EGGHEAD COM INC, 10-Q, 1999-08-17

EGGHEAD COM INC
10-Q, 1999-08-17
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended July 3, 1999
------------

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from____________________ to_________________

Commission File Number 0-16930

EGGHEAD.COM, INC.
-----------------
(Exact name of registrant as specified in its charter)

Washington 91-1296187
- ------------------------------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

521 S.E. Chkalov Drive
Vancouver, Washington 98683
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)

(360) 883-3447
--------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

YES x NO
----- -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock:

Outstanding at
Class August 9, 1999
----- --------------
Common Stock 30,784,628 shares
$.01 par value

1
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PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements and Supplementary Data

EGGHEAD.COM, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 3, July 3,
1999 1999
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $119,467 $109,803
Accounts receivable, net of allowance for doubtful
accounts of $786 and $920, respectively 2,316 2,269
Merchandise inventories, net 12,599 11,800
Prepaid expenses and other current assets 759 712
-------- --------
Total current assets 135,141 124,584

Property and equipment, net 9,196 9,791
Goodwill, net 31,631 31,202
Other assets 217 210
-------- --------
$176,185 $165,787
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Accounts payable $16,276 $18,016
Accrued liabilities 12,398 10,986
Reserves and liabilities related to restructuring 6,517 5,838
-------- --------
Total liabilities 35,191 34,840
-------- --------

Commitments and contingencies

Shareholders' equity:
Preferred stock, $.01 par value: 10,000,000 authorized
No shares issued and outstanding -- --
Common stock, $.01 par value:
50,000,000 shares authorized;
30,675,059 and 30,768,963 shares issued
and outstanding, respectively 307 308
Additional paid-in capital 249,927 250,397
Retained deficit (109,240) (119,758)
-------- --------
Total shareholders' equity 140,994 130,947
-------- --------
$176,185 $165,787
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.

2
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
13 Weeks Ended
(unaudited)
------------------------------
June 27, July 3,
1998 1999
-------------- -------------
<S> <C> <C>
Net sales $29,520 $ 40,567
Cost of sales 26,463 37,697
-------------- -------------
Gross margin 3,057 2,870

Selling and marketing expense 5,768 9,477
General and administrative expense 3,068 4,363
Amortization of goodwill 419 430
Depreciation 365 1,103
-------------- -------------
Operating loss (6,563) (12,503)
Other income, net 1,014 1,985
-------------- -------------
Loss before income taxes (5,549) (10,518)
Income tax provision -- --
-------------- -------------
Net loss $(5,549) $(10,518)
============== =============

Basic loss per share $ (0.24) $ (0.34)
============== ==============
Weighted average common shares outstanding 23,570 30,710
============== ==============
</TABLE>

See Notes to Consolidated Financial Statements.

3
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)

<TABLE>
<CAPTION>
13 Weeks Ended
(Unaudited)
-----------------------------
June 27, July 3,
1998 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss from operations $(5,549) $(10,518)

Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 784 1,533
Deferred rent (3) --
(Gain) loss on disposition of assets (273) 38
Changes in assets and liabilities:
Accounts receivable, net 536 47
Merchandise inventories 2,027 799
Prepaid expenses & other current assets 438 47
Other assets (98) 6
Accounts payable 1,035 1,740
Restructuring reserves (5,872) (679)
Accrued liabilities (1,308) (1,412)
--------- ------------
Net cash used in operating activities (8,283) (8,399)
--------- ------------
Cash flows from investing activities:
Additions to property and equipment (87) (1,736)
Proceeds from sale of property and equipment 7,100 --
--------- ------------
Net cash provided by (used in) investing activities 7,013 (1,736)
--------- ------------
Cash flows from financing activities:
Proceeds from stock issuances 923 471
--------- ------------
Net cash provided by financing activities 923 471
--------- ------------
Net decrease in cash and cash equivalents (347) (9,664)
--------- ------------
Cash and cash equivalents at beginning of period 67,381 119,467
--------- ------------
Cash and cash equivalents at end of period $67,034 $109,803
========= ============

</TABLE>
See Notes to Consolidated Financial Statements.

4
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)

13 weeks ended
-------------------------
June 27, July 3,
1998 1999
--------- ----------
(unaudited) (unaudited)

Supplemental disclosures of cash
paid (received) during the year:

Interest $ -- $ --
Income taxes $(230) $(283)

See Notes to Consolidated Financial Statements.

5
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts in thousands)

<TABLE>
<CAPTION>
Common Stock Additional Retained
---------------- Paid-in Earnings
Shares Amount Capital (Deficit) Total
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, April 4, 1999 30,675 $307 $249,927 $(109,240) $140,994

Stock issued for cash, pursuant to employee stock
purchase plan 16 - 113 - 113
Stock issued for cash, pursuant to stock option plan 74 1 316 - 317
Stock grants 4 - 41 - 41
Net loss - - - (10,518) (10,518)
-------------------------------------------------------
Balance, July 3, 1999 30,769 $308 $250,397 $(119,758) $130,947
=======================================================
</TABLE>

See Notes to Consolidated Financial Statements.

6
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EGGHEAD.COM, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

All references herein to fiscal 1999 relate to the fiscal year ended April 3,
1999 and all references to fiscal 2000 refer to the fiscal year ending April 1,
2000.

Note 1 Basis of Presentation

The accompanying unaudited financial statements of Egghead.com, Inc. and
subsidiaries ("Egghead.com" or the "Company") have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the rules and regulations of the Securities and Exchange
Commission. While these statements reflect the adjustments which are, in the
opinion of management, necessary to fairly state the results of the interim
periods, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These adjustments are of a normal and recurring nature. For further information,
refer to the annual financial statements and footnotes thereto, for the 53-week
period ended April 3, 1999, contained in the Company's Annual Report on Form 10-
K, as amended, filed pursuant to the Securities Exchange Act of 1934. Operating
results for the 13 weeks ended July 3, 1999 are not necessarily indicative of
the results that may be expected for the full fiscal year ending April 1, 2000.

Fiscal Years

The Company uses a 52/53 week fiscal year, ending on the Saturday nearest March
31 of each year. Fiscal quarters are such that the first three quarters consist
of 13 weeks and the fourth quarter consists of the remaining 13/14 weeks. Fiscal
2000 will consist of 52 weeks. Fiscal 1999 had 53 weeks.

Reclassifications

Certain prior year balances have been reclassified to conform with the current
period presentation. These reclassifications had no effect on retained earnings
or net income as previously reported.

Note 2 Subsequent Event

On July 14, 1999, Egghead.com announced that it had signed a definitive merger
agreement with Onsale, Inc. ("Onsale"), a leading internet retailer. In the
merger, each outstanding share of Egghead.com common stock (other than
dissenting shares meeting certain conditions) will be converted into the right
to receive .565 shares of Onsale common stock (the "Exchange Ratio"). The shares
of Onsale common stock received by Egghead.com shareholders in the merger will
represent stock ownership in the combined company after the merger. Options to
purchase Egghead.com common stock will be assumed by Onsale and converted into
options to purchase Onsale common stock, and the exercise price and number of
shares of Onsale common stock subject to each such option will be appropriately
adjusted to reflect the Exchange Ratio. The merger is intended by the parties to
qualify as a tax-free reorganization and be accounted for as a "pooling of
interests." If the merger is consummated, Egghead.com, Inc. will become a
wholly-owned subsidiary of Onsale. Upon closing of the merger, Onsale will
change its name to Egghead.com, Inc. so that the combined company will be called
Egghead.com, Inc. after the merger. The merger is subject to approval by
shareholders of both companies, regulatory approvals and satisfaction or waiver
of certain other conditions. There can be no assurance that the proposed merger
will ultimately be consummated.

Note 3 Loss Per Share

Basic loss per share amounts are computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings per Share. Diluted earnings per common share are not disclosed as
potentially dilutive common stock equivalents would be anti-dilutive to the loss
per share calculation for the 13-week periods ended July 3, 1999 and June 27,
1998.

7
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Note 4 Income Taxes

Egghead.com determines its income tax accounts in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes result primarily from
temporary differences in the recognition of certain items for income tax and
financial reporting purposes.

8
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EGGHEAD.COM, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Given its ongoing losses, Egghead.com does not believe that its deferred tax
assets meet the realization criteria of SFAS No. 109. Under SFAS No. 109, the
realization of the deferred tax assets depends on generating future taxable
income. Egghead.com management has determined that it is more likely than not
that the deferred tax assets could not be currently realized. Therefore, the
Company did not record a tax benefit for the three months ended June 27, 1998 or
July 3, 1999.

Note 5 Commitments and Contingencies

Significant Suppliers

During the three months ended July 3, 1999, one primary distributor accounted
for approximately 26% of Egghead.com's purchases. The loss of this distributor
could have a material adverse effect on Egghead.com's operating results and
financial condition.

