EGGHEAD INC /WA/, DEF 14A, 1997-07-25

EGGHEAD INC /WA/
DEF 14A, 1997-07-25
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/X/ Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

EGGHEAD, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
[LOGO]
22705 EAST MISSION AVE.
LIBERTY LAKE, WASHINGTON 99019

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

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
THURSDAY, SEPTEMBER 4, 1997

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

Notice is hereby given that the Annual Meeting of Shareholders of EGGHEAD,
INC. (the "Company") will be held at 10:00 a.m. local time on Thursday,
September 4, 1997, in the Snoqualmie North Room of the Bellevue Hilton, 100 -
112th Avenue Northeast, Bellevue, Washington 98004. Free parking is available at
the facility.

In addition to hearing a report about the Company and having an opportunity
to ask questions of general interest to shareholders, the meeting is called for
the following purposes:

1. To elect certain directors to the Company's Board of Directors to serve
for terms as more fully described in the accompanying proxy statement;

2. To consider and vote upon a proposal to amend the Egghead, Inc. 1993
Stock Option Plan; and

3. To transact such other business as may properly come before the meeting.

Shareholders of record on the books of the Company at the close of business
on July 8, 1997, will be entitled to notice of and to vote at the meeting.

By Order of the Board of Directors

[SIG]

Brian W. Bender
SECRETARY

Liberty Lake, Washington
August 1, 1997

YOUR VOTE IS IMPORTANT

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

Whether or not you plan to attend the meeting in person, please sign, date,
mark, and return the accompanying proxy in the enclosed stamped and
pre-addressed envelope. The giving of the proxy will not affect your right to
vote at the meeting if the proxy is revoked in the manner described in the
accompanying proxy statement.
<PAGE>
EGGHEAD, INC.
22705 EAST MISSION AVE.
LIBERTY LAKE, WASHINGTON 99019

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

PROXY STATEMENT

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

INFORMATION REGARDING PROXIES

This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Egghead, Inc. (the "Company") for use at
the 1997 Annual Meeting of Shareholders of the Company (the "1997 Annual
Meeting"), and any adjournment thereof, to be held on Thursday, September 4,
1997, at 10:00 a.m. local time, in the Snoqualmie North Room at the Bellevue
Hilton, 100 - 112th Avenue Northeast, Bellevue, Washington. Only shareholders of
record on the books of the Company at the close of business on July 8, 1997 (the
"Record Date"), will be entitled to notice of and to vote at the 1997 Annual
Meeting.

It is anticipated that these proxy solicitation materials and a copy of the
Company's 1997 Annual Report to Shareholders will be sent to shareholders of
record on or about August 1, 1997.

Any shareholder giving a proxy has the power to revoke it at any time before
it is exercised by (i) delivering written notice of revocation or another proxy
dated as of a later date to Brian W. Bender, Secretary of the Company, or (ii)
voting in person at the 1997 Annual Meeting.

VOTING SECURITIES

The only voting securities of the Company are shares of its common stock,
$0.01 par value per share (the "Common Stock"), each of which is entitled to one
vote. At the Record Date, there were issued and outstanding 17,614,342 shares of
Common Stock. The presence in person or by proxy of holders of record of a
majority of the outstanding shares of Common Stock is required to constitute a
quorum for the transaction of business at the 1997 Annual Meeting.

Under Washington law and the Company's Articles of Incorporation, if a
quorum is present (i) the nominees for director at the 1997 Annual Meeting who
receive the greatest number of votes cast for the election of directors will be
elected directors and (ii) proposal no. 2 will be approved if the votes cast in
favor of the proposal exceed the votes cast against the proposal at the 1997
Annual Meeting. Shareholders do not have the right to cumulate their votes in
the election of directors. In the election of directors, abstentions and broker
nonvotes will have the practical effect of a vote withheld from that nominee.
Abstention and broker nonvotes will have no effect on the outcome of proposal
no. 2 other than to reduce the number of "FOR" votes necessary to approve the
matter.

ELECTION OF DIRECTORS

The Company's Board of Directors (the "Board") is divided into three
classes: Class I, Class II, and Class III. Each director serves for a term
ending at the third annual meeting of shareholders following the annual meeting
at which he or she was elected, except that any director appointed by the Board
serves, subject to election by the shareholders at the next annual meeting, for
a term ending at the annual meeting of shareholders for the class to which the
director was appointed. Each director serves until his or her successor is
elected and qualified or until his or her earlier death, resignation, or
removal.

Information is provided below with respect to the one nominee for Class II
Director and the three nominees for Class III Director, as well as those other
directors whose terms will continue after the 1997 Annual Meeting.
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The Company has entered into an Agreement and Plan of Merger, dated as of
April 30, 1997, as amended (the "Merger Agreement"), among the Company, North
Face Merger Sub, Inc., a wholly-owned subsidiary of the Company ("Merger Sub"),
Surplus Software, Inc. (d.b.a. Surplus Direct) ("Surplus Direct") and the
principal shareholders of Surplus Direct which provides for the merger of
Surplus Direct with and into Merger Sub (the "Merger"). It is currently intended
that the Merger, if approved by the Company's shareholders, would become
effective before the 1997 Annual Meeting. If the Merger is consummated, the
Board will increase the size of the Board from six to eight members and, under
the terms of the Merger Agreement, appoint Gregory J. Boudreau, the Chief
Executive Officer of Surplus Direct, to the Board as a Class III Director, and
Jonathan W. Brodeur, the President of Surplus Direct, to the Board as a Class II
Director, at or prior to the effective time of the Merger.

The Board has nominated George P. Orban and Eric P. Robison for election at
the 1997 Annual Meeting as Class III Directors. The Board has also nominated
Gregory J. Boudreau for election at the 1997 Annual Meeting as a Class III
Director and Jonathan W. Brodeur for election at the 1997 Annual Meeting as a
Class II Director; provided, however, that if the Merger is not consummated
prior to the commencement of the 1997 Annual Meeting, then the nominations of
Gregory J. Boudreau and Jonathan W. Brodeur for election as Class III Director
and Class II Director, respectively, will automatically be withdrawn and be of
no further force and effect as of immediately prior to the commencement of the
1997 Annual Meeting. If the Merger is not consummated prior to the 1997 Annual
Meeting, it is currently expected that the size of the Board would remain at six
members as of the 1997 Annual Meeting.

Unless otherwise instructed, the persons named in the accompanying proxy
intend to vote shares represented by properly executed proxies for the four
nominees to the Board named below, except if the nominations of Messrs. Boudreau
and Brodeur are automatically withdrawn prior to the commencement of the 1997
Annual Meeting as described above, in which case the persons named in the
accompanying proxy intend to vote shares represented by properly executed
proxies for the election of Eric P. Robison and George P. Orban as Class III
Directors and not to vote in favor of the election of Gregory J. Boudreau and
Jonathan W. Brodeur as a Class III Director and a Class II Director,
respectively.

Although the Board anticipates that Messrs. Orban and Robison will be
available to serve as directors of the Company, should either of them not accept
the nomination, or otherwise be unwilling or unable to serve, it is intended
that the proxies will be voted for the election of a substitute nominee or
nominees designated by the Board.

NOMINEES FOR ELECTION

CLASS II DIRECTOR (TERM TO EXPIRE IN 1999)

JONATHAN W. BRODEUR, age 37, was elected a director and appointed President
of Surplus Direct in July 1995. Prior to joining Surplus Direct, Mr. Brodeur was
the Chief Operating/Operations Improvement Officer for Connecticut Spring and
Stamping, a high-precision manufacturing company, from June 1993 to June 1995,
and served as Senior Manager at KPMG Peat Marwick LLP's National Consulting
Practice from August 1988 to June 1993.

CLASS III DIRECTORS (TERMS TO EXPIRE IN 2000)

GREGORY J. BOUDREAU, age 34, is one of the founders of Surplus Direct and
has been a director of Surplus Direct, as well as its Chief Executive Officer
and Secretary, since Surplus Direct was founded in June 1992. From 1985 to 1992,
Mr. Boudreau owned and operated Software Wholesalers, a liquidation oriented
wholesaler of computer products.

GEORGE P. ORBAN, age 51, a director of the Company since November 1985, was
appointed Chairman of the Board in May 1996 and Chief Executive Officer in
January 1997. Mr. Orban is Managing Partner of Orban Partners, a private
investment company, and a director and cofounder of Ross

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Stores, Inc., which operates a nationwide chain of retail clothing stores. Mr.
Orban also serves as a director of Theatrix Inc. and is a former director of
Surplus Direct.

ERIC P. ROBISON, age 37, has been a director of the Company since July 1996.
Since 1994, Mr. Robison has been a Business Development Associate for Vulcan
Ventures Inc., a venture capital firm wholly owned by Paul G. Allen, a
shareholder and former director of Egghead, where Mr. Robison is responsible for
providing strategic business consultation to the companies controlled by Mr.
Allen. From 1992 to 1993, Mr. Robison was a cofounder and Vice President of The
Stanton Robison Group, Inc., a business development, marketing and advertising
consulting firm. He also serves as a director of ARI Network Services, Inc. and
C/NET, Inc.

CONTINUING BOARD MEMBERS

CONTINUING CLASS I DIRECTORS (TERMS TO EXPIRE IN 1998)

RICHARD P. COOLEY, age 73, has been a director of the Company since
September 1992 and served as Chairman of the Board from February 1993 to June
1993. Mr. Cooley was Chairman of Seattle-First National Bank ("Seafirst Bank")
from January 1983 to December 1990, was Chairman of the Executive Committee of
Seafirst Bank from January 1991 to March 1994, and was named Honorary Director
of Seafirst Bank in April 1994. Mr. Cooley also serves as a director of Ackerly
Communications, Inc.

TERENCE M. STROM, age 53, has been a director of the Company since June 1993
and served as President from 1993 to January 1997 and as Chief Executive Officer
from September 1993 to January 1997. From January 1990 until joining Egghead,
Mr. Strom served as Senior Vice President of Marketing, and from July 1989 to
December 1989 as Vice President of Merchandising, of Best Buy Co., Inc., a
consumer electronics retail chain.

SAMUEL N. STROUM, age 76, has been a director of the Company since June
1984. Mr. Stroum is the principal of Samuel Stroum Enterprises, a private
investment company, and Chairman of the Board of MACS Air, Inc., an air charter
company. From 1975 to April 1991, Mr. Stroum served as a director of Seafirst
Bank and Seafirst Corporation. Mr. Stroum also served on the Executive Committee
of Seafirst Corporation and was Chairman of its Organization Committee. He is a
Regent and Past President of the Board of Regents of the University of
Washington.

CONTINUING CLASS II DIRECTOR (TERM TO EXPIRE IN 1999)

MELVIN A. WILMORE, age 51, has been a director of the Company since July
1996. Mr. Wilmore has been a director and President since 1993, and Chief
Operating Officer since 1991, of Ross Stores, Inc., which operates a nationwide
chain of retail clothing stores. From October 1989 to December 1991, Mr. Wilmore
was President and Chief Executive Officer of Live Specialty Retail, a division
of LIVE Entertainment, Inc., which operates a chain of prerecorded software home
entertainment stores. He also serves as a director of Hechinger Company.

BOARD AND COMMITTEE MEETINGS

The Board held 14 meetings during fiscal year 1997, which ended on March 29,
1997.

The Board's Audit Committee held 3 meetings during fiscal year 1997. The
Committee consists of three directors: two non-employee directors who are
currently Mr. Cooley and Mr. Robison; and Mr. Orban. Its function is to (i)
recommend to the Board the independent auditors to be retained by the Company;
(ii) meet with the independent auditors and financial management of the Company
to review the scope of proposed audits and audit procedures; (iii) report to the
Board the results of audits and submit appropriate recommendations; (iv) review
the adequacy of the Company's internal accounting, financial, and operating
controls; (v) review the Company's reporting obligations and proposed audit

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plans; and (vi) review the Company's financial statements and procedures to
ensure compliance with applicable financial reporting requirements.

