder of
1998.  In addition, the Company has spent approximately $700,000 through the
quarter ended June 30, 1998 to 

                                       14
<PAGE>
 
install its new financial system. The Company has certain sponsorship agreements
allowing it to appear as the auction sponsor and, in some cases, the exclusive
auction sponsor, on specific Web sites. These agreements require future minimum
payments of up to $2.0 million and under certain circumstances incremental fees
based on the volume of traffic to its Web site. These agreements expire at
various times through December 1998.

     In the second quarter of 1998, the Company entered into a joint venture
with Softbank Corp. to perform on-line auctions for the Japanese market.  The
Company's share of the initial investment, approximately $2.0 million, will be
funded through a loan from Softbank Corp.

     The Company intends in the future to offer credit to certain customers,
which may require additional cash to support the anticipated growth in accounts
receivable.  The Company expects its operating expenses to increase as a result
of increased staffing, expanded marketing efforts, increased software
development efforts, and its growing infrastructure.  As a result, the Company
expects to experience quarterly net losses through at least the first half of
1999, and thus may need to finance its accounts receivable, capital expenditures
and some portion of its operating expenses from its current cash and cash
equivalents balances.  The Company believes that its current cash and cash
equivalent balance will meet its anticipated cash needs for working capital and
capital expenditures for at least the next 12 months.  The Company may consider
alternative financing, such as the issuance of additional equity or convertible
debt securities or obtain further credit facilities, if market conditions make
such alternatives financially attractive for funding the Company's expansion.
The sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders.

IMPACT OF THE YEAR 2000 ISSUE

     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year.  Any computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000.  This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.

     The Company's internally developed systems and its accounting system are
Year 2000 compliant.  During 1998, the Company has been working with its vendors
and third party processors to ensure compatibility with the Year 2000 issue.
Costs related to the Company's Year 2000 plan have been expensed as incurred and
are not currently expected to have a material effect on the results of
operations of the Company.  The Company's estimate of costs related to Year 2000
compliance is a forward-looking statement that is subject to risks and
uncertainties, including the risk that the operations of the Company's credit
card processors and merchandise vendors could be disrupted by Year 2000
problems.

RISK FACTORS AND 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

                                       15
<PAGE>
 
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 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 or
the loss of the Company's credit card processor, (xii) general economic
conditions and economic conditions specific to the Internet and electronic
commerce, (xiii) uncertainties of introducing new categories of merchandise and 
businesses. 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 related to seasonality in Internet usage and
traditional retail fluctuations. 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 net losses through at least the
first two quarters of 1999.

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.

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 1997 and for the first half of
1998, approximately 30% of the Company's gross merchandise sales was 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 

                                       16
<PAGE>
 
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, or if the Company is unable to obtain sufficient quantities of
merchandise, or 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.

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 129 employees at December 31, 1997 to 169 employees at June 30, 1998 and
its sales increased from over 24,000 units per week at December 31, 1997 to over
41,000 units per week at the quarter ended June 30, 1998.  The Company's new
employees include a number of key managerial and technical employees who have
not yet been fully integrated into the Company's management team, and the
Company seeks to add additional key personnel in the near future.  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, on a timely
basis, of its financial and other internal management systems, and to train,
manage and expand its already growing employee base.  The Company also replaced
its existing finance and accounting system software in the second quarter of
1998 and continues 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. The
Company expects in the future to begin offering credit to certain of its
customers that have been pre-qualified as having appropriate credit ratings and,
accordingly, will be required to manage the associated risks of accounts
receivable expansion and collection. 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.

RISKS OF A PRINCIPAL SALES MODEL

     Since the second quarter of 1997, sales of purchased inventory have
represented between 40% and 50% of total gross merchandise sales.  Purchased
inventory sales add additional risks from consignment inventory sales. These
risks include the potential declination of market value related to the
refurbished and excess goods sold by the Company; the ability to manage customer
returns and credits associated with merchandise returned to vendors;

                                       17
<PAGE>
 
 shrinkage resulting from theft, loss or misrecording of inventory; and
the unpredictable selling price due to the nature of the auction process.

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.  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.

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.