Credit Line for Inventory Financing

The Company has available credit lines of up to $10 million for the financing of
inventory. The terms of such financings vary depending on the vendor terms. The
credit lines are fully secured by the inventory purchased through the agreements
with the lenders. The lenders have reserved the right to discontinue the
inventory financing at any time at their discretion. At July 3, 1999, there were
no borrowings outstanding under these credit lines.

Leases

Egghead.com leases corporate offices and distribution facilities under operating
leases with remaining terms ranging from one to five years. The leases generally
require Egghead.com to pay taxes, insurance and certain common area maintenance
costs.

Aggregate rental expense, including common area maintenance charges, for all
operating leases for the three months ended June 27, 1998 and July 3, 1999 was
approximately $174,000 and $420,000, respectively. As of July 3, 1999, future
minimum rental payments under noncancelable operating leases for headquarters
and distribution facilities and equipment consisted of the following:

<TABLE>
<CAPTION>
Operating
Leases
Fiscal Year (in thousands)
-------------
<S> <C>
Remainder of 2000 $1,037
2001 1,095
2002 463
2003 467
Thereafter 583
------
Total minimum payments $3,645
======
</TABLE>

The Company has recorded a restructuring liability for the closure of Egghead
retail stores and the Sacramento, California distribution center, and a
significant reduction in headquarters staff. The restructuring liability was
$5.8 million at July 3, 1999, of which $4.4 million related to retail lease
obligations, which are not included in the above schedule of future minimum
rental payments.

9
<PAGE>

ITEM 2

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

The following discussion and analysis should be read in conjunction with the
consolidated financial statements of Egghead.com and the notes thereto included
elsewhere in this filing. References in this filing to "Egghead.com," "Egghead,"
the "Company," "we," "our," and "us" refer to Egghead.com, Inc. and our wholly
owned subsidiaries, unless the context otherwise requires.

The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward-looking statements based on current
expectations, estimates and projections about our industry, management's beliefs
and certain assumptions made by management. All statements, trends, analyses and
other information contained in this Report on Form 10-Q relative to trends in
net sales, gross margin, expense levels, liquidity and capital resources, as
well as other statements in this Report on Form 10-Q, including, but not limited
to, words such as "expect(s)," "anticipate(s)," "intend(s)," "plan(s),"
"believe(s)," "seek(s)," "estimate(s)," and other similar expressions,
constitute forward-looking statements. These forward-looking statements are not
guarantees of future performance. Because these forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those set forth under "Liquidity and
Capital Resources," and "Additional Factors That May Affect Future Results"
included in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Particular attention should be paid to the
cautionary statements involving our limited online operating history, our
history of losses and expectation of future losses, the unpredictability of our
future revenues and fluctuations in our operating results, the fluctuation of
our operating results due to seasonality, the potential negative effects if the
proposed merger transaction with Onsale is not completed, the risks of systems
failures and business interruptions, the risks of capacity constraints, the
risks relating to systems development, management of growth, the intensely
competitive nature of the electronic commerce industry, reliance on third
parties and reliance on manufacturers, distributors and suppliers. Readers are
cautioned not to place undue reliance on the forward-looking statements, which
speak only as of the date made. Except as required by law, we undertake no
obligation to update any forward-looking statement, whether as a result of new
information, future events or otherwise. Readers, however, should carefully
review the factors set forth in other reports or documents that we file from
time to time with the Securities and Exchange Commission.

Proposed Merger

On July 14, 1999, Egghead.com announced that it had signed a definitive
merger agreement with Onsale, a leading internet retailer. In
the merger, each outstanding share of Egghead.com common stock (other than
dissenting shares meeting certain conditions) will be converted into the right
to receive .565 shares of Onsale common stock (the "Exchange Ratio"). The shares
of Onsale common stock received by Egghead.com shareholders in the merger will
represent stock ownership in the combined company after the merger. Options to
purchase Egghead.com common stock will be assumed by Onsale and converted into
options to purchase Onsale common stock, and the exercise price and number of
shares of Onsale common stock subject to each such option will be appropriately
adjusted to reflect the Exchange Ratio. The merger is intended by the parties to
qualify as a tax-free reorganization and be accounted for as a "pooling of
interests." If the merger is consummated, Egghead.com, Inc. will become a
wholly-owned subsidiary of Onsale. Upon closing of the merger, Onsale will
change its name to Egghead.com, Inc. so that the combined company will be called
Egghead.com, Inc. after the merger. The merger is subject to approval by
shareholders of both companies, regulatory approvals and satisfaction or waiver
of certain other conditions. There can be no assurance that the proposed merger
will ultimately be consummated.

Overview

We are a leading online retailer of personal computer hardware, software,
peripherals, accessories and other related products. In addition to computer-
related products, we sell consumer electronics and other consumer and

10
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business goods.

Egghead, Inc. began operations primarily as a traditional software
reseller. The predecessor to Egghead, Inc., DJ&J Software Corporation, was
incorporated in Washington in 1983. Egghead, Inc. was incorporated in Washington
in 1984 and became the parent company to DJ&J Software Corporation. By 1992,
Egghead, Inc. had over 200 retail store locations and had begun a direct mail
division and a Corporate, Government and Educational Sales Division. On May 13,
1996, Egghead, Inc. sold the Corporate, Government and Educational Sales
Division for $45.0 million. In response to continuing retail store losses,
Egghead, Inc. closed 70 retail stores in February 1997 and recorded a related
$24.0 million restructuring and asset impairment charge. On August 14, 1997,
Egghead, Inc. acquired Surplus Software, Inc. ("Surplus Direct"). Surplus Direct
owned and operated two Web sites and a direct mail division which specialized in
excess, closeout and refurbished computer related merchandise. On February 28,
1998, we changed our name from Egghead, Inc. to Egghead.com, Inc., closed our
remaining retail stores and shifted our primary business emphasis to electronic
commerce. As part of this transition, we closed our distribution center in
Sacramento, California, combined our management and operations with those of
Surplus Direct and consolidated the majority of our operations in Vancouver,
Washington.

Operations. Net sales, cost of sales, gross margin and selling and
marketing expenses consist of the results of our online shopping Web sites and
inbound telephone orders. Customers can purchase products via the Internet at
our online store, or can browse through our online store or review advertising
flyers and then contact the inbound telephone center to complete purchases. We
offer discounts to businesses, educational institutions and governmental
entities that purchase large volumes for use or for resale.

Anticipated Losses. We have incurred substantial losses in the operation
and closure of our former retail store network and in the operation of our
online store. As of July 3, 1999, we had a retained deficit of $119.8 million.
We have not achieved profitability as an electronic commerce company and expect
to continue to incur substantial net losses for the foreseeable future. We plan
to continue to enhance our brand name through marketing and advertising
programs, offer additional categories of merchandise for sale on our online
store and improve and enhance our technology, infrastructure and systems. These
initiatives will likely result in operating expenses that are higher than
current operating expenses. We will need to generate significantly higher
revenues to achieve profitability and maintain profitability if it is achieved.
Although our net sales from electronic commerce have grown in recent quarters,
such growth rates may not be sustainable. Because of these and other factors, we
believe that period-to-period comparisons of our historical results of
operations are not good indicators of our future performance.

11
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Results of Operations--Three Months Ended June 27, 1998 Compared with the Three
Months Ended July 3, 1999

The following table shows the relationship of certain items relating to
continuing operations included in our Consolidated Statements of Operations
expressed as a percentage of net sales:

<TABLE>
<CAPTION>
Percentage of Net Sales
-----------------------------------
Three months ended
-----------------------------------
June 27, 1998 July 3, 1999
-----------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 89.6 92.9
-----------------------------------
Gross margin 10.4 7.1

Selling and marketing expense 19.5 23.3
General and administrative expense 10.4 10.8
Depreciation and amortization expense 2.7 3.8
-----------------------------------
Operating loss (22.2) (30.8)
Other income, net 3.4 4.9
===================================
Loss before income taxes (18.8)% (25.9)%
===================================
</TABLE>

12
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Net Sales. Total net sales for the first quarter of fiscal 2000 increased
37.4% to $40.6 million as compared with $29.5 million for the first quarter of
fiscal 1999. The increase in net sales was primarily attributable to an increase
in the online customer base, significant investments in marketing programs
designed to promote and maintain brand awareness, an increase in the number of
daily and weekly online auctions, and an increase in the categories and amount
of merchandise offered. Our customer accounts increased to approximately 1.1
million as of July 3, 1999 from approximately 530,000 as of June 27, 1998.