The Board's Compensation Committee held 4 meetings during fiscal year 1997.
The Committee consists of two non-employee directors who are currently Messrs.
Cooley and Stroum (Chairman). Its function is to (i) consider and make
recommendations to the Board on salaries, bonuses, and other forms of
compensation for the Company's five most highly compensated executive officers;
(ii) establish salaries, bonuses, and other forms of compensation for the
Company's other officers and employees; and (iii) administer the Company's stock
option plans, including granting stock options to employees thereunder, and
reviewing management recommendations for granting stock options and any proposed
plans or practices of the Company relating to compensation of its employees and
directors.

The Board's Nominating Committee met once during fiscal year 1997. The
Committee consists of two non-employee directors who are currently Messrs.
Cooley and Stroum (Chairman). The Committee's function is to recommend nominees
for election as directors at annual meetings of shareholders and to fill
vacancies on the Board between annual meetings. The Nominating Committee will
consider written proposals from shareholders for nominees for directors to be
elected at the 1998 Annual Meeting of Shareholders which are submitted to the
Secretary of the Company by March 25, 1998.

Each director attended at least 75% of all meetings of the Board and
Committees to which he or she was assigned that were held during fiscal year
1997.

NON-EMPLOYEE DIRECTORS' COMPENSATION

Directors who are not also employees of the Company are compensated at the
rate of $25,000 per annum. In addition, non-employee directors receive $1,000
for each Board meeting attended and $1,000 for each Committee meeting attended,
provided that such Committee meeting is not held in conjunction with a Board
meeting. Non-employee directors are also reimbursed for actual travel and
out-of-pocket expenses incurred in connection with Board membership.

Pursuant to the Egghead, Inc. Non-Employee Director Stock Option Plan (the
"Director Plan"), each non-employee director is granted an option to purchase
22,500 shares of Common Stock upon his or her initial election to the Board at
an annual shareholders meeting, subject to three-year vesting in annual
increments of one-third. In addition, pursuant to the Director Plan, each
non-employee director who is initially elected or appointed other than at an
annual shareholders meeting is granted an option to purchase up to 7,500 shares
of Common Stock, prorated for the number of months between the date of grant and
the next annual shareholders meeting thereafter, subject to vesting in full on
the date of such meeting. Under the Director Plan, each non-employee director
who holds an option granted on or after June 7, 1995 that becomes fully vested
thereafter automatically will be granted, on the day after the annual
shareholders' meeting at which the prior option has become fully vested, an
additional option to purchase 22,500 shares, subject to three-year vesting in
annual increments of one-third. All of the current non-employee directors were
granted a new option to purchase an additional 22,500 shares of Common Stock on
the day after the 1996 Annual Shareholders' Meeting, one-third of which will be
vested immediately after the 1997 Annual Meeting.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

BRIAN W. BENDER, age 48, joined the Company initially in May 1995, serving
as Secretary, Vice President and Chief Financial Officer until his resignation
from the Company in May 1996. Mr. Bender rejoined the Company in November 1996
and currently serves as Vice President, Chief Financial Officer and Secretary.
From May 1996 to November 1996, Mr. Bender served as Senior Vice President and
Chief Financial Officer of Proffitts, Inc., an operator of retail department
stores. From May 1993 to May 1995, Mr. Bender was Senior Vice President,
Controller and Assistant Treasurer of Younkers, Inc., a department

4
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store chain, and from 1990 to May 1993, Chief Financial Officer of May D&F, a
department store chain that was consolidated into Foley's by its parent, the May
Department Stores Company.

TOMMY E. COLLINS, age 40, joined the Company in July 1995 as Director of
Management Information Systems ("MIS") and was promoted to Vice President of MIS
in May 1996. From 1985 to 1995, Mr. Collins was employed at Key Tronic
Corporation, an independent computer peripheral manufacturing company, serving
from 1990 to 1995 as Director of Corporate Information Services.

NORMAN HULLINGER, age 37, joined Egghead in September 1996 as Vice President
of Store Operations. From January 1993 to September 1996, he was Vice-President
of Store Operations, Distribution and Real Estate at California-based Aaron
Brothers, Inc., a retail art supply chain and wholly owned subsidiary of
Michaels Stores Inc., a crafts and art supply chain. From February 1989 to
January 1993, Mr. Hullinger served as Director of Operations and Distribution at
L. Luria and Sons, a Florida-based catalog showroom retailer.

JAMES F. KALASKY, age 47, joined the Company in July 1995 as Merchandising
Manager and was promoted to Vice President of Merchandising in May 1996. From
1994 to 1995, Mr. Kalasky was Director of Merchandising at Damark International,
a membership-driven consumer direct-marketing company, and, from 1992 to 1994,
Vice President of Merchandising at Best Buy Co., Inc., a consumer electronics
retail chain. From 1982 to 1992, Mr. Kalasky was the Merchandising Manager at
Boscov's Department Store, Inc., a Pennsylvania-based department store chain.

COMMON STOCK OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 8, 1997 by: (i) each person
known by the Company to own beneficially 5% or more of the Company's outstanding
Common Stock; (ii) each director and nominee, (iii) each executive officer of
the Company for whom information is given in the Summary Compensation Table in
this Proxy Statement; and (iv) all directors, nominees, and executive officers
of the Company as a group.

[Table appears on the following page.]

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<TABLE>
<CAPTION>
EGGHEAD COMMON SHARES
---------------------------------------
NUMBER OF SHARES
BENEFICIALLY PERCENT OF SHARES
OWNED(1) OUTSTANDING
-------------------- -----------------
<S> <C> <C>
GREATER THAN 5% SHAREHOLDERS
Morgan Stanley Asset Management Ltd. (2)(3)............................... 1,763,450 10.0%
25 Cabot Square, Canary Wharf
London E14 4QA, England

Paul G. Allen(4).......................................................... 1,666,934 9.5%
110 - 110th Ave. N.E., #550
Bellevue, Washington 98004

David A. Rocker(2)(5)..................................................... 1,644,900 9.3%
45 Rockefeller Plaza, Suite 1759
New York, New York 10111

Brookhaven Capital Management Co., Ltd.(2)(6)............................. 1,515,883 8.6%
3000 Sand Hill Road
Building 3, Suite 105
Menlo Park, California 94025

Cramer Rosenthal McGlynn, Inc.(2)(7)...................................... 965,650 5.5%
707 Westchester Avenue
White Plains, New York 10604

Vincent A. Carrino(8)..................................................... 898,003 5.1%
c/o Brookhaven Capital Management Co., Ltd.
3000 Sand Hill Road
Building 3, Suite 105
Menlo Park, California 94025

NAMED EXECUTIVE OFFICERS
Brian W. Bender........................................................... -- --
Tommy E. Collins.......................................................... 2,430 *
Kurt S. Conklin........................................................... -- --
Peter F. Grossman(9)...................................................... 23,334 *
James F. Kalasky(10)...................................................... 800 *
George P. Orban(11)....................................................... 780,494 4.2%
Ronald J. Smith(12)....................................................... 15,834 *

DIRECTORS AND NOMINEES
Gregory J. Boudreau(13)................................................... -- --
Jonathan W. Brodeur(14)................................................... -- --
Richard P. Cooley(15)..................................................... 35,000 *
Eric P. Robison(16)....................................................... 8,750 *
Terence M. Strom(17)...................................................... 293,000 1.6%
Samuel N. Stroum(18)...................................................... 180,096 *
Melvin A. Wilmore(19)..................................................... 8,750 *
Directors and executive officers as a group (15 persons)(20).............. 1,348,488 7.3%
</TABLE>

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

* Less than one percent.

[Footnotes to this table appear on the following pages.]

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(1) The persons named in the above table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by
them, except as otherwise described in these footnotes.

(2) Deemed beneficial owner of the shares of Common Stock by virtue of the
direct or indirect investment and/or voting discretion possessed by such
person pursuant to the provisions of investment advisory agreements with
clients or other fiduciary arrangements such as partnership agreements.

(3) Based on Amendment No. 3 to Schedule 13G of Morgan Stanley Group, Inc. and
its wholly owned subsidiary, Morgan Stanley Asset Management Limited, dated
February 13, 1997, as jointly filed with the U.S. Securities and Exchange
Commission (the "Commission").

(4) Represents 1,648,934 shares held by Vulcan Ventures Inc., a private venture
capital firm of which Mr. Allen is President and sole shareholder, and
18,000 shares subject to options that are exercisable currently or within 60
days of July 8, 1997.

(5) Based on Amendment No. 4 to Schedule 13D, dated February 21, 1996, as filed
with the Commission.

(6) Based on Schedule 13D dated May 19, 1997, as jointly filed with the
Commission, Brookhaven Capital Management Co., Ltd. ("BCM") has sole voting
and dispositive power with respect to 42,700 shares and shared voting and
dispositive power with respect to 1,473,183 shares. BCM is the investment
advisor to Cadence Fund, L.P., a Delaware limited partnership ("CF"), which
has shared voting and dispositive power with respect to 112,278 shares,
Watershed Partners, L.P., a Delaware limited partnership ("WP"), which has
shared voting and dispositive power with respect to 489,725 shares, and
Focused Capital Partners, L.P. ("FCP"), a Delaware limited partnership,
which has shared voting and dispositive power with respect to 85,100 shares.
Vincent A. Carrino, who has sole voting and dispositive power with respect
to 210,900 shares and shared voting and dispositive power with respect to
687,103 shares, and Daniel R. Coleman, who has shared voting and dispositive
power with respect to 687,103 shares, are the general partners of CF, WP and
FCP. Mr. Carrino is also the President of BCM.

(7) Based on Schedule 13G, dated March 28, 1997, as filed with the Commission.

(8) Based on Schedule 13D, dated May 19, 1997, as jointly filed with the
Commission, Mr. Carrino has sole voting and dispositive power with respect
to 210,900 shares and shared voting and dispositive power with respect to
687,103 shares. Mr. Carrino is the President of BCM and disclaims beneficial
ownership of 617,880 of the 1,515,803 shares shown as beneficially owned by
BCM.

(9) Represents 23,334 shares subject to options held by Mr. Grossman that are
exercisable currently or within 60 days of July 8, 1997. Mr. Grossman
terminated his employment with Egghead on April 25, 1997.

(10) Represents 800 shares held by Mr. Kalasky in his IRA account.

(11) Represents 84,000 shares held by Orban Partners, a general partnership of
which Mr. Orban is Managing Partner, 107,494 shares held by Mr. Orban and
589,000 shares subject to options that are exercisable currently or within
60 days of July 8, 1997. Mr. Orban is a director and nominee in addition to
being a named executive officer.

(12) Represents 15,834 shares subject to options held by Mr. Smith that are
exercisable currently or within 60 days of July 8, 1997. Mr. Smith
terminated his employment with the Company on February 15, 1997.
(13) Mr. Boudreau will obtain shares of Common Stock of the Company upon the
closing of the Merger with Surplus Direct. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."

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(14) Mr. Brodeur will obtain shares of Common Stock of the Company upon the
closing of the Merger with Surplus Direct. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."

(15) Represents 5,000 shares held by Mr. Cooley and 30,000 shares subject to
options that are exercisable currently or within 60 days of July 8, 1997.

(16) Represents 8,750 shares subject to options held by Mr. Robison that are
exercisable currently or within 60 days of July 8, 1997.