     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, consumer electronics and sports and fitness equipment to
the auction and sale of other excess merchandise. Recently the Company announced
that it will launch a travel and vacation auction site to offer certain
condominium rental weeks and has entered into a partnership to provide online
auctions for vendors, manufacturers and businesses that buy and sell industrial
products ("vertical trade" communities).  The Company has also entered into a
joint venture with a Japanese software distributor to perform online auctions in
Japan.  To date, the Company has limited experience in conducting auctions and
developing localized versions of its Web site in foreign markets.  There is no
guarantee that this venture will be successful or that the social, economic or
market conditions will support this type of venture.  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

                                       18
<PAGE>
 
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.

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. 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.

ITEM 3:   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Not applicable.

                                       19
<PAGE>
 
PART II  - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

           Not applicable.

Item 2.   CHANGES IN SECURITIES AND 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 June 30, 1998, 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 $1.7 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 June 30, 1998, the amount of the net proceeds
applied to various categories of expenditures were as follows (in thousands):
                                               
     Purchase of property and equipment..............     $  3,780
     Working capital.................................     $ 11,028

     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 3.   DEFAULTS UPON SENIOR SECURITIES

          Not applicable.

                                       20
<PAGE>
 
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     An Annual Meeting of Stockholders of ONSALE, Inc. was held on May 18, 1998.
Matters voted on at the meeting and votes cast on each were as follows:

(1)  To re-elect the following five directors of the Company, each to serve
until the next Annual Meeting of Stockholders and until his successor has been
elected and qualified or until his earlier resignation, death or removal.

<TABLE> 
<CAPTION> 
                                                                                Authority Withheld
                                  For                  Authority Withheld       From All Nominees 
                                 -----               ----------------------     ------------------
<S>                          <C>                     <C>                         <C> 
   
S. Jerrold Kaplan             11,163,721                      11,356                   0
Alan S. Fisher                11,163,021                      12,056                   0
Peter L. Harris               11,163,243                      11,834                   0
Peter H. Jackson              11,163,543                      11,534                   0
Kenneth J. Orton              10,695,851                     479,226                   0                        
</TABLE> 


(2)  To approve an amendment to the Company's 1995 Equity Incentive Plan to
increase the number of shares of Common Stock reserved for issuance thereunder
from 3,500,000 shares to 5,000,000 shares.

<TABLE> 
<CAPTION> 
      For               Against              Abstain                Non-vote
      ---               -------              -------                --------    
<S>                   <C>                   <C>                  <C> 
    7,723,658          1,078,486               7,005               2,365,928
</TABLE> 

(3)  To approve an amendment to the Company's 1996 Employee Stock Purchase Plan
(i) to increase the number of shares of Common Stock reserved for issuance
thereunder from 150,000 shares to 300,000 shares, and (ii) to provide that the
number of shares reserved for issuance thereunder will be increased
automatically each year by an amount equal to 1.5% of the outstanding shares of
the Company as of the last day of the prior year.

<TABLE> 
<CAPTION> 
      For               Against              Abstain                Non-vote
      ---               -------              -------                --------    
<S>                   <C>                   <C>                  <C> 
   7,918,819             881,100                9,230              2,365,928
</TABLE> 

(4)  To ratify the selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for 1998.

<TABLE> 
<CAPTION> 
      For               Against              Abstain                Non-vote
      ---               -------              -------                --------    
<S>                   <C>                   <C>                  <C> 
   11,166,477            4,575                  3,925                  100
</TABLE> 

                                       21
<PAGE>
 
Item 5.   OTHER INFORMATION
 
     On June 24, 1998, ONSALE issued a press release announcing the appointment
of John E. Labbett as Senior Vice President, Chief Financial Officer.

Item 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)    The following exhibits are being filed as part of this Report:

Exhibit 10.01  Lease Agreement between the Company and SCI Limited 
               Partnership-I, dated March 31, 1998

Exhibit 27.01  Financial Data Schedule


(b)    The Company did not file any reports on Form 8-K during the three months
ended June 30, 1998.

                                       22
<PAGE>
 
SIGNATURES



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


Date:  August 14, 1998                            By:  /s/ John E. Labbett
                                                     ---------------------------
                                                      John E. Labbett
                                                      Senior Vice President and
                                                      Chief Financial Officer

                                       23