Gross Margin. Gross margin consists of net sales minus cost of sales. Cost
of sales includes initial margin (net sales minus cost of products sold),
obsolete inventory charges and net shipping (shipping reimbursements less
shipping costs). Gross margin from net sales was $2.9 million, or 7.1% of sales,
for the first quarter of fiscal 2000, a reduction from gross margin of 10.4% of
sales for the comparable prior year period. Gross margin in the current quarter
was negatively affected by responses to some competitors selling current version
goods below or marginally above their acquisition cost. Although we have not
adopted this pricing strategy, we have responded to these competitive pressures
by reducing the selling prices on certain products. This reduction in selling
prices had a material adverse impact on our first quarter fiscal 2000 gross
margins when compared to our historical online gross margins. This reduction in
selling prices was partially offset by an increase in advertising revenue for
the quarter. Management has initiated, and will continue to initiate, actions in
an attempt to offset the reduction in gross margins; however, there can be no
assurance that we will be able to maintain gross margins or that this reduction
in selling prices will not negatively affect our gross margins in the second
quarter of fiscal 2000.

Selling and Marketing Expense. Selling and marketing expense consists
primarily of operating expenses related to marketing, inbound telephone support,
online store support and distribution. Such operating expenses include
promotional agreements for online and offline advertising, credit card
processing costs, payroll and benefits, telecommunications, bad debts and
supplies. The selling and marketing expenses for the first quarter of fiscal
2000 increased 64.3% to $9.5 million from $5.8 million for the comparable period
in the prior year. The increase in selling and marketing expenses was primarily
attributable to our efforts to enhance our brand name recognition, expand our
online shopping capabilities and increase our market share. However, we cannot
assure you that the increase in such expenses will actually result in enhanced
brand name recognition, expanded Web site capabilities or increased market
share.

General and Administrative Expense. General and administrative expense
consists primarily of payroll and related expenses of headquarters support
functions, such as executive, merchandising, purchasing, engineering,
accounting, recruiting and facilities expenses and other general corporate
expenses. The general and administrative expenses for the first quarter of
fiscal 2000 increased 42.2% to $4.4 million as compared with $3.1 million for
the first quarter of fiscal 1999. This increase was primarily due to increased
payroll and other overhead costs to support our sales growth. General and
administrative expense as a percentage of net sales was 10.8% for the first
quarter of fiscal 2000 as compared with 10.4% for the first quarter of fiscal
1999.

Depreciation and Amortization Expense. Depreciation and amortization
expense consists primarily of depreciation of our capital equipment and
amortization of goodwill recorded in connection with the acquisition of Surplus
Direct in August 1997. Depreciation expense for the first quarter of fiscal 2000
increased to $1.1 million as compared with $0.4 million for the first quarter of
fiscal 1999. Net property and equipment increased $7.3 million to $9.8 million
at July 3, 1999 from $2.5 million at June 27, 1998. These increases are
primarily due to the purchasing of hardware and software necessary for expanding
our Web site capabilities and serving our increasing customer base, and
leasehold improvements to our headquarters in Vancouver, Washington and our
distribution facility. Amortization expense remained consistent for each of the
first quarters of fiscal 2000 and fiscal 1999 at $0.4 million.

Other Income, Net. Other income, net for the first quarter of fiscal 2000
increased 95.8% to $2.0 million from $1.0 million for the first quarter of
fiscal 1999. This increase was primarily attributable to an increase in interest
income, resulting from a higher average cash balance due to the issuance of an
additional 5.75 million shares of common stock through a public offering in
March 1999, which resulted in net proceeds of $72.9 million.

Income Taxes. Due to our ongoing net operating losses, we did not record a
provision for income taxes for the first quarter of fiscal 2000 or the first
quarter of fiscal 1999. Given our recent losses, we have determined that our
deferred tax assets do not meet the realization criteria of Statement of
Financial Accounting Standards ("SFAS") No. 109,

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Accounting for Income Taxes. Under SFAS No. 109, the realization of the
deferred tax assets depends on generating future taxable income. We have
determined that it is more likely than not that the deferred tax assets could
not currently be realized. Until we have determined that all of the existing net
operating losses are realizable, we will not record a tax charge or benefit for
future operating results. Our net operating losses can be recovered for tax
purposes over a 15-year period from origin if profitability is achieved. See
Note 4 of Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

In recent fiscal years, we have funded our operations through cash provided
by operations, public issuance of common stock, asset sales, exercises of stock
options and the proceeds relating to the sale of the Corporate, Government and
Educational Sales Division.

Cash and cash equivalents decreased to $109.8 million as of July 3, 1999
from $119.5 million at April 3, 1999. The decrease in the cash balance was
primarily due to the net loss of $10.5 million, and fixed asset additions of
$1.7 million.

Cash used in operating activities of $8.4 million for the first three
months of fiscal 2000 was primarily due to the net loss of $10.5 million,
partially offset by depreciation and amortization of $1.5 million.

Net cash used in investing activities of $1.7 million for the first three
months of fiscal 2000, consisted of capital expenditures of $1.7 million,
primarily related to the upgrading of the Web site software platforms and
related hardware.

Cash provided by financing activities of $0.5 million for the first three
months of fiscal 2000 consisted of proceeds from stock issuances under our stock
option and stock purchase plans.

As of July 3, 1999, our principal source of liquidity was $109.8 million of
cash. We have credit lines totaling $10.0 million for the financing of
inventory. The credit lines are fully secured by the inventory purchased. As of
July 3, 1999, there were no borrowings outstanding under these lines of credit.
As of July 3, 1999, our principal commitments consisted of obligations in
connection with operating leases and commitments for advertising and promotional
arrangements. Although we have no material commitments for capital expenditures,
we anticipate future purchases related to enhancements of our Web site to
improve functionality and navigation, incorporating features that are intended
to improve the customer shopping experience, and scalability and performance of
our Web site. We estimate capital expenditures through the end of fiscal 2000 to
be at least $10 million. See Note 5 of Notes to Consolidated Financial
Statements.

We believe that our current cash and cash equivalent balances, without
considering the effect of the consummation of the proposed merger with Onsale,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for the next twelve months. Our future liquidity and
capital requirements will depend upon numerous factors discussed under the
"Additional Factors That May Affect Future Results" section of this Report on
Form 10-Q. In addition, we may, from time to time, consider the acquisition of
or investment in complementary businesses, products, services and technologies,
which might increase our liquidity requirements or cause us to issue additional
equity or debt securities. Although we believe that our current cash and cash
equivalent balances will be sufficient for the next twelve months (without
considering the effects of the consummation of the proposed merger with Onsale),
we cannot assure you that we will not require additional financing within this
time frame or that such additional funding, if needed, will be available on
terms acceptable to us or at all. We do not currently use derivative financial
instruments.

Impact of the Year 2000 Issue

The Year 2000 issue exists because many computer systems and applications
use two-digit fields to designate a year. Date-sensitive computer systems and
programs may fail to recognize or correctly process the year 2000 as the century
date change approaches or occurs. This inability to properly recognize or
address the year 2000 may cause systems errors or failures that could seriously
disrupt or prevent normal business operations.

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As a company engaged in electronic commerce, we rely on computer programs
and systems in connection with our internal and external communication networks
and systems (including transmissions of information over the Internet), the
operation of our Web site, customer use of our Web site, order processing and
fulfillment, accounting and financial systems, and other business functions.
Because our internal systems and software are relatively new, and the majority
are covered by maintenance agreements with third-party suppliers, we do not
expect that the Year 2000 costs relating to our own internal systems will be
significant. Our plan for addressing Year 2000 issues has three phases: (1)
identification and evaluation; (2) development of plans for addressing the
issues and prioritization of those plans; and (3) implementation of plans and
verification of effectiveness. We have already identified and evaluated our
major internal information technology and data processing systems for Year 2000
compliance. Certain critical internal information technology and data processing
systems have already been modified, upgraded or replaced to remedy Year 2000
issues. We have completed the assessment and planning phase for addressing our
remaining significant internal systems for Year 2000 compliance. Management
intends to complete the implementation and verification phases for our remaining
critical internal systems by October 1999.

Due to our electronic commerce focus, our reliance on significant non-
information technology systems is primarily limited to telecommunications
equipment, voicemail systems and property security systems. We have replaced our
telecommunications equipment and voicemail systems with systems that the
suppliers state are Year 2000 compliant. We have evaluated our property security
systems and determined that they are Year 2000 compliant.

Any failure of third-party networks, systems or services could have a
material adverse impact on our business. Our business depends on the
satisfactory performance and reliability of the external communication and
computer networks, systems and services integral to the Internet. These
networks, systems and services are maintained or provided by third parties and
affect the ability of customers to access and purchase products at our Web site.
We also rely on other systems and services that third parties provide to our
customers. As a result, the success of our plan to address the Year 2000 issues
depends in part on parallel efforts being undertaken by such other third
parties. We have identified and initiated communications with those third
parties whose networks, systems or services are critical to our business to
determine the status of these entities' Year 2000 compliance. We cannot assure
you that all such parties will provide accurate and complete information, or
that all their networks, systems or services will achieve full Year 2000
compliance in a timely fashion. In an attempt to mitigate the risk of
noncompliance by certain critical service providers, we have begun to diversify
our use of certain services among several providers. However, we cannot assure
you that this diversification will mitigate the risk of noncompliance.