(17) Represents 68,000 shares held by Mr. Strom and 225,000 shares subject to
options that are exercisable currently or within 60 days of July 8, 1997.
Mr. Strom terminated his employment with the Company on February 15, 1997.

(18) Represents 150,002 shares held by Mr. Stroum, 94 shares held jointly with
his spouse and 30,000 shares subject to options held by Mr. Stroum that are
exercisable currently or within 60 days of July 8, 1997. Excludes 300,000
shares transferred by Mr. Stroum to the Stroum Foundation and to the Stroum
Family Foundation, with respect to which shares Mr. Stroum disclaims
beneficial ownership.

(19) Represents 8,750 shares subject to options held by Mr. Wilmore that are
exercisable currently or within 60 days of July 8, 1997.

(20) Includes 930,668 shares subject to options held by such directors and
executive officers that are exercisable currently or within 60 days of July
8, 1997.

EXECUTIVE COMPENSATION

ANNUAL AND LONG-TERM COMPENSATION

The following table sets forth annual and long-term compensation for
services rendered during fiscal years 1997, 1996, and 1995, by Terence M. Strom,
who served as the Company's Chief Executive Officer until January 1997, George
P. Orban, who has served as the Company's Chief Executive Officer since January
1997, the other four most highly compensated executive officers of the Company
and two former executive officers of the Company who served as officers during
fiscal year 1997 (collectively, the "Named Executive Officers").

[Table appears on the following page.]

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SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($) ($) OPTIONS (#) ($)
- ------------------------------ ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Strom(2)........... 1997 $289,255 -- -- -- $ 34,615
Chief Executive Officer 1996 300,000 -- -- -- 66,377
1995 300,000 300,000 -- 50,000 --

George P. Orban............... 1997 -- -- -- 1,022,500 220,000(3)
Chief Executive Officer 1996 N/A N/A N/A N/A N/A
1995 N/A N/A N/A N/A N/A

Brian W. Bender(4)............ 1997 117,705 -- -- 40,000(10) 33,950
Vice President, Chief 1996 196,442 30,080 -- 45,000(11) 49,703
Financial Officer 1995 N/A N/A N/A N/A N/A
and Secretary

Peter F. Grossman(5).......... 1997 246,937 7,026 -- 50,000(11) 3,015
Executive Vice President 1996 230,000 -- -- 20,000 61,149
1995 123,846 -- -- 40,000 5,846

Tommy E. Collins(6)........... 1997 132,692 20,000 -- 30,000(10) 2,843
Vice President of MIS 1996 N/A N/A N/A N/A N/A
1995 N/A N/A N/A N/A N/A

James F. Kalasky(7)........... 1997 150,769 5,000 -- 30,000(10) 3,088
Vice President of 1996 N/A N/A N/A N/A N/A
Merchandising 1995 N/A N/A N/A N/A N/A

Ronald J. Smith(8)............ 1997 165,472 68,016 -- 40,000(11) 46,679
Senior Vice President 1996 150,000 77,943 -- 20,000 59,980
1995 147,308 -- -- 25,000 1,247

Kurt S. Conklin(9)............ 1997 147,715 69,630 -- 40,000(11) 114,628
Senior Vice President 1996 140,000 62,940 -- 20,000 62,695
1995 70,615 -- 21,800 7,500 --
</TABLE>

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

(1) Fiscal 1997, 1996 and 1995 each had 52 weeks.

(2) Mr. Strom's bonus for fiscal 1995 represents a guaranteed bonus based on
his former employment agreement. All Other Compensation for fiscal 1997
represents severance payments commencing on February 15, 1997 and for fiscal
1996 represents amounts paid for relocation expenses incurred as a result of
the relocation of the Company's corporate headquarters and $351 paid as a
premium on a split dollar life insurance policy used to fund the 1996
Executive Deferred Compensation Plan.

(3) Represents a consulting fee paid to Retail Enterprises, Inc., a firm wholly
owned by Mr. Orban. See "Change of Control, Severance and Employment
Arrangements--Employment Agreement; Change of Control Arrangement." Mr.
Orban was not an executive officer in fiscal 1996 and 1995.

(4) Mr. Bender joined the Company initially in May 1995, resigning in May 1996
and rejoining in November 1996. The salary shown for each of fiscal 1997 and
1996 is for a partial fiscal year's employment. All Other Compensation for
fiscal 1997 and 1996 represents amounts paid for

9
<PAGE>
Mr. Bender's relocation costs associated with his reemployment and initial
employment, respectively, with the Company.

(5) All Other Compensation for fiscal 1997 and 1996 consists of $3,015 and
$4,423, respectively, in Company matching contributions under the Company's
401(k) savings plan, $56,611 paid in fiscal 1996 for relocation expenses
incurred in connection with the relocation of the Company's corporate
headquarters $115 paid as a premium on a split dollar life insurance policy
used to fund the 1996 Executive Deferred Compensation Plan, and $5,846 paid
in fiscal 1995 for Mr. Grossman's relocation costs. Mr. Grossman's
employment with the Company terminated in April 1997.

(6) The bonus paid in fiscal 1997 relates to the completion of the fulfillment
period following the sale of the Company's Corporate, Government and
Education ("CGE") division. All Other Compensation for fiscal 1997
represents Company matching contributions under the Company's 401(k) savings
plan. Mr. Collins was not an executive officer in fiscal 1996 and 1995.

(7) The bonus paid in fiscal 1997 relates to the completion of the fulfillment
period following the sale of the Company's CGE division. All Other
Compensation for fiscal 1997 represents Company matching contributions under
the Company's 401(k) savings plan. Mr. Kalasky was not an executive officer
in fiscal 1996 and 1995.

(8) All Other Compensation for fiscal 1997, 1996 and 1995 consists of $24,320,
$56,459 and $0, respectively, paid for relocation expenses incurred as a
result of the relocation of the Company's corporate headquarters, $2,744,
$3,398 and $1,247, respectively, representing Company-matching contributions
under the Company's 401(k) savings plan, $123 paid as a premium on a split
dollar life insurance policy used to fund the 1996 Executive Deferred
Compensation Plan, and, for fiscal 1997, $19,615 in severance payments
commencing on February 16, 1997. Mr. Smith's employment with the Company
terminated in February 1997.

(9) All Other Compensation for fiscal 1997 and 1996 consists of $72,669 and
$58,652, respectively, paid for relocation expenses incurred as a result of
the relocation of the Company's corporate headquarters, $1,959 and $3,951,
respectively, representing Company-matching contributions under the
Company's 401(k) savings plan, $92 paid as a premium on a split dollar life
insurance policy used to fund the 1996 Executive Deferred Compensation Plan,
and, for fiscal 1997, $40,000 paid for Mr. Conklin's relocation costs. Mr.
Conklin joined the Company in August 1994. His employment with the Company
terminated in February 1997.

(10) These stock options were subsequently canceled, and new options for the
same number of shares of the Company's Common Stock were granted, pursuant
to an option repricing in fiscal 1998. See "--Option Repricing."

(11) These stock options expired pursuant to Mr. Bender's resignation from the
Company in May 1996, Mr. Grossman's resignation in April 1997, Mr. Smith's
resignation in February 1997, and Mr. Conklin's resignation in February
1997.

10
<PAGE>
OPTION GRANTS IN FISCAL YEAR 1997

The following table sets forth stock option grants made during the fiscal
year ended March 29, 1997, to the Company's Chief Executive Officers, and the
other Named Executive Officers, pursuant to the Company's 1993 Stock Option
Plan.

OPTION GRANTS IN FISCAL 1997

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------
NUMBER OF AT ASSUMED ANNUAL RATES OF
SECURITIES PERCENT OF STOCK PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS FOR OPTION TERM
OPTIONS GRANTED TO EXERCISE --------------------------
GRANTED EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME (#)(1) FISCAL YEAR ($/SHARE) DATE ($)(2) ($)(2)
- --------------------------------------------- ---------- ------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Terence M. Strom............................. -- -- -- -- -- --

George P. Orban.............................. 22,500 1.23% $ 5.88 09/26/06 $ 83,202 $ 210,852
1,000,000 54.65% 5.38 01/31/07 3,383,454 8,574,334

Brian W. Bender(3)........................... 40,000 2.19% 6.19 11/29/06 155,714 394,611

Peter F. Grossman(4)......................... 50,000 2.73% 10.94 04/25/97 -- --

Tommy E. Collins(3).......................... 30,000 1.64% 10.94 05/03/06 206,403 523,066

James F. Kalasky(3).......................... 30,000 1.64% 10.94 05/03/06 206,403 523,066

Ronald J. Smith(4)........................... 40,000 2.19% 10.94 02/15/97 -- --

Kurt S. Conklin(4)........................... 40,000 2.19% 10.94 02/14/97 -- --
</TABLE>

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

(1) Except for certain options granted as described below, the options shown in
the above table are nonqualified options, have a 10-year term from the date
of grant and vest over a three-year period with the following vesting
schedule: one-sixth on the first anniversary of grant; one-third on the
second anniversary of grant; and one-half on the third anniversary of grant.
The options were granted at the fair market value of the Company's Common
Stock on the date of grant. Upon the occurrence of certain business
combinations, the exercisability of the options would be accelerated, or the
options would be assumed by the surviving or acquiring corporation. The
option granted to Mr. Bender was issued upon his reemployment with the
Company and vests over a two-year period with the following vesting
schedule: one-sixth upon grant, one-third on the first anniversary of grant
and one-half on the second anniversary of grant. On January 30, 1997,
Egghead granted Mr. Orban an option to purchase 1,000,000 shares of Common
Stock, which vests over a period of 18 months, with 250,300 shares vesting
on January 31, 1997, 44,100 shares vesting on March 8, 1997 and an
additional 44,100 shares vesting each month thereafter until July 8, 1998.
Mr. Orban also was granted under the Company's Nonemployee Directors' Stock
Option Plan, at the 1996 annual shareholders' meeting, an option to purchase
22,500 shares of Common Stock, which vest over a three-year period in equal
one-third increments. See "--Change of Control, Severance and Employment
Arrangements--Option Plans."

(2) Represent amounts that may be realized upon exercise of the options
immediately prior to their expiration assuming the specified compounded
rates of appreciation on the base price (5% and 10%) of the Common Stock
over the option terms. The 5% and 10% amounts are calculated based on rules
required by the Commission and do not reflect the Company's estimate of
future stock price growth. Actual gains, if any, on stock option exercises
depend on the timing of such exercises, the future performance of the Common
Stock and overall stock market conditions. There can be no assurance that
the rates of appreciation assumed in these columns can be achieved or that
the amounts reflected will be received by the individuals.

11
<PAGE>
(3) The respective stock options were subsequently canceled, and new options for
the same number of Common Stock granted, pursuant to an option repricing in
the first quarter of fiscal 1998. See "--Option Repricing."

(4) The respective stock options expired on the date the individual terminated
his employment with Egghead, which, in the case of Mr. Grossman, was April
25, 1997, in the case of Mr. Smith, was February 15, 1997 and, in the case
of Mr. Conklin, was February 14, 1997.

The following table sets forth information with respect to stock option
grants made under the Company's stock option plans to the Chief Executive
Officers and the other Named Executive Officers, including (i) the number of
shares of Common Stock purchased upon exercise of options in fiscal year 1997;
(ii) the net value realized upon such exercise; (iii) the number of unexercised
options outstanding at March 29, 1997; and (iv) the value of unexercised
in-the-money options at March 29, 1997.