Costs related to our efforts to address Year 2000 issues have been expensed
as incurred and have not been material to date. We expect to fund the Year 2000-
related costs through funds provided by operations and do not expect these costs
to have a material adverse effect on our liquidity or results of operations. Our
estimates of the cost of these efforts are partially based on numerous
assumptions about future events. We cannot assure you that these estimates will
be correct. Actual costs could differ materially from these estimates.

Although we are taking steps to achieve Year 2000 compliance of our
internal systems and to evaluate the compliance of third-party service providers
on which our business depends, the most reasonably likely worst-case scenario
resulting from possible Year 2000 noncompliance is that noncompliance by third
parties would disrupt, reduce or eliminate for a period of time the ability of
our customers to access and purchase products at our Web site. If such
occurrences are frequent or long in duration, they could materially adversely
affect our business. The Year 2000 compliance of third-party global, national
and local communications networks and the compliance of individual Internet
service providers is not within our control. Accordingly, a contingency plan for
this worst-case scenario does not exist and we do not believe we will be able to
develop one. We have, however, begun to diversify our uses of certain services
among several providers to attempt to mitigate this risk. We cannot assure you,
however, that our efforts will mitigate the risk of non-compliance, and any
failure of third-party networks, systems or services could materially adversely
affect our business.

We believe we are taking the necessary steps regarding Year 2000 compliance
with respect to matters within our control to seek to minimize the impact of
Year 2000 issues on our business. We currently expect our Year 2000 project to
be completed in 1999. However, not all of the systems on which we rely are Year
2000 compliant and we cannot assure you that these systems will be made Year
2000 compliant in a timely manner, that we will not incur significant additional
expenses in dealing with Year 2000 issues, that the third parties upon which our
business

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depends will achieve Year 2000 compliance, or that the Year 2000 problem will
not materially adversely affect our business, financial condition or results of
operations.

We rely on the quality of the products that manufacturers, distributors and
suppliers provide to us for sale to our customers. To the extent that the
products we sell are not Year 2000 compliant, we may be subject to claims by
customers that could materially adversely affect our business or damage our
reputation.

Recent Accounting Pronouncements

During June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The new
standard requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. Because we do
not use derivatives, the new standard is expected to have no material impact on
our financial position or results of operations. SFAS No. 133 will be effective
for fiscal 2001.

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Additional Factors That May Affect Future Results

In addition to other information contained in this report, the following factors
could affect our actual results and could cause such results to differ
materially from those achieved in the past or expressed in our forward-looking
statements.

We have a limited online operating history which provides little information
with which to evaluate our electronic commerce business

In February 1998, we shifted our business emphasis to the Internet and
closed our remaining retail stores. We therefore have had only a limited
operating history as an electronic commerce company. As a result, there is
little information on which to evaluate our business and prospects as an
electronic commerce company. An investor in our common stock must consider the
risks and difficulties that early-stage companies frequently encounter in the
new and rapidly evolving market of electronic commerce. Such risks for us
include:

. our evolving and unpredictable business model;

. our competitors that have more established electronic commerce operations;

. our need and ability to manage growth; and

. the rapid evolution of technology in electronic commerce.

We have a history of losses and expect future losses

We have incurred substantial losses in the operation and closing of our
former retail store network and in the operation of our electronic commerce
business. As of July 3, 1999, we had a retained deficit of $119.8 million. We
have not achieved profitability as an electronic commerce company, and we expect
to continue to incur substantial net losses for the foreseeable future. We plan
to continue to enhance our brand name through competitive pricing, marketing and
advertising programs, offer additional categories of merchandise for sale at our
online store and improve and enhance our technology, infrastructure and systems.
These initiatives will likely result in operating expenses that are higher than
current operating expenses. We will need to generate significant revenues to
achieve profitability and to maintain profitability if it is achieved. Although
our revenues from electronic commerce have grown in recent quarters, such growth
rates may not be sustainable and we may not become profitable in the future.

Our future revenues are unpredictable and our operating results may
fluctuate significantly

Because we have a limited operating history in electronic commerce and
because electronic commerce is a new, emerging market, we cannot accurately
forecast our revenues. Although our revenues from electronic commerce have grown
in recent quarters, you should not use these past results to predict our future
results. We base our current and future expenditures on our plans and estimates
of future revenues. Our expenses are, to a large degree, fixed. We may be unable
to adjust spending in a timely manner if we experience an unexpected shortfall
in our revenues.

We expect that our future quarterly operating results will fluctuate
significantly because of many factors, several of which we do not control. Such
factors include:

. our ability to satisfy customers, retain existing customers and attract new
customers at a steady rate;

. our ability to acquire, price and market merchandise inventory such that we
maintain gross margins in our existing business and in future product lines
and markets;

. pricing competition, including, but not limited to, pricing which results
in no gross margin on certain products;

. the level of traffic at our Web site;

. our ability to fulfill customer orders;

. the development, announcement or introduction of new sites, services or
products by us or by our competitors;

. the amount the Internet is used generally and, more specifically, for the
purchase of consumer products such as those that we offer;

. our ability to upgrade and develop our systems and infrastructure and
attract new employees;

. the occurrence of technical or communications failures, system downtime and
Internet disruptions;

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. the amount and timing of operating costs and capital expenditures that we
incur to expand our business;

. governmental regulation and taxation policies;

. disruptions in service by common carriers such as United Parcel Service;

. unanticipated increases in shipping and transaction-processing costs; and

. general economic conditions and economic conditions specific to the
Internet, electronic commerce and the computer industry.

Our revenues depend on the number of times customers make purchases at our
online store and the level of sales and bidding activity at the Egghead Auctions
section of our online store. The amount of sales and bidding activity at our
online store depends in part on the number of customers, the competitive pricing
of our products and the availability of merchandise from our suppliers. We
cannot forecast the number of future customers, the future pricing strategies of
our competitors or the future availability of merchandise with any degree of
certainty. It is clear, however, that if the number of customers does not
increase, if our gross margins decrease or if the amount of merchandise
available to us decreases substantially, our business will suffer.

Because of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good indicator of
our future performance.

Our operating results may fluctuate depending on the season

We expect to experience fluctuations in our operating results because of
seasonal fluctuations in traditional retail patterns. Retail sales in the
traditional retail industry tend to be significantly higher in the fourth
calendar quarter of each year than in the preceding three quarters. As a result
of such factors, our operating results in one or more future quarters may
fluctuate and, therefore, period-to-period comparisons of our historical results
of operations may not be good indicators of our future performance.

Failure to complete the merger transaction with Onsale, Inc. could harm our
stock price and future business and operations

We face a number of specific risks if the proposed merger with Onsale is
not completed, including the following:

. we may be required to pay Onsale a termination fee equal to four percent of
our equity value (as described in the merger agreement filed as an exhibit
to our current report on Form 8-K filed with the Securities and Exchange
Commission on July 23, 1999);

. we may be required to make an unsecured loan to Onsale for up to $16.0
million;

. an option that has been granted to Onsale to purchase 19.9% of our common
stock may become exercisable;

. the price of our common stock may decline to the extent that the current
market price reflects a market assumption that the merger will be
completed; and

. costs related to the merger, such as legal and accounting and some
financial advisor fees, must be paid even if the merger is not completed.

In addition, current and prospective employees may experience uncertainty
about their future roles, which may impair our ability to attract and retain key
management, marketing, technical and administrative personnel. This may impair
our ability to conduct normal business operations if the merger is not
completed.

Furthermore, if the stock option granted to Onsale is exercised, we will be
unable to account for future business combinations as a "pooling of interests."

We face risks relating to the Year 2000 issue

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<PAGE>

systems errors or failures that could seriously disrupt or prevent normal
business operations. As a company engaged in electronic commerce, we rely on
computer programs and systems in connection with our internal and external
communication networks and systems (including transmissions of information over
the Internet), the operation of our Web site, customer use of our Web site,
order processing and fulfillment, accounting and financial systems, and other
business functions. Not all of the systems on which we rely are Year 2000
compliant, and we cannot assure you that our systems will be made Year 2000
compliant in a timely manner or that the third parties upon which our business
depends will achieve Year 2000 compliance. We may incur significant additional
expenses for Year 2000 issues.