AGGREGATED OPTION EXERCISES IN FISCAL 1997
AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES OPTIONS AT
SHARES UNDERLYING UNEXERCISED FISCAL YEAR END
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR END(#) ($)(1)
EXERCISE REALIZED -------------------------------- ---------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ----------------------------------------- ----------- ----------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Terence M. Strom......................... -- -- 225,000 -- --

George P. Orban.......................... -- -- 316,900 728,100 --

Brian W. Bender.......................... -- -- 6,668 33,332 --

Peter F. Grossman(2)..................... -- -- 23,334 86,666 --

Tommy E. Collins......................... -- -- 834 34,166 --

James F. Kalasky......................... -- -- 1,667 38,333 --

Ronald J. Smith.......................... -- -- 27,834 -- --

Kurt S. Conklin.......................... 1,251 $ 4,172 5,833 -- --

NAME UNEXERCISABLE
- ----------------------------------------- -----------------
<S> <C>
Terence M. Strom......................... --
George P. Orban.......................... --
Brian W. Bender.......................... --
Peter F. Grossman(2)..................... --
Tommy E. Collins......................... --
James F. Kalasky......................... --
Ronald J. Smith.......................... --
Kurt S. Conklin.......................... --
</TABLE>

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

(1) As of June 30, 1997, the exercise prices of all the options listed in the
table were above the fair market value as quoted on the Nasdaq National
Market.

(2) Terminated employment on April 25, 1997; pursuant to a resignation agreement
between the Company and Mr. Grossman, vested stock options are exercisable
until January 1999.

CHANGE OF CONTROL, SEVERANCE AND EMPLOYMENT ARRANGEMENTS

CHANGE OF CONTROL AGREEMENTS. In fiscal 1997, the Company entered into
Senior Management Employment Agreements with Brian W. Bender, Peter F. Grossman,
Ronald J. Smith, Kurt S. Conklin, Tommy E. Collins, James F. Kalasky and nine
other executives. These agreements provide certain benefits in the event that,
during the two-year period after execution, such executive's employment is
terminated by the Company for any reason other than "cause" or by the executive
for "good reason" (as both terms are defined in the agreements) following a
"change of control" of the Company. Such benefits include (i) payment of the
executive's base salary for the balance of such two-year period, (ii) payment of
an amount equal to such executive's annual base salary for one year following
termination (or six months in the case of certain executives), and (iii)
continuation of life insurance, disability, medical and dental, and other
similar employee benefits for the balance of such two-year period or for one
year (or six months in the case of certain executives), whichever is longer.
Such benefits are also payable by the Company in the event of the executive's
death or disability following a change of control of the Company. All amounts

12
<PAGE>
payable under the Senior Management Employment Agreements are subject to the
limitation that no amounts that would constitute an excess parachute payment
(within the meaning of Section 280G(b) of the Internal Revenue Code of 1986, as
amended) may be paid to any executive. On each anniversary, the Senior
Management Employment Agreements are automatically extended for an additional
year, unless the Company notifies the executive at least 60 days prior to such
anniversary. See also "--Employment Agreement; Change of Control Arrangement."

SEVERANCE ARRANGEMENTS. The Company paid severance benefits during fiscal
1997 in connection with the resignations of Terence M. Strom and Ronald J. Smith
and during fiscal 1998 in connection with the resignation of Peter F. Grossman.
In Mr. Strom's case, the severance benefits include monthly payments totaling
$300,000 annually for each of the first two years following his termination and
payment of relocation expenses of up to $80,000. The severance benefits for each
of Messrs. Smith and Grossman include monthly payments equal to the executive's
monthly salary ($14,167 per month and $20,834 per month, respectively) for at
least nine months following the date of termination, and for up to nine and 12
additional months, respectively, in the event the executive has not obtained
employment during such period, plus payment of relocation expenses of up to
$40,000 each. In addition, the periods during which Messrs. Strom, Smith and
Grossman are entitled to exercise their vested stock options were extended to
dates two years, 18 months and 21 months, respectively, following the date of
termination.

EMPLOYMENT AGREEMENT; CHANGE OF CONTROL ARRANGEMENT. The Company has
entered into an employment agreement with George P. Orban, setting forth the
terms and conditions of his employment as Chairman of the Board and Chief
Executive Officer (the "Agreement"). The Agreement provides for an annual base
salary of $300,000 through August 31, 1998, the end of the Agreement's term and
a lump-sum payment of $1,600,000 payable (i) 30 days after termination by the
Company of his employment during the term of the Agreement for any reason other
than "cause," as defined in the Agreement, or (ii) in the event of a sale of
substantially all of the assets of the Company or a merger or business
combination of the Company in which holders of voting stock of the Company
before such a transaction own less than 50% of the voting stock of the combined
or surviving company following such a transaction, if Mr. Orban continues his
employment through the completion of such transaction. If Mr. Orban is employed
by the Company as of August 31, 1998, he would receive a retention incentive
bonus of $750,000. Should Mr. Orban choose to continue with the Company as a
consultant from September 1, 1998 through March 31, 1999, he would receive
$550,000 on April 1, 1999. Funds will be segregated and pledged to secure the
Company's obligations to Mr. Orban under the Agreement, other than salary. In
addition, the Company will reimburse Mr. Orban in an amount up to $3,000 per
year in 1997, 1998 and 1999 for the cost of life insurance premiums. The
Agreement also provides that Mr. Orban may not compete with the Company for two
years after termination of his employment or until August 31, 2000, whichever is
later.

Except as described in the foregoing paragraphs, the Company has not entered
into employment agreements with its executive officers as of the date of this
Proxy Statement. See "--Change of Control Agreements."

OPTION PLANS. The Company's stock option plans provide that, upon the
occurrence of certain transactions, including certain mergers and other business
combinations involving the Company, outstanding options will fully vest, subject
to termination upon consummation of such transaction. In the alternative, at the
discretion of the Company and the corporation(s) participating in such
transactions, such options may be assumed by the acquiring or surviving
corporation.

DIRECTOR PLAN. The Company's Restated Non-Employee Director Stock Option
Plan provides that upon the occurrence of certain transactions, including
certain mergers and business combinations involving the Company, the vesting of
outstanding options will be accelerated so that all options would be immediately
exercisable. Any options not exercised would terminate upon consummation of such
a transaction.

13
<PAGE>
OPTION REPRICING

On April 23, 1997, the Compensation Committee of the Board of Directors
approved a plan pursuant to which certain executive officers were offered an
opportunity to exchange options having exercise prices in excess of the then
current fair market value for new options having an exercise price of $4.375 per
share of Common Stock (a "Common Share"). Recipients of the repriced replacement
options received credit for vesting under the original options, but cannot
exercise the new options for a one-year period following the date of grant of
the new options.

The Compensation Committee repriced Mr. Bender's option to purchase 40,000
Common Shares at an exercise price of $6.1875 per share; Tommy E. Collins' and
James F. Kalasky's options to each purchase 30,000 Common Shares at an exercise
price of $10.9375 per share; Mr. Collins' option to purchase 5,000 Common Shares
at an exercise price of $13.50 per share; Mr. Kalasky's option to purchase
10,000 Common Shares at an exercise price of $12.00 per share; and Norm
Hullinger's option to purchase 40,000 Common Shares at an exercise price of
$5.875 per share. The new exercise price for the new options which replaced
these options was $4.375 per share.

The Compensation Committee approved a similar option repricing for employees
other than executive officers on April 4, 1997.

The option repricing plan was implemented in order, among other reasons, to
provide a greater incentive for employees and executives to increase the
Company's revenues and profits and to retain experienced employees and
executives.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Each of Richard P. Cooley and George P. Orban, directors of the Company,
Steven E. Lebow, a former director of the Company, and Paul G. Allen, a former
director of the Company and the beneficial owner of greater than 5% of the
Common Stock, served as a member of the Compensation Committee of the Board
during part or all of fiscal year 1997.

Mr. Allen is a shareholder and director of Microsoft Corporation, the
founder and Chairman of Asymetrix Corporation, and the President and sole
shareholder of Vulcan Ventures Inc. In fiscal year 1997, aggregate software
purchases by the Company directly from Microsoft were approximately $79,586,000.
Additional Microsoft products were purchased by the Company through third-party
distributors. In fiscal year 1997, aggregate purchases by the Company from
Asymetrix were approximately $153,000. In a stock purchase agreement among
Vulcan Ventures Inc. and certain shareholders of the Company (including certain
of the Company's directors) dated June 18, 1987, such shareholders agreed to use
their best efforts to encourage the Company and its subsidiaries to do business
with the above entities as well as with any other affiliate of Mr. Allen or
Vulcan Ventures Inc., provided the transaction is on an arm's-length basis.

Richard P. Cooley serves as Honorary Director of Seafirst Bank. On December
8, 1995, the Company entered into a Revolving Loan Agreement with Seafirst Bank
and U.S. Bank of Washington, National Association, which provided for secured
borrowings of up to $35,000,000. The Revolving Loan Agreement expired April 30,
1996 and was not renewed.

On May 13, 1996, the Company sold its CGE division to Software Spectrum,
Inc., a Texas corporation. Steven E. Lebow is a Managing Director of the
Investment Banking Division of Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), an investment banking firm that assisted the Company with
the CGE transaction. In that connection, DLJ was paid a fee of $1,210,200.

Pursuant to a letter agreement between the Company and DLJ, dated December
5, 1996 (the "DLJ Engagement Letter"), the Company agreed to pay DLJ as
compensation both for its services as exclusive financial advisor to the Company
generally and to render an opinion in connection with the Merger, (i) a retainer
fee of $100,000 (which has been paid) upon execution of the DLJ Engagement
Letter, (ii) a fee of

14
<PAGE>
$300,000 (which has also been paid) at the time DLJ notifies the Board that it's
prepared to deliver an opinion as to the fairness from a financial point of view
of the consideration payable by the Company in the Merger (without regard to the
conclusion reached in such opinion) and (iii) a stock performance-dependent
transaction fee, less the sum of the amounts paid pursuant to clauses (i) and
(ii) above (the "Net Transaction Fee"), upon consummation of the Merger. Based
on the price of the Common Stock at July 11, 1997, the Net Transaction Fee would
be approximately $28,000. In addition, the Company has agreed to reimburse DLJ
for its out-of-pocket expenses, including reasonable fees and expenses of its
counsel, and to indemnify DLJ for certain liabilities and expenses arising out
of the Merger or the transactions in connection therewith, including liabilities
under federal securities laws. The terms of the fee arrangement with DLJ, which
DLJ and the Company believe are customary in transactions of this nature, were
negotiated at arm's length between the Company and DLJ, and the Board was aware
of such arrangements, including the fact that an additional portion of the
aggregate fee payable to DLJ is contingent on consummation of the Merger.

During fiscal 1997, the Company paid consulting fees (consisting of Mr.
Orban's directors' fees and compensation for his services as CEO) of
approximately $252,000 to Retail Enterprises, Inc., which is wholly owned by
George P. Orban, the Company's Chief Executive Officer. Mr. Orban was appointed
as the Company's Chief Executive Officer in January 1997.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

OVERVIEW AND PHILOSOPHY. The Compensation Committee of the Board (the
"Committee") is responsible for recommending to the Board compensation for the
Company's five highest-compensated executive officers, including the Company's
Chief Executive Officer, and for reviewing and approving compensation
recommendations made by the Chief Executive Officer for the other executive
officers. The Committee is also responsible for administering all of the
Company's compensation programs.

The Committee's goal is to provide compensation that is fair and competitive
and that will reward sustained high performance. The Committee also believes
that executives should have the opportunity for a significant portion of their
compensation to be "at risk" in the form of incentive compensation. The
Company's executive compensation packages generally consist of base salary and
long-term incentive compensation in the form of stock options, and may, from
time to time, include annual incentive compensation in the form of bonuses. The
Committee also administers and reviews any employment agreements between the
Company and its executives.

BASE SALARY. In determining the base salary for a particular executive
within the salary range for his or her position, the Committee initially takes
into account the salary necessary to encourage the executive to join the Company
in lieu of pursuing other employment opportunities. In later years, the
Committee considers the amount budgeted by the Board for salary increases, the
executive's level of responsibility, prior experience, breadth of knowledge and
job performance, and the amount of increase necessary to retain the executive.
The Company does not have a target range for base salaries for executive
officers.

ANNUAL INCENTIVE COMPENSATION. In fiscal year 1997, cash bonuses for
executives were considered at the end of the fiscal year by the Committee in
consultation with certain members of Company management. Such consultation took
into consideration the Company's financial performance, including the Company's
earnings per share. Based upon the Company's financial performance, no executive
officer received a bonus for fiscal year 1997, except for the following
individuals who received the bonuses noted below for their contributions towards
the completion of the sale of the Company's former CGE division: Peter F.
Grossman, former Executive Vice President ($7,026); Ronald J. Smith, former
Senior Vice President ($68,016); Kurt S. Conklin, former Senior Vice President
($69,630); Tommy E. Collins, Vice President of MIS ($20,000); and James F.
Kalasky, Vice President of Merchandising ($5,000).

15
<PAGE>
LONG-TERM INCENTIVE COMPENSATION. The primary objective of the Company's
stock option program is to provide incentives tied to the performance of the
Company as measured by stock price appreciation. The Committee believes that the
Company's stock option program better aligns the interests of the Company's
executives with those of its shareholders. The Committee generally grants
nonqualified stock options with an exercise price equal to the fair market value
of the Common Stock on the date of grant and a three year vesting schedule.

In granting options, the Committee considers the amount and value of options
currently held, but does not have a target ownership level for Common Stock
holdings for executives. In fiscal year 1997, the Committee granted options to
purchase 1,807,400 shares of Common Stock, of which options to purchase
1,330,000 shares were granted to executive officers, seven of which are Named
Executive Officers as referred to throughout this document, and the remaining
477,400 were granted to a broad range of employees, generally fixed by salary
grade. Within the group of executive officers (other than the Chief Executive
Officer), the exact number of shares subject to options was recommended to the
Committee by the Chief Executive Officer. Subsequent to the end of fiscal 1997,
the Compensation Committee approved a stock option repricing plan for employees
and certain executive officers in order, among other reasons, to provide a
greater incentive for employees and executives to increase the Company's
revenues and profits and to retain experienced employees and executives. See
"EXECUTIVE COMPENSATION--Option Repricing."

CHIEF EXECUTIVE OFFICER COMPENSATION. Mr. Strom served as the Company's
Chief Executive Officer during fiscal year 1997 until his resignation in January
1997. Mr. Strom's compensation was governed through June 28, 1996 by the terms
of an employment agreement, which provided that he receive an annual base salary
of $300,000, with a minimum bonus of $300,000 for fiscal year 1995. Mr. Strom's
annual base salary was maintained at $300,000 until his resignation. No bonus
was paid to Mr. Strom for fiscal year 1996 or fiscal year 1997.

Mr. Orban was elected Chairman of the Company in May 1996 and Chief
Executive Officer of the Company in January 1997. Upon commencement of his
employment, the Committee granted Mr. Orban an option to purchase 1,000,000
shares of Common Stock. In 1997, the Company entered into an employment
agreement with Mr. Orban which expires on August 31, 1998. Under the agreement,
Mr. Orban receives, among other things, an annual base salary of $300,000, and
retention incentive bonus of $750,000 if Mr. Orban's employment with the Company
has not terminated prior to August 31, 1998. The agreement provides for a
lump-sum payment of $1,600,000 payable 30 days after the termination by the
Company of his employment during the term of the agreement for any reason other
than "cause" as defined in the agreement, or payable in the event of a sale of
substantially all of the assets of the Company or a merger or business
combination under certain circumstances if Mr. Orban continues his employment
through the completion of such transaction. See "Change of Control, Severance
and Employment Arrangements--Employment Agreement; Change of Control
Arrangement."

In approving Mr. Orban's employment and option arrangements, the Committee's
goal was to offer fair and competitive compensation that would attract and
retain Mr. Orban as the Chief Executive Officer and an equity incentive that
puts a substantial portion of Mr. Orban's compensation "at risk" and will reward
him for the successful performance of the Company. In addition, the Committee
believes that Mr. Orban's participation in the Company's stock price
appreciation through his stock option grant aligns his interests with those of
the shareholders.

COMPENSATION COMMITTEE

Richard P. Cooley

Samuel N. Stroum, Chairman

16
<PAGE>
STOCK PRICE PERFORMANCE GRAPHS

The first graph below shows a comparison of cumulative total shareholder
returns of the Company for the last five fiscal years ("Cumulative Shareholder
Returns") with (a) the cumulative total return of the University of Chicago's
Center for Research in Security Prices ("CRSP") Index for Nasdaq Stock Market
SIC Code 573 - U.S., a retail trade line-of-business index of U.S. company
equities that includes computer and software retailers (the "U.S. SIC 573
Index") and (b) the cumulative total return of the CRSP Index for the Nasdaq
Stock Market - U.S., a broad market equity index including U.S. company equities
("Nasdaq U.S. Index"). The second graph shows a comparison of Cumulative
Shareholder Returns with (x) the cumulative total return of the CRSP Index for
the Nasdaq Stock Market SIC Code 573 - U.S. and foreign, a retail trade
line-of-business index of U.S. and foreign company equities that includes
computer and software retailers (the "U.S. and Foreign SIC 573 Index") and (y)
the cumulative total return of the CRSP Index for the Nasdaq Stock Market - U.S.
and foreign, a broad market equity index including U.S. and foreign company
equities ("Nasdaq U.S. and Foreign Index").

As a result of the Company's sale of its former CGE division, the Company's
current primary source of revenues is sales through its retail stores in the
United States. The Company therefore believes that the U.S. SIC 573 Index is a
line-of-business index and the Nasdaq U.S. Index is a broad market equity index
that provide more useful comparisons to the Company's Cumulative Shareholder
Returns than the U.S. and Foreign SIC 573 Index and the Nasdaq U.S. and Foreign
Index. The graphs below include a comparison of Cumulative Shareholder Returns
with the cumulative total return of the newly selected U.S. SIC 573 Index and
Nasdaq U.S. Index, and a comparison of Cumulative Shareholder Returns with the
cumulative total return of the U.S. and Foreign SIC 573 Index and the Nasdaq
U.S. and Foreign Index used in last year's proxy statement.

The comparison assumes $100 was invested in the Company's Common Stock and
in each of the foregoing indices on March 27, 1992, and assumes reinvestment of
dividends, if any. The Company has not paid dividends. Dates on the horizontal
axis on each graph represent the last day of trading before the respective
fiscal year end. The stock performance shown on the graphs below is not
necessarily indicative of future price performance.

17
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
EGGHEAD, INC.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
NASDAQ STOCKS

<S> <C> <C> <C>
Nasdaq Stock Market (SIC 5730-5739
EGGHEAD, Inc. (US Companies) US Companies)
03/27/92 100.0 100.0 100.0
04/29/92 81.5 94.0 85.2
05/29/92 78.4 96.7 83.6
06/29/92 68.0 92.1 72.8
07/29/92 65.8 95.7 72.5
08/28/92 36.9 93.4 63.4
09/29/92 32.0 95.8 71.2
10/29/92 35.1 100.7 82.6
11/27/92 36.0 108.1 87.5
12/29/92 36.0 111.3 86.4
01/29/93 35.6 115.8 92.6
02/26/93 29.3 111.5 87.6
03/29/93 27.9 113.0 88.1
04/29/93 29.7 109.3 83.8
05/28/93 31.1 116.4 88.1
06/29/93 28.8 116.4 81.2
07/29/93 26.1 117.5 85.1
08/27/93 26.6 121.5 87.2
09/29/93 24.8 126.8 94.5
10/29/93 26.6 129.6 96.5
11/29/93 31.5 125.2 95.5
12/29/93 32.0 127.8 88.5
01/28/94 33.8 132.5 82.5
02/28/94 34.2 131.9 80.2
03/29/94 32.4 125.8 75.9
04/29/94 30.6 122.2 66.8
05/27/94 28.4 122.1 62.4
06/29/94 26.6 117.7 57.8
07/29/94 23.9 120.4 59.1
08/29/94 25.7 127.6 62.4
09/29/94 25.7 127.0 64.3
10/28/94 31.5 130.0 63.4
11/29/94 35.6 126.2 65.6
12/29/94 42.6 126.0 61.9
01/27/95 40.1 127.7 61.5
02/28/95 37.8 133.8 57.2
03/29/95 30.6 138.1 54.7
04/28/95 34.2 142.1 52.3
05/26/95 36.9 147.0 54.5
06/29/95 47.3 156.4 61.8
07/28/95 47.3 169.8 63.1
08/29/95 45.0 169.7 63.1
09/29/95 29.3 176.5 57.0
10/27/95 25.2 173.7 49.6
11/29/95 27.3 179.3 45.4
12/29/95 23.2 178.6 37.4
01/29/96 19.8 176.6 34.8
02/29/96 20.9 186.4 35.0
03/29/96 38.5 187.0 39.3
04/29/96 34.9 202.1 42.6
05/29/96 40.1 208.7 46.2
06/28/96 40.1 202.2 46.6
07/29/96 32.9 181.7 36.3
08/29/96 29.3 195.1 35.6
09/27/96 21.6 210.1 30.6
10/29/96 20.7 203.8 28.2
11/29/96 22.3 219.9 28.4
12/27/96 18.9 220.0 25.4
01/29/97 20.9 230.7 26.2
02/28/97 18.5 222.3 28.4
03/27/97 16.7 212.6 26.1
</TABLE>

18
<PAGE>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
EGGHEAD, INC.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
NASDAQ STOCKS

<S> <C> <C> <C>
(SIC 5730-5739
US + Foreign)
Radio, Television,
Nasdaq Stock Market Consumer Electronics,
EGGHEAD, Inc. (US & Foreign) and Music Stores
03/27/92 100.0 100.0 100.0
04/29/92 81.5 094.0 85.2
05/29/92 78.3 096.7 83.5
06/29/92 68.0 092.2 72.7
07/29/92 65.7 095.5 72.4
08/28/92 36.9 093.2 63.3
09/29/92 31.9 095.6 71.2
10/29/92 35.1 100.2 82.5
11/27/92 36.0 107.4 87.4
12/29/92 36.0 110.7 86.4
01/29/93 35.5 115.3 92.5
02/26/93 29.2 111.2 87.5
03/29/93 27.9 113.0 88.0
04/02/93 28.8 111.3 87.7
05/28/93 31.0 116.6 88.1
06/29/93 28.8 116.8 81.1
07/29/93 26.1 117.9 85.0
08/27/93 26.5 122.2 87.2
09/29/93 24.7 127.2 94.5
10/29/93 26.5 130.0 96.5
11/29/93 31.5 125.5 95.4
12/29/93 31.9 128.2 88.5
01/28/94 33.7 133.1 82.5
02/28/94 34.2 132.3 80.2
03/31/94 31.1 124.3 71.7
04/29/94 30.6 122.6 66.7
05/27/94 28.3 122.4 62.3
06/29/94 26.5 117.6 57.8
07/29/94 23.8 120.7 59.0
08/29/94 25.6 127.6 62.3
09/29/94 25.6 127.0 64.2
10/28/94 31.5 129.9 63.3
11/29/94 35.5 125.7 65.5
12/29/94 42.5 125.3 61.8
01/27/95 40.0 126.8 61.4
02/28/95 37.8 132.6 56.6
03/31/95 30.6 136.8 54.5
04/28/95 34.2 141.2 53.6
05/26/95 36.9 145.9 54.6
06/29/95 47.2 155.2 60.1
07/28/95 47.2 168.2 60.6
08/29/95 45.0 168.1 60.5
09/29/95 29.2 175.0 54.5
10/27/95 25.0 171.8 47.3
11/29/95 27.2 177.4 43.5
12/29/95 23.1 176.6 36.5
01/29/96 19.8 174.9 33.8
02/29/96 20.9 184.8 34.0
03/29/96 38.5 185.2 38.1
04/29/96 34.9 199.9 40.5
05/29/96 40.0 206.4 43.9
06/28/96 40.0 199.5 44.1
07/29/96 32.8 179.2 34.1
08/29/96 29.2 192.5 33.4
09/27/96 21.6 206.8 28.5
10/29/96 20.7 201.0 26.1
11/29/96 22.2 216.5 26.0
12/27/96 18.9 216.3 23.7
01/29/97 20.9 227.2 24.5
02/28/97 18.4 219.4 26.4
03/27/97 16.7 210.0 24.3
</TABLE>

19
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 1997, Richard P. Cooley and George P. Orban, directors of the
Company, Steven E. Lebow, a former director of the Company, and Paul G. Allen, a
shareholder and former director of the Company, were all parties to certain
transactions with the Company. See "EXECUTIVE COMPENSATION--Compensation
Committee Interlocks and Insider Participation."