Any failure of third-party networks, systems or services upon which our
business depends could have a material adverse impact on our business. Our
business depends on the satisfactory performance and reliability of the external
communication and computer networks, systems and services integral to the
Internet. These networks, systems and services are maintained or provided by
third parties and affect the ability of our customers to access and purchase
products at our Web site. We also rely on other systems and services that third
parties provide to our customers. As a result, the success of our plan to
address Year 2000 issues depends in part on parallel efforts being undertaken by
other third parties. We have identified and initiated communications with third
parties whose networks, systems or services are critical to our business to
determine the status of their Year 2000 compliance. We cannot assure you that
all such parties will provide accurate and complete information, or that all
their networks, systems or services will achieve full Year 2000 compliance in a
timely fashion. The most reasonably likely worst-case scenario for us resulting
from Year 2000 issues is that third-party noncompliance would disrupt, reduce or
eliminate for a period of time the ability of our customers to connect with and
purchase products at our Web site. If such occurrences are frequent or long in
duration, they could materially adversely affect our business. The compliance of
third-party global, national and local communications networks and the
compliance of individual Internet service providers is not within our control.
Accordingly, a contingency plan for this worst-case scenario does not exist, and
we do not believe we will be able to develop one.

We may have future capital needs

We currently anticipate that our available funds (without considering the
effects of the consummation of the proposed merger with Onsale), will be
sufficient to meet our anticipated needs for working capital (including, without
limitation, for marketing and advertising expenses), capital expenditures and
business expansion for the next twelve months. Thereafter, we may need to raise
additional funds. However, we may need to raise additional funds sooner in order
to fund more rapid expansion, to develop new or enhanced services or products,
to respond to competitive pressures or to acquire complementary businesses,
products, services or technologies. We cannot assure you that additional
financing will be available, or available on terms favorable to us. If such
financing is not available, we may not be able to fund our expansion, take
advantage of unanticipated acquisition opportunities, develop or enhance
services, products or technologies, or respond to competitive pressures.

We may suffer systems failures and business interruptions

Our success, especially our ability to receive and fulfill customer orders,
largely depends on the efficient and uninterrupted operation of our computer and
telephone communications systems. Almost all of our computer and communications
systems are located at a single leased facility in Vancouver, Washington. We
have experienced temporary power failures and telecommunications failures from
time to time at this facility. Our systems are vulnerable to damage from fire,
floods, power loss, telecommunications failures, break-ins, earthquakes and
other events. Although we have implemented network security measures, our
servers are vulnerable to computer viruses, physical or electronic break-ins,
attempts by third parties deliberately to exceed the capacity of our systems and
similar disruptions. Any of these events could lead to interruptions or delays
in service, loss of data or the inability to accept and confirm customer orders.
Generally, we do not have redundant systems or a formal disaster recovery plan,
and our coverage limits on our property and business interruption insurance may
not be adequate to compensate us for losses that may occur.

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We face risks of capacity constraints

Our revenues depend to a significant degree on the number of customers who
use our online store to buy merchandise. We depend on the satisfactory
performance, reliability and availability of our Web site, transaction-
processing systems, network infrastructure, customer support center and delivery
and shipping systems. These factors are critical to our reputation, our ability
to attract and retain customers and to maintain adequate customer service
levels, and our operating results. Prior to the launch of our redesigned Web
site in November 1998, our online store experienced temporary capacity
constraints from time to time. If the amount of traffic, the number of orders or
the amount of auction bidding at our Web site increases substantially, we may
experience capacity constraints and may need to further expand and upgrade our
technology, transaction-processing systems and network infrastructure. We may be
unable to sufficiently predict the rate or timing of increases in the use of our
online store to enable us to quickly upgrade our systems to handle such
increases.

We face risks relating to systems development

We are heavily dependent on our technological systems, some of which were
not designed for electronic commerce but have been modified by us for that use.
Although we upgrade and expand these systems on an ongoing basis, in the near
future we will need to significantly upgrade and expand or replace our
transaction-processing systems to handle increased traffic at our online store.
We will also need to upgrade and expand our systems for the Egghead Auctions
format of our online store, particularly to improve its scalability. We also
plan to upgrade and expand our systems to add customer feedback features to
provide enhanced customer service, more complete customer data and better
management reporting information. These efforts will require us to integrate
newly developed and/or purchased technologies into our existing systems and to
hire more engineering and information technology personnel in the near future.
If we are unable in a timely manner to hire required personnel and to add new
software and hardware or to develop and upgrade our existing systems to handle
increased traffic and increased sales and auction bidding at our online store,
we could experience unanticipated system disruptions, slower response times,
degraded customer service and a decrease in our ability to fulfill customer
orders.

We may be unable to manage our growth

Our ability to successfully implement our business plan in a rapidly
evolving market requires an effective planning and growth-management process. If
we are unable to manage our growth, we may not be able to implement our business
plan, and our business may suffer as a result. We expect that we will have to
expand our business to address potential growth in the number of customers, to
expand our product and service offerings and to pursue other market
opportunities. We expect that we will need to expand existing operations,
particularly those relating to information technology and merchandising. We
expect that we will also need to continue to improve our operational, financial
and inventory systems, procedures and controls, and will need to expand, train
and manage our workforce, particularly our information technology staff.
Furthermore, we expect that we will need to continue to manage multiple
relationships with various suppliers, freight companies, warehouse operators,
Web sites, Internet service providers, and other third parties as the electronic
commerce business evolves.

The electronic commerce market is intensely competitive

The electronic commerce industry is new, rapidly evolving and intensely
competitive. We may not be successful in competing against our current and
future competitors. It is not difficult to enter the electronic commerce market,
and current and new competitors can launch new electronic commerce Web sites at
relatively low cost. We expect competition in electronic commerce to increase as
retailers, suppliers, manufacturers and direct marketers who have not
traditionally sold computer products and consumer goods directly to consumers
through the Internet enter this market segment. Furthermore, competition may
increase to the extent that mergers and acquisitions result in electronic
commerce companies with greater market share and revenues. Increased competition
or failure by us to compete successfully is likely to result in price
reductions, fewer customer orders, reduced gross margins, increased marketing
costs, loss of market share, or any combination of these problems.

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We currently compete with a variety of companies that sell personal computer
products and other consumer goods through a variety of sales channels to
customers. These competitors include:

. Catalog-based merchants with a significant electronic commerce offering,
such as CDW Computers Centers, Inc., Micro Warehouse, Inc., Insight
Enterprises, Inc., Multiple Zones International, Inc. and Creative
Computers, Inc.;

. Companies with electronic commerce sites such as Amazon.com, Inc.,
Beyond.com Corporation, Buy.com Inc. and Cyberian Outpost, Inc., Dell
Computer Corporation and NECX Office and Personal Technology Center, and
electronic software distributors such as Digital River, Inc.;

. Companies offering Internet auctions, such as ONSALE, Inc., uBid, Inc.,
Yahoo! Inc., Internet Shopping Network, Inc. (the FirstAuction site), Micro
Warehouse, Inc., eBay Inc. and Amazon.com, Inc.;

. Companies whose primary business is not online retailing but who derive
significant revenue from electronic commerce, including America Online,
Inc., Yahoo! Inc. and QVC, Inc.;

. Traditional retailers of personal computer products such as CompUSA, Inc.
and Computer City;

. Manufacturers such as Dell Computer Corporation and Gateway 2000, Inc. that
sell directly to the consumer, including over the Internet;

. Mass merchandisers such as Wal-Mart Stores, Inc., Costco Wholesale
Corporation and Best Buy Co., Inc. that primarily sell through traditional
retail channels but also sell over the Internet; and

. Office products retailers such as Office Depot Inc. and Staples, Inc. that
primarily sell through traditional retail channels but also sell over the
Internet.

We believe that the principal competitive factors affecting our market are
brand name recognition, competitive pricing, quality of customer service,
quality of product information, breadth of merchandise offerings, cost of
customer acquisition and ease of use of electronic commerce sites. Although we
believe we compete adequately with respect to such factors, we cannot assure you
that we can maintain our competitive position against current and potential
competitors, especially those with greater financial, marketing, customer
support, technical and other resources. Some competitors have begun selling
certain products at or near the purchase price paid by them to acquire the
products. To improve our competitive position, we are focused on increasing our
level of customer service and maintaining competitive pricing.

Current and potential competitors have established or may establish
cooperative relationships among themselves or directly with suppliers to obtain
exclusive or semi-exclusive sources of merchandise. New competitors or alliances
among competitors and suppliers may emerge and rapidly acquire market share. For
example, Dell Computer Corporation and Amazon.com, Inc. have agreed to provide
links from their Web sites to new Web pages that advertise their respective
products. Also, manufacturers might elect to sell or liquidate their products
directly over the Internet. Many of our current and potential competitors have
significantly greater financial, marketing, customer support, technical and
other resources than we do. As a result, they may be able to secure merchandise
from suppliers on more favorable terms than we can, and they may be able to
respond more quickly to changes in customer preference or to devote greater
resources to the development, promotion and sale of their merchandise than we
can.

We rely heavily on certain third parties, including Internet service providers
and telecommunications companies

Our operations depend on a variety of third parties for Internet access,
telecommunications, operating software, order fulfillment, merchandise delivery
and credit card transaction processing. We have limited control over these third
parties, and we cannot assure you that we will be able to maintain satisfactory
relationships with any of them on acceptable commercial terms. Nor can we assure
you that the quality of products and services that they provide will remain at
the levels needed to enable us to conduct our business effectively.