On April 23, 1997, the Compensation Committee of the Company's Board of
Directors approved a plan allowing certain executive officers holding stock
options to replace them with repriced options. The following four executives
elected to reprice their outstanding options: Tommy E. Collins, James F.
Kalasky, Brian W. Bender and Norman Hullinger. See "EXECUTIVE
COMPENSATION--Option Repricing" and "EXECUTIVE COMPENSATION--Annual and
Long-Term Compensation--Summary Compensation Table."

If the Merger is consummated, Gregory Boudreau and Jonathan Brodeur, each of
whom is a nominee for director, will receive approximately 1,775,250 and 355,050
shares of Common Stock, respectively, in exchange for their shares of Surplus
Direct stock and upon exercise of their options to purchase Surplus Direct
stock. Also in connection with the consummation of the Merger, four promissory
notes in an aggregate principal amount of $232,000, payable by Mr. Brodeur to
Surplus Direct, will be exchanged at the closing of the Merger for a single
$232,000 note (the "Egghead Note"), payable to the Company, bearing interest at
6.36% per annum. The maturity date of the Egghead Note will be the earlier of
(i) two years after the closing of the Merger and (ii) 30 days after termination
of Mr. Brodeur's employment with Surplus Direct.

PROPOSAL TO AMEND THE EGGHEAD, INC. 1993 STOCK OPTION PLAN

The purpose of the Egghead, Inc. 1993 Stock Option Plan (the "1993 Plan") is
to assist the Company in attracting and retaining selected employees, directors,
officers, agents, consultants, advisors and independent contractors through the
grant of incentive stock options ("ISOs") and/or nonqualified stock options
("NSOs") to purchase the Common Stock, and to provide added incentive to such
persons by encouraging stock ownership in the Company.

The amendment to the 1993 Plan provides that the maximum number of shares of
Common Stock with respect to which an option or options may be granted to any
optionee in any one fiscal year of the Company shall not exceed 300,000 shares,
except that the Company may make one-time grants of options for up to 750,000
shares per individual to newly-hired individuals. The Board believes that the
amendment is necessary for the 1993 Plan to comply with Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), which imposes a cap on
the deductibility, for federal income tax purposes, of certain compensation
payments in excess of $1 million. The limitation on deductibility applies to
that portion of compensation (including compensation attributable to the
exercise of stock options) for a taxable year in excess of $1 million to the
corporation's chief executive officer and the four other most highly compensated
executive officers. Certain kinds of performance-based compensation, including
certain stock options, are not subject to the cap on deductibility if certain
conditions are met. For grants made under the 1993 Plan to qualify as
performance-based compensation, the 1993 Plan must state the maximum number of
shares with respect to which grants may be made during the fiscal year. Each
proxy will be voted for the amendment to the 1993 Plan if no contrary
instructions are given in the proxy.

DESCRIPTION OF THE 1993 PLAN

As of June 30, 1997, approximately 2,352,900 shares of Common Stock were
subject to outstanding options and approximately 852,400 shares of Common Stock
were available for future grant of options under the 1993 Plan. The text of the
1993 Plan, as amended, subject to shareholder approval, is attached to this
proxy statement as Exhibit A. The following summary of the 1993 Plan is
qualified by reference to Exhibit A for a more complete statement of the 1993
Plan's provisions.

20
<PAGE>
ADMINISTRATION. The administrator of the 1993 Plan (the "Plan
Administrator") is currently the Board's Compensation Committee. Subject to the
terms of the 1993 Plan, the Plan Administrator has the authority, in its
discretion, to determine all matters relating to the options to be granted under
the 1993 Plan, including the selection of the individuals to be granted options,
the number of shares to be subject to each option, the exercise price, vesting,
and all other terms and conditions of the options.

NUMBER OF SHARES AND PRICE. The number of shares that may be purchased and
the exercise price per share for each option is established by the Plan
Administrator, provided that the exercise price with respect to ISOs may not be
less than the fair market value per share (or 110% of the fair market value per
share for 10% shareholders) at the time of grant. As of June 30, 1997, the last
sale price of the Common Stock on the Nasdaq Stock Market was $3.9375.

TERM, VESTING AND EXERCISE. Unless modified by the Plan Administrator,
options expire ten years from the date of grant and vest over a three-year
period in annual increments of one-sixth, one-third and one-half of the total
shares. The term of incentive stock options granted to greater than 10%
shareholders, however, is limited to five years. Subject to vesting, each option
generally may be exercised in whole or in part at any time and from time to
time. The Plan Administrator may determine the terms and conditions under which
an option may be exercised following termination of an optionee's relationship
with the Company.

CHANGE IN CONTROL. The 1993 Plan provides that, upon the occurrence of
certain transactions, including certain mergers and other business combinations
involving the Company, outstanding options will be exercisable, regardless of
vesting, immediately prior to any such transaction, and such options will then
terminate upon consummation of such transaction if they are not exercised. In
the alternative, at the discretion of the Company and the corporation
participating in such transaction involving a stock for stock exchange, such
options may be converted into options to purchase the capital stock of such
other participating corporation.

AMENDMENT AND TERMINATION. The Board may amend, suspend or terminate the
1993 Plan at any time, provided that no such amendment shall be made without the
approval of the Company's shareholders if such approval is required to comply
(a) with respect to incentive stock options, Section 422 of the Code, or any
successor provision or (b) any other law or regulation.

TERM. The 1993 Plan will expire on June 16, 2003, unless sooner terminated
by the Board.

TAX CONSEQUENCES

NONQUALIFIED STOCK OPTIONS. The NSOs granted under the 1993 Plan are taxed
pursuant to rules under Section 83 of the Code. An optionee will not be deemed
to receive any income at the time an option is granted nor will the Company be
entitled to a deduction at that time. When any part of an option is exercised,
the optionee will be deemed to have received ordinary income in an amount equal
to the difference between the option price and the fair market value at the time
of exercise of the shares to which the option pertains. The Company will be
entitled to a tax deduction at that time in an amount equal to the amount of
ordinary income realized by the optionee.

INCENTIVE STOCK OPTIONS. The ISOs granted under the 1993 Plan are taxed
pursuant to rules under Section 422 of the Code. An optionee will not be deemed
to receive any income at the time an ISO is granted or, assuming certain holding
periods are met, at the time an ISO is exercised. However, the exercise of an
ISO creates taxable income for the purpose of calculating the alternative
minimum tax, if any, in the amount by which the fair market value of the shares
at the time of exercise exceeds the option price. For purposes of regular income
tax calculation, however (and assuming certain statutory holding-period
requirements are met), the recognition of taxable income does not occur until
the shares acquired by exercise of the options are subsequently sold. The income
(or loss) recognized at that time will equal the

21
<PAGE>
amount by which the fair market value of the shares at the time of sale exceeds
(or is exceeded by) the option exercise price. The gain or loss arising from a
sale of the shares received upon the exercise of an ISO after the statutory
holding periods are met will be long term capital gain or loss. If shares
received upon the exercise of an ISO are sold before the statutory holding
period (a "disqualifying disposition"), the optionee will be deemed to have
received ordinary income in an amount equal to the difference between (i) the
option price and (ii) the lesser of the sales price or the fair market value at
the time of exercise. The Company is not generally entitled to a deduction as a
result of the grant or exercise of an ISO except in the case of disqualifying
dispositions.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
APPROVAL OF THE AMENDMENT OF THE EGGHEAD, INC. 1993 STOCK OPTION PLAN TO COMPLY
WITH SECTION 162(m) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.

SELECTION OF INDEPENDENT AUDITORS

The Company has selected Arthur Andersen LLP to continue as its independent
auditors for the fiscal year ending March 28, 1998. Representatives of Arthur
Andersen LLP are expected to attend the 1997 Annual Meeting and to have the
opportunity to make a statement if they so desire and to respond to appropriate
questions.

OTHER BUSINESS

As of the date of this proxy statement, management knows of no other
business that will be presented for action at the 1997 Annual Meeting. If any
other business requiring a vote of the shareholders should come before the
meeting, the persons designated as your proxies will vote or refrain from voting
in accordance with their best judgment.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Officers and directors of the Company and persons who own more than ten
percent of the Company's stock are required to report to the Securities and
Exchange Commission ("SEC") ownership and changes in ownership of the Company's
stock. Regulations promulgated by the SEC require the Company to disclose to its
shareholders those filings that were not made on a timely basis. Based solely on
its review of copies of such reports received by it, or written representations
received from reporting persons that no such forms were required for those
persons, the Company believes that, during fiscal year 1997, its officers and
directors complied with all applicable filing requirements.

SHAREHOLDER PROPOSALS FOR THE
1998 ANNUAL MEETING OF SHAREHOLDERS

Shareholder proposals to be presented at the 1998 Annual Meeting of
Shareholders must be received at the Company's executive offices by March 25,
1998, in order to be included in the Company's proxy statement and form of proxy
relating to that meeting.

SOLICITATION OF PROXIES

This solicitation is made on behalf of the Board of Directors of the
Company. Proxies may be solicited by officers, directors, and regular
supervisory and executive employees of the Company, none of whom will receive
any additional compensation for their services. In addition, Allen Nelson & Co.
will assist the Company in the solicitation of proxies by the Company for a fee
of approximately $5,500, plus reasonable expenses. Solicitations of proxies may
be made personally, or by mail, telephone, telegraph, facsimile, or messenger.
The Company will pay persons holding shares of Common Stock in their names or in
the names of nominees, but not owning such shares beneficially, such as
brokerage houses, banks, and other

22
<PAGE>
fiduciaries, for the expense of forwarding soliciting materials to their
principals. All the costs of solicitation of proxies will be paid by the
Company.

By Order of the Board of Directors

[SIG]

Brian W. Bender
SECRETARY

Liberty Lake, Washington
August 1, 1997

23
<PAGE>
EXHIBIT A

EGGHEAD, INC.
AMENDED 1993 STOCK OPTION PLAN

SECTION 1. PURPOSE

The purpose of the 1993 Stock Option Plan (this "Plan") is to provide a
means whereby selected employees, directors, officers, agents, consultants,
advisors and independent contractors of Egghead, Inc. (the "Company"), or of any
parent or subsidiary (as defined in subsection 5.8 and referred to hereinafter
as "related corporations") thereof, may be granted incentive stock options
and/or nonqualified stock options to purchase the Common Stock (as defined in
Section 3) of the Company, in order to attract and retain the services or advice
of such employees, directors, officers, agents, consultants, advisors and
independent contractors and to provide added incentive to such persons by
encouraging stock ownership in the Company.