We rely on Internet service providers to connect our Web site to the
Internet. From time to time, we have experienced temporary interruptions in our
Web site connection and also our telecommunications access. Frequent or
prolonged interruptions of these Web site connection services could result in
significant losses of revenues. Our

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Web site software and internally developed auction software depend on operating
systems, data base and server software that were produced by and licensed from
third parties. From time to time, we have discovered errors and defects in such
software and, in part, rely on these third parties to correct these errors and
defects promptly.

Third-party distribution centers fulfill a significant portion of the sales
for which we are responsible. Accordingly, any service interruptions experienced
by these distribution centers as a result of labor problems or otherwise could
disrupt or prevent the fulfillment of some of our customers' orders. In
addition, we use United Parcel Service and Airborne Express as the primary
delivery services for our products. Our business would suffer if labor problems
or other causes prevented these or any other major carriers from delivering our
products for significant time periods. Furthermore, First USA Bank, through its
relationship with First USA Paymentech, Inc. (Paymentech) is our sole processor
of credit card transactions. If computer systems failures or other problems were
to prevent Paymentech from processing our credit card transactions, we would
experience delays and business disruptions. Any such delays or disruptions in
customer service may damage our reputation or result in loss of customers.

We rely heavily on certain manufacturers, distributors and suppliers

We depend entirely on certain manufacturers, distributors and suppliers to
supply us with merchandise for sale at our online store. We cannot assure you
that we will be able to develop and maintain satisfactory relationships with
such parties on acceptable commercial terms, or that we will be able to obtain
sufficient quality and quantities of merchandise at competitive prices. Also,
the quality of service provided by such parties may fall below the standard
needed to enable us to conduct our business effectively. We acquire products for
sale both directly from manufacturers and indirectly through distributors and
suppliers. Purchases from Ingram Micro Inc., a distributor of computers and
related products, accounted for approximately 25.7% of our aggregate merchandise
purchases for the three months ended July 3, 1999. We have no long-term
contracts or arrangements with manufacturers, distributors or suppliers that
guarantee availability of merchandise for our online store. We cannot assure you
that current manufacturers, distributors and suppliers will continue to sell
merchandise to us or otherwise provide merchandise for sale by us or that we
will be able to establish new manufacturer, distributor or supplier
relationships that ensure merchandise will be available for sale by us. We also
rely on many of our distributors and suppliers to ship merchandise to customers.
We have limited control over the shipping procedures of these distributors and
suppliers, and such shipments have often been subject to delays. Most
merchandise sold by us carries a warranty from the manufacturer or the supplier,
and we are not obligated to accept merchandise returns. Nevertheless, we in fact
have accepted returns from customers for which we did not receive reimbursements
from our suppliers or manufacturers, and the levels of returned merchandise in
the future may exceed our expectations. We may also find that we have to accept
more returns in the future to maintain customer satisfaction.

We face the risks of expanding into new services and business areas

To increase our revenues, we will need to expand, over time, our operations
by promoting new or complementary products or by expanding the breadth and depth
of our product or service offerings. If we expand our operations in this manner,
we will require significant additional development resources and such expansion
may strain our management, financial and operational resources. We may not
significantly benefit in such expansion from the Egghead.com brand name or from
the early entry advantage that we have experienced in the online computer
products market. Gross margins attributable to new business areas may be lower
than those associated with our existing business activities. We cannot assure
you that our expansions into new product categories, online sales formats or
products or service offerings will be timely or will generate enough revenue to
offset their costs. Also, any new product category or product or service
offering that we launch that is not favorably received by consumers could damage
our reputation or the Egghead.com brand.

We depend on our key personnel, and we will need to attract and retain
additional personnel

Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
George P. Orban, our Chief Executive Officer and Chairman of the Board. We do
not maintain "key person" life insurance policies. Although some of our
executive officers and key employees have entered into employment agreements,
none of these agreements prevents any of them from leaving

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Egghead.com. The loss of the services of any of our executive officers or other
key employees could materially adversely affect our business. Additionally, we
believe we will need to expand significantly our information technology staff in
the near future and will need to identify, attract, hire, train and retain other
highly-skilled personnel to be successful. Competition for personnel in the
electronic commerce industry is intense. We cannot assure you that we will be
able to expand our information technology staff or successfully identify,
attract, hire and retain other highly-skilled personnel in a timely and
effective manner.

Electronic commerce poses security risks to us

A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely
upon encryption and authentication technology licensed from third parties to
provide secure transmission of confidential information. We cannot assure you
that our security measures will prevent security breaches, and such breaches
could expose us to operating losses, litigation and possible liability. Advances
in computer capabilities, new discoveries in the field of cryptography or other
events or developments may result in a compromise or breach of the algorithms
that we use to protect customer transaction data. A party who is able to
circumvent our security measures could steal proprietary information or
interrupt our operations. We may need to spend a great deal of money and use
other resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of online
transactions and the privacy of users may also inhibit the growth of the
Internet generally, and the Web in particular, especially as a means of
conducting commercial transactions.

We face risks relating to our inventory

We directly purchase some of the merchandise that we sell at our online
Egghead Superstores and most of our off-price merchandise, including excess,
close-out, refurbished and reconditioned goods, that we sell at our online
Egghead SurplusDirect liquidation center and through Egghead Auctions. We assume
the inventory risks, inventory obsolescence risks and price erosion risks for
products that we purchase directly. These risks are especially significant
because much of the merchandise we sell at our online store (for example,
computer hardware, software and consumer electronics) is characterized by rapid
technological change, obsolescence and price erosion. In the recent past we have
recorded charges for obsolete inventory and have had to sell certain merchandise
at a discount or loss. It is impossible to determine with certainty whether an
item will sell for more than the price we pay for it. Because we rely heavily on
purchased inventory, our success will depend on our ability to liquidate our
inventory rapidly, the ability of our buying staff to purchase inventory at
attractive prices relative to its resale value, and our ability to manage
customer returns and the shrinkage resulting from theft, loss and misrecording
of inventory. If we are unsuccessful in any of these areas, we may be forced to
sell our inventory at a discount or loss.

We are dependent on intellectual property

Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We rely on a combination of trademark,
copyright and trade secret laws to establish and protect our proprietary rights.
Although we have applied for trademark protection for the Egghead.com name, this
name is not currently a registered trademark in the United States. We cannot
assure you that we will be able to secure significant protection for this
trademark and our other trademarks or service marks. It is possible that our
competitors or others will adopt product or service names similar to
"Egghead.com" or other service marks or trademarks of ours, thereby impeding our
ability to build brand identity and possibly confusing customers.

Our proprietary software is protected by copyright laws. The source code
for our proprietary software also is protected under applicable trade secret
laws. We cannot assure you that the steps we take to protect our software will
prevent misappropriation of our technology or that the agreements we enter into
for that purpose will be enforceable. It might be possible for a third party to
copy or otherwise obtain and use our software or other proprietary information
without authorization, or to develop similar software independently. Policing
unauthorized use of our technology is difficult, particularly because the global
nature of the Internet makes it difficult to control the ultimate destination or
security of software or other data transmitted. The laws of other countries may
not adequately protect our intellectual property.

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We may in the future receive notices from third parties claiming
infringement by our software or other intellectual property used in our
business. While we are not currently subject to any such claim, any future
claim, with or without merit, could result in significant litigation costs and
distraction of management, and could require us to enter into costly and
burdensome royalty and licensing agreements. Such royalty and licensing
agreements, if required, may not be available on terms acceptable to us, or may
not be available at all. In the future, we may also need to file lawsuits to
defend the validity of our intellectual property rights and trade secrets, or to
determine the validity and scope of the proprietary rights of others. Such
litigation, whether successful or unsuccessful, could result in substantial
costs and diversion of resources.

We also rely on a variety of technologies that we license from third
parties such as the database and Internet commerce server applications that we
license from Oracle Corporation. We cannot assure you that these third-party
technology licenses will continue to be available to us on commercially
reasonable terms. If we lose any such licenses, or if we are unable to maintain
or obtain upgrades to any of these licenses, it could delay completion of our
proprietary software enhancements until equivalent technology is identified,
licensed or developed, and integrated.

We are vulnerable to the rapid evolution of electronic commerce and related
technology

The Internet and the electronic commerce industry are characterized by
rapid technological change, changes in user and customer requirements, frequent
new service or product introductions embodying new technologies, and the
emergence of new industry standards and practices. Changes in the Internet,
electronic commerce and the related technology could render our Web site and
technology obsolete. To remain competitive, we must continue to enhance and
improve the customer service features, responsiveness and functionality of our
Web site. Our success in achieving these goals depends on our ability to develop
or license new technologies and respond promptly and cost-effectively to
technological advances and emerging industry standards and practices. The
development and licensing of technologies relating to the Internet and
electronic commerce involves significant technical, financial and business
risks. We may not be successful in developing, licensing or integrating new
technologies or promptly adapting our Web site, proprietary technology and
transaction-processing systems to customer needs or emerging industry standards.