SECTION 2. ADMINISTRATION

This Plan shall be administered by the Board of Directors of the Company
(the "Board") or a committee or committees (which term includes subcommittees)
appointed by, and consisting of two or more members of, the Board. The
administrator of this Plan shall hereinafter be referred to as the "Plan
Administrator." So long as the Common Stock is registered under Section 12(b) or
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the Board shall consider, in selecting the Plan Administrator and the membership
of any committee acting as the Plan Administrator of this Plan with respect to
any persons subject or likely to become subject to Section 16 under the Exchange
Act, the provisions regarding (a) "outside directors," as contemplated by
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
and (b) "nonemployee directors," as contemplated by Rule 16b-3 under the
Exchange Act. The Board may delegate the responsibility for administering this
Plan with respect to designated classes of eligible participants to different
committees, subject to such limitations as the Board deems appropriate.
Committee members shall serve for such term as the Board may determine, subject
to removal by the Board at any time.

2.1 RESPONSIBILITIES

Except for the terms and conditions explicitly set forth in this Plan, the
Plan Administrator shall have the authority, in its discretion, to determine all
matters relating to the options to be granted under this Plan, including
selection of the individuals to be granted options, the number of shares to be
subject to each option, the exercise price, and all other terms and conditions
of the options. Grants under this Plan need not be identical in any respect,
even when made simultaneously. The interpretation and construction by the Plan
Administrator of any terms or provisions of this Plan or any option issued
hereunder, or of any rule or regulation promulgated in connection herewith,
shall be conclusive and binding on all interested parties, so long as such
interpretation and construction with respect to incentive stock options
correspond to the requirements of Section 422 of the Code, the regulations
thereunder and any amendments thereto.

2.2 SECTION 16

Notwithstanding anything in this Plan to the contrary, the Board, in its
absolute discretion, may bifurcate this Plan so as to restrict, limit or
condition the use of any provision of this Plan to participants who are officers
and directors subject to Section 16 of the Exchange Act without so restricting,
limiting or conditioning this Plan with respect to other participants.

1
<PAGE>
SECTION 3. STOCK SUBJECT TO THIS PLAN

The stock subject to this Plan shall be the Company's Common Stock (the
"Common Stock"), presently authorized but unissued or subsequently acquired by
the Company. Subject to adjustment as provided in Section 7, the aggregate
amount of Common Stock to be delivered upon the exercise of all options granted
under this Plan shall not exceed (a) 2,000,000 shares as such Common Stock was
constituted on or about June 16, 1993, plus (b) to the extent that additional
options are not granted under the Company's 1986 Combined Incentive and
Non-Qualified Stock Option Plan, as amended (the "1986 Plan"), an additional
number of shares of Common Stock equal to the number of shares which are
currently reserved for issuance under the 1986 Plan and which (i) are available
for options not yet granted under the 1986 Plan as of June 16, 1993, or (ii)
would become available for issuance thereafter under the 1986 Plan as a result
of the cancellation, expiration or other termination of outstanding options. If
any option granted under this Plan shall expire or be surrendered, exchanged for
another option, canceled or terminated for any reason without having been
exercised in full, the unpurchased shares subject thereto shall thereupon again
be available for purposes of this Plan.

SECTION 4. ELIGIBILITY

An incentive stock option may be granted only to any individual who, at the
time the option is granted, is an employee of the Company or any related
corporation. A nonqualified stock option may be granted to any employee,
director, officer, agent, consultant, advisor or independent contractor of the
Company or any related corporation, whether an individual or an entity.

SECTION 5. TERMS AND CONDITIONS OF OPTIONS

Options granted under this Plan shall be evidenced by written agreements
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with this
Plan. Notwithstanding the foregoing, options shall include or incorporate by
reference the following terms and conditions:

5.1 NUMBER OF SHARES AND PRICE

The maximum number of shares that may be purchased pursuant to the exercise
of each option and the price per share at which such option is exercisable (the
"Exercise Price") shall be as established by the Plan Administrator; provided
that the maximum number of shares with respect to which an option or options may
be granted to any Optionee in any one fiscal year of the Company shall not
exceed 300,000 shares, except that the Company may make one-time grants of
options for up to 750,000 shares per individual to newly hired individuals (the
"Maximum Annual Optionee Grants"); and provided, further, that the Plan
Administrator shall act in good faith to establish the Exercise Price which
shall be not less than the fair market value per share of the Common Stock at
the time the option is granted with respect to incentive stock options; and
provided, further, that, with respect to incentive stock options granted to
greater than 10% shareholders, the exercise price shall be as required by
subsection 6.1.

5.2 TERM AND MATURITY

Subject to the restrictions contained in Section 6 with respect to granting
incentive stock options to greater than 10% shareholders, the term of each
incentive stock option shall be as established by the Plan Administrator and, if
not so established, shall be 10 years from the date it is granted but in no
event shall it exceed 10 years. The term of each nonqualified stock option shall
be as established by the Plan Administrator and, if not so established, shall be
10 years. To ensure that the Company or related corporation will achieve the
purpose and receive the benefits contemplated in this Plan, any option granted
to any eligible person hereunder ("Optionee") shall, unless the condition of
this sentence is waived or

2
<PAGE>
modified in the agreement evidencing the option or by resolution adopted at any
time by the Plan Administrator, be exercisable according to the following
schedule:

<TABLE>
<CAPTION>
PERIOD OF OPTIONEE'S CONTINUOUS
RELATIONSHIP WITH THE COMPANY
OR RELATED CORPORATION FROM PORTION OF TOTAL OPTION THAT IS
THE DATE THE OPTION IS GRANTED EXERCISABLE
- ---------------------------------------------------------------- -------------------------------
<S> <C>
After one year.................................................. 16 2/3%

After two years................................................. 50%

After three years............................................... 100%
</TABLE>

5.3 EXERCISE

Subject to the vesting schedule described in subsection 5.2, each option may
be exercised in whole or in part at any time and from time to time; provided,
however, that no fewer than 100 shares (or the remaining shares then purchasable
under the option, if less than 100 shares) may be purchased upon any exercise of
option rights hereunder and that only whole shares will be issued pursuant to
the exercise of any option. Options shall be exercised by delivery to the
Company of notice of the number of shares with respect to which the option is
exercised, together with payment of the Exercise Price.

5.4 PAYMENT OF EXERCISE PRICE

Payment of the option Exercise Price shall be made in full at the time the
notice of exercise of the option is delivered to the Company and shall be in
cash, bank certified or cashier's check or personal check (unless at the time of
exercise the Plan Administrator in a particular case determines not to accept a
personal check) for the Common Stock being purchased.

The Plan Administrator can determine at any time before exercise that
additional forms of payment will be permitted. Unless the Plan Administrator in
its sole discretion determines otherwise, either at the time the option is
granted or at any time before it is exercised, and to the extent permitted by
applicable laws and regulations (including, but not limited to, federal tax and
securities laws and regulations and state corporate law), an option may be
exercised by a combination of cash and/or check (if any) and one or more of the
following alternative forms:

(a) tendering (either actually or by attestation) shares of stock of the
Company held by an Optionee having a fair market value equal to the Exercise
Price, such fair market value to be determined in good faith by the Plan
Administrator; provided, however, that, with respect to options granted
after July 11, 1997, payment in stock held by an Optionee shall not be made
unless the stock shall have been owned by the Optionee for a period of at
least six months (or any shorter period necessary to avoid a charge to the
Company's earnings for financial accounting purposes);

(b) delivery of a full-recourse promissory note executed by the
Optionee; provided that (i) such note delivered in connection with an
incentive stock option shall, and such note delivered in connection with a
nonqualified stock option may, in the sole discretion of the Plan
Administrator, bear interest at a rate specified by the Plan Administrator
but in no case less than the rate required to avoid imputation of interest
(taking into account any exceptions to the imputed interest rules) for
federal income tax purposes, and (ii) the Plan Administrator in its sole
discretion shall specify the term and other provisions of such note at the
time an incentive stock option is granted or at any time prior to exercise
of a nonqualified stock option, and (iii) the Plan Administrator may require
that the Optionee pledge the Optionee's shares to the Company for the
purpose of securing the payment of such note and may require that the
certificate representing such shares be held in escrow in order to perfect
the Company's security interest, and (iv) the Plan Administrator in its sole
discretion may at any time restrict or rescind this right upon notification
to the Optionee; or

3
<PAGE>
(c) delivery of a properly executed exercise notice, together with
irrevocable instructions to a broker, all in accordance with the regulations
of the Federal Reserve Board, to promptly deliver to the Company the amount
of sale or loan proceeds to pay the Exercise Price and any federal, state or
local withholding tax obligations that may arise in connection with the
exercise.

5.5 WITHHOLDING TAX REQUIREMENT

The Company or any related corporation shall have the right to retain and
withhold from any payment of cash or Common Stock under this Plan the amount of
taxes required by any government to be withheld or otherwise deducted and paid
with respect to such payment. At its discretion, the Company may require an
Optionee receiving shares of Common Stock to reimburse the Company for any such
taxes required to be withheld by the Company and withhold any distribution in
whole or in part until the Company is so reimbursed. In lieu thereof, the
Company shall have the right to withhold from any other cash amounts due or to
become due from the Company to the Optionee an amount equal to such taxes. The
Company may also retain and withhold or the Optionee may elect, subject to
approval by the Company at its sole discretion, to have the Company retain and
withhold a number of shares having a market value not less than the amount of
such taxes required to be withheld by the Company to reimburse the Company for
any such taxes and cancel (in whole or in part) any such shares so withheld.

5.6 HOLDING PERIODS

If an individual subject to Section 16 of the Exchange Act sells shares of
Common Stock obtained upon the exercise of a stock option within six months
after the date the option was granted, such sale may result in short-swing
profit liability under Section 16(b) of the Exchange Act.

5.7 NONTRANSFERABILITY OF OPTIONS

Options granted under this Plan and the rights and privileges conferred
hereby may not be transferred, assigned, pledged or hypothecated in any manner
(whether by operation of law or otherwise) other than by will or by the
applicable laws of descent and distribution, and shall not be subject to
execution, attachment or similar process. During an Optionee's lifetime, any
options granted under this Plan are personal to him or her and are exercisable
solely by such Optionee or a permitted assignee or transferee of such Optionee
(as provided below). Any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of any option under this Plan or of any right or privilege
conferred hereby, contrary to the Code or to the provisions of this Plan, or the
sale or levy or any attachment or similar process upon the rights and privileges
conferred hereby shall be null and void. Notwithstanding the foregoing, to the
extent permitted by Section 422 of the Code, the Plan Administrator may permit
an Optionee to (i) during the Optionee's lifetime, designate a person who may
exercise the option after the Optionee's death by giving written notice of such
designation to the Plan Administrator (such designation may be changed from time
to time by the Optionee by giving written notice to the Plan Administrator
revoking any earlier designation and making a new designation) or (ii) transfer
the option and the rights and privileges conferred hereby; provided, however,
that any option so assigned or transferred shall be subject to all the same
terms and conditions contained in the instrument evidencing the option.

5.8 TERMINATION OF RELATIONSHIP

The Plan Administrator shall determine the terms and conditions under which
an option may be exercised following termination of an Optionee's relationship
with the Company or any related corporation.

As used herein, the term "related corporation," when referring to a
subsidiary corporation, shall mean any corporation (other than the Company) in,
at the time of the granting of the option, an unbroken chain of corporations
ending with the Company, if stock possessing 50% or more of the total combined
voting

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power of all classes of stock of each of the corporations other than the Company
is owned by one of the other corporations in such chain. When referring to a
parent corporation, the term "related corporation" shall mean any corporation in
an unbroken chain of corporations ending with the Company if, at the time of the
granting of the option, each of the corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.

5.9 NO STATUS AS SHAREHOLDER

Neither the Optionee nor any party to which the Optionee's rights and
privileges under the option may pass shall be, or have any of the rights or
privileges of, a shareholder of the Company with respect to any of the shares
issuable upon the exercise of any option granted under this Plan unless and
until such option has been exercised.

5.10 CONTINUATION OF RELATIONSHIP

Nothing in this Plan or in any option granted pursuant to this Plan shall
confer upon any Optionee any right to continue in the employ or other
relationship of the Company or of a related corporation, or to interfere in any
way with the right of the Company or of any such related corporation to
terminate his or her employment or other relationship with the Company at any
time.

5.11 LIMITATION ON VALUE FOR INCENTIVE STOCK OPTIONS

As to all incentive stock options granted under the terms of this Plan, to
the extent that the aggregate fair market value of the stock (determined at the
time the incentive stock option is granted) with respect to which incentive
stock options are exercisable for the first time by the Optionee during any
calendar year (under this Plan and all other incentive stock option plans of the
Company, a related corporation or a predecessor corporation) exceeds $100,000,
such options shall be treated as nonqualified stock options. The previous
sentence shall not apply if the Internal Revenue Service issues a public rule,
issues a private ruling to the Company, any Optionee or any legatee, personal
representative or distributee of an Optionee or issues regulations changing or
eliminating such annual limit.

SECTION 6. GREATER THAN 10% SHAREHOLDERS

6.1 EXERCISE PRICE AND TERM OF INCENTIVE STOCK OPTIONS

If incentive stock options are granted under this Plan to employees who own
more than 10% of the total combined voting power of all classes of stock of the
Company or any related corporation, the term of such incentive stock options
shall not exceed five years and the exercise price shall be not less than 110%
of the fair market value of the Common Stock at the time the incentive stock
option is granted. This provision shall control notwithstanding any contrary
terms contained in an option agreement or any other document.

6.2 ATTRIBUTION RULE

For purposes of subsection 6.1, in determining stock ownership, an employee
shall be deemed to own the stock owned, directly or indirectly, by or for his or
her brothers, sisters, spouse, ancestors and lineal descendants. Stock owned,
directly or indirectly, by or for a corporation, partnership, estate or trust
shall be deemed to be owned proportionately by or for its shareholders, partners
or beneficiaries. If an employee or a person related to the employee owns an
unexercised option or warrant to purchase stock of the Company, the stock
subject to that portion of the option or warrant which is unexercised shall not
be counted in determining stock ownership. For purposes of this Section 6, stock
owned by an employee shall include all stock actually issued and outstanding
immediately before the grant of the incentive stock option to the employee.

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<PAGE>
SECTION 7. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

The aggregate number and class of shares for which options may be granted
under this Plan, the Maximum Annual Optionee Grants set forth in subsection 5.1,
the number and class of shares covered by each outstanding option and the
exercise price per share thereof (but not the total price) shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a split-up or consolidation
of shares or any like capital adjustment, or the payment of any stock dividend.

7.1 EFFECT OF LIQUIDATION OR REORGANIZATION

7.1.1 CASH, STOCK OR OTHER PROPERTY FOR STOCK

Except as provided in subsection 7.1.2, upon a merger (other than a
merger of the Company in which the holders of Common Stock immediately prior
to the merger have the same proportionate ownership of Common Stock in the
surviving corporation immediately after the merger), consolidation,
acquisition of property or stock, separation, reorganization (other than a
mere reincorporation or the creation of a holding company) or liquidation of
the Company, as a result of which the shareholders of the Company receive
cash, stock or other property in exchange for or in connection with their
shares of Common Stock, any option granted hereunder shall terminate, but
the Optionee shall have the right immediately prior to any such merger,
consolidation, acquisition of property or stock, separation, reorganization
or liquidation to exercise such Optionee's option in whole or in part
whether or not the vesting requirements set forth in the option agreement
have been satisfied.

7.1.2 CONVERSION OF OPTIONS ON STOCK FOR STOCK EXCHANGE

If the shareholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of Common Stock
in any transaction involving a merger, consolidation, acquisition of
property or stock, separation or reorganization, all options granted
hereunder shall be converted into options to purchase shares of Exchange
Stock unless the Company and the corporation issuing the Exchange Stock, in
their sole discretion, determine that any or all such options granted
hereunder shall not be converted into options to purchase shares of Exchange
Stock but instead shall terminate in accordance with the provisions of
subsection 7.1.1; provided, however, that all options granted hereunder
shall be converted automatically into Exchange Stock in (i) a merger of the
Company in which the holders of Common Stock immediately prior to the merger
have the same proportionate ownership of Common Stock in the surviving
corporation immediately after the merger, (ii) a mere reincorporation, or
(iii) the creation of a holding company. The amount and price of converted
options shall be determined by adjusting the amount and price of the options
granted hereunder in the same proportion as used for determining the number
of shares of Exchange Stock the holders of the Common Stock receive in such
merger, consolidation, acquisition of property or stock, separation or
reorganization. The converted options shall retain the vesting requirements
applicable to the options granted hereunder, unless the Company and the
corporation issuing the Exchange Stock, in their sole discretion, determine
otherwise.

7.2 FRACTIONAL SHARES

In the event of any adjustment in the number of shares covered by any
option, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.

7.3 DETERMINATION OF BOARD TO BE FINAL

All Section 7 adjustments shall be made by the Board, and its determination
as to what adjustments shall be made, and the extent thereof, shall be final,
binding and conclusive. Unless an Optionee agrees

6
<PAGE>
otherwise, any change or adjustment to an incentive stock option shall be made
in such a manner so as not to constitute a "modification" as defined in Code
Section 425(h) and so as not to cause his or her incentive stock option issued
hereunder to fail to continue to qualify as an incentive stock option as defined
in Code Section 422(b).

SECTION 8. SECURITIES REGULATION

Shares shall not be issued with respect to an option granted under this Plan
unless the exercise of such option and the issuance and delivery of such shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, any applicable state securities laws, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance, including the availability, if
applicable, of an exemption from registration for the issuance and sale of any
shares hereunder.

SECTION 9. AMENDMENT AND TERMINATION

9.1 BOARD ACTION

The Board may amend, suspend or terminate this Plan at any time, provided
that no such amendment shall be made without the approval of the Company's
shareholders if such approval is required to comply (a) with respect to
incentive stock options, Section 422 of the Code or any successor provision or
(b) any other law or regulation.

9.2 TERM OF THIS PLAN

Unless sooner terminated by the Board, this Plan shall terminate ten years
from the earlier of (a) the date on which this Plan is adopted by the Board or
(b) the date on which this Plan is approved by the shareholders of the Company.
No option may be granted after such termination or during any suspension of this
Plan. The amendment or termination of this Plan shall not, without the consent
of the option holder, alter or impair any rights or obligations under any option
theretofore granted under this Plan.

SECTION 10. EFFECTIVENESS OF THIS PLAN

This Plan shall become effective upon adoption by the Board so long as it is
approved by a majority of stock represented by shareholders voting either in
person or by proxy at a duly held shareholders' meeting any time within 12
months before or after the adoption of this Plan.

Plan adopted by the Board of Directors on June 16, 1993 and approved by the
shareholders on September 15, 1993. Amended and restated by the Board on July
11, 1997 and approved by the shareholders on , 199 .

7
<PAGE>

EGGHEAD, INC.

PROXY CARD - ANNUAL MEETING OF SHAREHOLDERS

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF EGGHEAD, INC.
(THE "BOARD"). The undersigned hereby appoints Brian W. Bender and George P.
Orban and each of them as proxies, each with full power of substitution, to
represent and vote for and on behalf of the undersigned the number of shares of
common stock of Egghead, Inc. that the undersigned would be entitled to vote if
personally present at the 1997 Annual Meeting of Shareholders (the "1997 Annual
Meeting") to be held on September 4, 1997, or at any adjournment thereof. The
undersigned directs that this proxy be voted as follows:

(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)

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FOLD AND DETACH HERE
<PAGE>

Please mark
your votes as [X]
indicated in
this example.

1. Election of Directors: NOMINEES: GREGORY J. BOUDREAU, JONATHAN W. BRODEUR,
GEORGE P. ORBAN and ERIC P. ROBISON

[ ] FOR all nominees [ ] WITHHOLD AUTHORITY
(except as indicated to vote for all
to the contrary below) nominees

The undersigned directs that if the undersigned has marked the box "FOR
all nominees" above and if the merger of Surplus Software, Inc. (d.b.a.
Surplus Direct) with and into North Face Merger Sub, Inc., a wholly-owned
subsidiary of Egghead, Inc. (the "Merger"), is not consummated prior to the
1997 Annual Meeting, then (a) the proxies shall not vote the shares of the
undersigned in favor of the election of Gregory J. Boudreau and Jonathan W.
Brodeur as Directors because the nominations of such persons by the Board
will have been withdrawn immediately prior to the 1997 Annual Meeting, and
(b) the proxies shall vote the shares of the undersigned FOR the election of
George P. Orban and Eric P. Robison as Directors (except as indicated to the
contrary below).

INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE,
PRINT THAT NOMINEE'S NAME IN THE FOLLOWING SPACE:

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

2. Approval of amendment to the Egghead, Inc. 1993 Stock Option Plan (the "Plan
Amendment"): [ ] FOR [ ] AGAINST [ ] ABSTAIN

3. In their discretion, the holders of this proxy are authorized to vote upon
such other business as may properly come before the meeting.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
ON THIS PROXY CARD. MANAGEMENT RECOMMENDS A VOTE FOR ALL NOMINEES DESIGNATED
ON THIS PROXY CARD (EXCEPT THAT IF THE NOMINATIONS OF MESSRS. BOUDREAU AND
BRODEUR BY THE BOARD HAVE BEEN WITHDRAWN BECAUSE THE MERGER IS NOT
CONSUMMATED PRIOR TO THE 1997 ANNUAL MEETING, THEN MANAGEMENT RECOMMENDS A
VOTE FOR NOMINEES GEORGE P. ORBAN AND ERIC P. ROBISON ONLY) AND FOR THE
PLAN AMENDMENT. IF NO SPECIFICATIONS ARE MADE (a) A VOTE FOR ALL OF SAID
NOMINEES WILL BE ENTERED, EXCEPT THAT IF THE NOMINATIONS OF GREGORY J.
BOUDREAU AND JONATHAN W. BRODEUR BY THE BOARD HAVE BEEN WITHDRAWN BECAUSE THE
MERGER HAS NOT BEEN CONSUMMATED PRIOR TO THE 1997 ANNUAL MEETING, THEN A
VOTE FOR GEORGE P. ORBAN AND ERIC P. ROBISON WILL BE ENTERED AND NO VOTE WILL
BE ENTERED WITH RESPECT TO GREGORY J. BOUDREAU AND JONATHAN W. BRODEUR, AND
(b) A VOTE FOR THE PLAN AMENDMENT WILL BE ENTERED.

DATE: _______________________, 1997

________________________________
Signature

________________________________
Signature if held jointly

The undersigned hereby revokes any proxy or proxies heretofore given for
such shares and ratifies all that said proxies or their substitutes may
lawfully do by virtue hereof. Please sign exactly as name appears on this
proxy. If stock is held jointly, both persons should sign. Persons signing
in a representative capacity should give their title.

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FOLD AND DETACH HERE