We are dependent on the continued development of the Internet infrastructure

We depend almost entirely on the Internet for revenue and the increased use
of the Internet for commerce is essential for our business to grow. Accordingly,
our success depends in large part on the continued development of the
infrastructure for providing Internet access and services. The Internet could
lose its viability or its usage could decline due to many factors, including:

. delays in the development of the Internet infrastructure;

. power outages;

. disruptions due to the inability of computer systems to recognize the year
2000;

. the adoption of new standards or protocols for the Internet; or

. changes or increases in governmental regulation.

We cannot be certain that the infrastructure or complementary services
necessary to maintain the Internet as a useful and easy means of buying goods
will be developed or that, if they are developed, the Internet will remain a
viable marketing and sales channel for the types of products and services that
we offer at our online store.

We face risks associated with maintaining the value of our domain names

We currently hold various Web domain names relating to our brand, including
the Egghead.com, Surplusdirect.com and Surplusauction.com domain names. We
cannot assure you that we will be able to acquire or maintain relevant domain
names in all jurisdictions in which we conduct business. The acquisition and
maintenance of domain names generally is regulated by governmental agencies and
their designees. The regulation of domain names in the United States and in
foreign countries is subject to change. Governing bodies may establish
additional top-level domains, appoint additional domain name registrars or
modify the requirements for holding domain names. The relationship between
regulations governing domain names and laws protecting trademarks and similar

24
<PAGE>

proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe on or
otherwise decrease the value of our brand and our trademarks and other
proprietary rights.

We are subject to government regulation and legal uncertainties

We are currently subject to regulations applicable to businesses generally,
as well as laws or regulations directly applicable to communications or commerce
over the Internet. The adoption or modification of laws or regulations relating
to the Internet could adversely affect our business. The law of the Internet
remains largely unsettled, even in areas where there has been some legislative
action. Several states have laws that regulate auctions and auction companies
within their jurisdictions. Some states may interpret their statutes to apply to
our auction transactions with consumers in such states. The burdens of complying
with auctioneering laws could materially increase our cost of doing business.
Similarly, states may construe their existing laws governing issues such as
property ownership, taxation, intellectual property, libel and personal privacy
to apply to Internet companies servicing consumers within their jurisdictions.
Resolution of whether or how these laws will be applied is uncertain and may
take years to resolve. In addition, due to the increasing popularity and use of
the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet or other online services covering issues
such as user privacy, security, pricing, content, copyrights, distribution,
taxation and characteristics and quality of products and services. Furthermore,
the growth and development of electronic commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on
electronic commerce companies.

We are vulnerable to additional tax obligations

We currently collect sales tax only on sales of products delivered to
residents in the state of Washington. However, other states or foreign countries
may seek to impose sales tax collection obligations on us and other electronic
commerce companies. A number of proposals have been made at the state and local
levels that would impose additional taxes on the sale of goods and services
through the Internet. These proposals, if adopted, could substantially impair
the growth of electronic commerce and cause purchasing at our online store to be
less attractive to customers as compared with traditional retail purchasing. The
U.S. Congress has passed legislation limiting, for a limited period of time, the
ability of the states to impose taxes on Internet-based transactions. Failure to
renew this legislation could result in the imposition by various states of taxes
on electronic commerce.

Our stock price may be extremely volatile

The market price of our common stock has fluctuated substantially in the
past and is likely to fluctuate substantially in the future. In addition, the
securities markets have experienced significant price and volume fluctuations
and the market prices of the securities of Internet-related companies have been
especially volatile. In the past, companies that have experienced volatility in
the market price of their stock have been subject to securities class action
litigation. A securities class action lawsuit against us could result in
substantial costs and a diversion of management's attention and resources.

We face risks associated with the closing of our retail network

On January 28, 1998, we announced that we were changing our name to
Egghead.com, Inc. and shifting our entire business emphasis to electronic
commerce. During the subsequent transition, we closed our remaining retail store
network and our distribution center in Sacramento, California. Although we
have recorded reserves for liabilities associated with the closure of the retail
store network, we cannot assure you that these reserves will be adequate to
cover all remaining obligations or liabilities.

Our restated articles of incorporation and restated bylaws provide director and
officer indemnification and limit their liability

We may have to spend significant resources indemnifying our officers and
directors or paying for damages

25
<PAGE>

caused by their conduct. The Washington Business Corporation Act provides for
broad indemnification by corporations of their officers and directors, and our
restated bylaws implement this indemnification to the fullest extent permitted
under the Act as it currently exists or as it may be amended in the future.
Similarly, our restated articles of incorporation include a provision that
limits the liability of our directors to the fullest extent permitted by the Act
as it currently exists or as it may be amended in the future. Consequently,
subject to this Act and to certain limited exceptions in our restated articles,
none of our directors will be liable to us or to our shareholders for monetary
damages resulting from his or her conduct as a director.

We have anti-takeover provisions in place that make it more difficult for a
third party to acquire us

Provisions of our restated articles of incorporation, our restated bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders. For example, our
restated articles of incorporation provide that our board of directors may,
without shareholder approval, issue preferred stock with rights superior to the
rights of the holders of our common stock. As a result, our board could issue
preferred stock quickly and easily, adversely affecting the rights of holders of
our common stock. Such preferred stock could include terms calculated to delay
or prevent a change in control of Egghead.com or make the removal of management
more difficult. Also, our restated bylaws contain advance notice procedures with
respect to shareholder proposals and the nomination of candidates for election
as directors which could make it more difficult for our shareholders to propose
a change of control or to change our board of directors. In addition, our
restated articles of incorporation and our restated bylaws provide for the
division of our board of directors into three classes, with the directors in
each class serving for three-year terms, and one class being elected each year
by our shareholders. Because this system of electing and removing directors
generally makes it more difficult for shareholders to replace a majority of the
board of directors, it may tend to discourage a third party from making a tender
offer or otherwise attempting to gain control of Egghead.com and may preserve
the tenure of the current board of directors. Furthermore, Washington law
imposes restrictions on certain transactions between a corporation and certain
significant shareholders. The Washington Business Corporation Act prohibits a
target corporation, with certain exceptions, from engaging in certain
"significant business transactions" with an "acquiring person" (generally a
person or group of persons that beneficially owns 10% or more of the outstanding
voting securities of the target corporation) for five years from the date the
person or group of persons became an "acquiring person," unless a majority of
the target corporation's board of directors approved the significant business
transaction before the person or group of persons became an acquiring person.
Generally, a "significant business transaction" includes a merger, asset or
stock sale, and certain other transactions resulting in a financial benefit to
the acquiring person. After the five-year period, a significant business
transaction may occur, as long as it complies with certain "fair price"
provisions of the statute. These provisions could delay or prevent a change of
control of Egghead.com, even if such change of control would benefit our
shareholders.

26
<PAGE>

Part II. OTHER INFORMATION

ITEM 1. Legal Proceedings

None.

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

ITEM 5. Other Information

On July 14, 1999, Egghead.com announced that it had signed a definitive
merger agreement with Onsale, a leading internet retailer. In the merger,
each outstanding share of Egghead.com common stock (other than dissenting
shares meeting certain conditions) will be converted into the right to
receive .565 shares of Onsale common stock (the "Exchange Ratio"). The
shares of Onsale common stock received by Egghead.com shareholders in the
merger will represent stock ownership in the combined company after the
merger. Options to purchase Egghead.com common stock will be assumed by
Onsale and converted into options to purchase Onsale common stock, and the
exercise price and number of shares of Onsale common stock subject to each
such option will be appropriately adjusted to reflect the Exchange Ratio.
The merger is intended by the parties to qualify as a tax-free
reorganization and be accounted for as a "pooling of interests." If the
merger is consummated, Egghead.com, Inc. will become a wholly-owned
subsidiary of Onsale. Upon closing of the merger, Onsale will change its
name to Egghead.com, Inc. so that the combined company will be called
Egghead.com, Inc. after the merger. The merger is subject to approval by
shareholders of both companies, regulatory approvals and satisfaction or
waiver of certain other conditions. There can be no assurance that the
proposed merger will ultimately be consummated.

If the merger is consummated, George Orban, the Chief Executive Officer and
Chairman of the board of directors of Egghead.com, will become the Chairman
of the board of directors of the combined company, and Jerry Kaplan, the
Chief Executive Officer, President and Chairman of the board of directors
of Onsale, will become the Chief Executive Officer of the combined company.

ITEM 6. Exhibits and Reports On Form 8-K

a. Exhibits

2.1 Agreement and Plan of Merger dated as of July 13, 1999 by and among
Onsale, Inc., EO Corporation and Egghead.com, Inc. (incorporated
herein by reference to Exhibit 2.1 to registrant's report on Form
8-K dated July 13, 1999)

2.2 Company Stock Option Agreement dated as of July 13, 1999 between
Egghead.com, Inc. and Onsale, Inc. (incorporated herein by reference
to Exhibit 2.2 to registrant's report on Form 8-K dated July 13,
1999)

2.3 Parent Stock Option Agreement dated as of July 13, 1999 between
Onsale, Inc. and Egghead.com, Inc. (incorporated herein by reference
to Exhibit 2.3 to registrant's report on Form 8-K dated July 13,
1999)

3.2 Amended and Restated Bylaws of Egghead.com, Inc. (incorporated
herein by reference to Exhibit 3.2 to registrant's report on Form
8-K dated June 8, 1999)

10.1 Retention Bonus Agreements Between Egghead.com, Inc. and each of
Brian W. Bender, Tommy Collins, Norman Hullinger and James Kalasky,
dated July 13, 1999.

10.2 Amendment No.1 to Employment Agreement Between Egghead.com, Inc. and
Brian W. Bender, effective June 30, 1999.

27.1 Financial Data Schedule

b. Reports on Form 8-K

We filed a report on Form 8-K dated June 8, 1999 to report, under Item 5 of
Form 8-K, that our Board of Directors had approved an amendment to our
Amended and Restated Bylaws which sets forth, among other things,
procedures our shareholders must follow, as well as deadlines, for
nominations of directors or proposals of other business for consideration
at shareholder meetings.

27
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the city of Vancouver, State
of Washington, on the 17th day of August, 1999.

EGGHEAD.COM, INC.

By: /s/ Brian W. Bender
-------------------
Brian W. Bender
Chief Financial Officer,
Vice President of Finance
and Secretary
(Authorized Officer and
Principal Financial Officer)

28
<PAGE>

EXHIBIT INDEX

Exhibits

2.1 Agreement and Plan of Merger dated as of July 13, 1999 by and
among Onsale, Inc., EO Corporation and Egghead.com, Inc.
(incorporated herein by reference to Exhibit 2.1 to registrant's
report on Form 8-K dated July 13, 1999)

2.2 Company Stock Option Agreement dated as of July 13, 1999 between
Egghead.com, Inc. and Onsale, Inc. (incorporated herein by
reference to Exhibit 2.2 to registrant's report on Form 8-K
dated July 13, 1999)

2.3 Parent Stock Option Agreement dated as of July 13, 1999 between
Onsale, Inc. and Egghead.com, Inc. (incorporated herein by
reference to Exhibit 2.3 to registrant's report on Form 8-K
dated July 13, 1999)

3.2 Amended and Restated Bylaws of Egghead.com, Inc. (incorporated
herein by reference to Exhibit 3.2 to registrant's report on
Form 8-K dated June 8, 1999)

10.1 Retention Bonus Agreements Between Egghead.com, Inc. and each of
Brian W. Bender, Tommy Collins, Norman Hullinger and James
Kalasky, dated July 13, 1999.

10.2 Amendment No.1 to Employment Agreement Between Egghead.com, Inc.
and Brian W. Bender, effective June 30, 1999.

27.1 Financial Data Schedule

<PAGE>
EXHIBIT 10.1

RETENTION BONUS AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND BRIAN W. BENDER

THIS RETENTION BONUS AGREEMENT (the "Agreement") between Egghead.com, Inc.
(the "Company") and Brian W. Bender ("Employee") is entered into as of July 13,
1999.

WHEREAS, the Company desires to create an incentive for retention of
Employee, and whereas Employee is willing to receive a retention bonus in the
circumstances set forth in this Agreement.

In consideration of the mutual promises and agreements contained herein,
the parties hereto agree as follows:

1. Retention Bonus. As an incentive for retention of Employee, the
Company agrees to pay to Employee a lump sum bonus, in an amount equal to the
product of 0.222 and the current 12-month salary of Employee, to be paid on
October 31, 1999 (the "Retention Date") if Employee remains employed with the
Company (or any successor, or parent of successor, of the Company) through the
Retention Date; provided, however, that such retention bonus shall also be
payable in the event Employee is terminated without Cause (as defined in the
Employment Agreement effective January 22, 1998 between the Company and
Employee, as amended by Amendment No. 1 thereto) by the Company (or any
successor, or parent of successor, of the Company) prior to the Retention Date.

2. Successors. This Agreement shall be binding upon, and inure to the
benefit of, the successors and assigns of the parties hereto. This Agreement may
not be assigned by Executive without the prior written consent of the Company.

3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of
principles of conflicts of laws.

IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.

EMPLOYEE EGGHEAD.COM, INC.

/s/ Brian W. Bender By: /s/ George P. Orban
------------------- ------------------------------------
Name: Brian W. Bender George P. Orban
Chairman and Chief Executive Officer

<PAGE>

RETENTION BONUS AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND TOMMY COLLINS

THIS RETENTION BONUS AGREEMENT (the "Agreement") between Egghead.com, Inc.
(the "Company") and Tommy Collins ("Employee") is entered into as of July 13,
1999.

WHEREAS, the Company desires to create an incentive for retention of
Employee, and whereas Employee is willing to receive a retention bonus in the
circumstances set forth in this Agreement.

In consideration of the mutual promises and agreements contained herein,
the parties hereto agree as follows:

1. Retention Bonus. As an incentive for retention of Employee, the
Company agrees to pay to Employee a lump sum bonus, in an amount equal to the
Employee's current 12-month salary, to be paid on January 31, 2000 (the
"Retention Date") if Employee remains employed with the Company (or any
successor, or parent of successor, of the Company) through the Retention Date;
provided, however, that such retention bonus shall also be payable in the event
Employee is terminated without Cause (as defined in the Employment Agreement
effective January 22, 1998 between the Company and Employee, as amended by
Amendment No. 1 thereto effective January 28, 1999) by the Company (or any
successor, or parent of successor, of the Company) prior to the Retention Date.

3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of
principles of conflicts of laws.

IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.

EMPLOYEE EGGHEAD.COM, INC.

/s/ Tommy Collins By: /s/ George P. Orban
----------------- ------------------------------------
Name: Tommy Collins George P. Orban
Chairman and Chief Executive Officer
<PAGE>

RETENTION BONUS AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND NORMAN HULLINGER

THIS RETENTION BONUS AGREEMENT (the "Agreement") between Egghead.com, Inc.
(the "Company") and Norman Hullinger ("Employee") is entered into as of July 13,
1999.

WHEREAS, the Company desires to create an incentive for retention of
Employee, and whereas Employee is willing to receive a retention bonus in the
circumstances set forth in this Agreement.

In consideration of the mutual promises and agreements contained herein,
the parties hereto agree as follows:

3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of
principles of conflicts of laws.

IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.

EMPLOYEE EGGHEAD.COM, INC.

/s/ Norman F. Hullinger By: /s/ George P. Orban
----------------------- ------------------------------------
Name: Norman F. Hullinger George P. Orban
Chairman and Chief Executive Officer
<PAGE>

RETENTION BONUS AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND JAMES KALASKY

THIS RETENTION BONUS AGREEMENT (the "Agreement") between Egghead.com, Inc.
(the "Company") and James Kalasky ("Employee") is entered into as of July 13,
1999.

WHEREAS, the Company desires to create an incentive for retention of
Employee, and whereas Employee is willing to receive a retention bonus in the
circumstances set forth in this Agreement.

In consideration of the mutual promises and agreements contained herein,
the parties hereto agree as follows:

3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without application of
principles of conflicts of laws.

IN WITNESS WHEREOF, this Agreement is entered into as of the date first
above written.

EMPLOYEE EGGHEAD.COM, INC.

/s/ James Kalasky By: /s/ George P. Orban
----------------- ------------------------------------
Name: James Kalasky George P. Orban
Chairman and Chief Executive Officer

<PAGE>

EXHIBIT 10.2

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT
BETWEEN EGGHEAD.COM, INC. AND BRIAN BENDER

EGGHEAD.COM, INC. (the "Company"), as successor to EGGHEAD, INC., and Brian
Bender ("Executive") are parties to an EMPLOYMENT AGREEMENT (the "Agreement"),
dated and effective as of January 22, 1998. The Company and Executive now wish
to amend the Agreement as set forth below, with amendments effective as of June
30, 1999. The Company and the Executive agree and acknowledge the sufficiency of
consideration for these amendments based on the mutual benefits conferred.

A. Term of the Agreement

Executive and the Company have discussed changes in Executive's work
situation due to both the relocation of the Company's finance department and
Executive's desire to remain in the Spokane, Washington area. The Company wants
to continue Executive's employment until at least October 31, 1999, or the date
of a Change of Control, as defined in the Agreement. Executive and the Company
therefore mutually agree to amend Section 1.1 of the Agreement to read as
follows:

This Agreement will extend from the Effective Date to the earlier of
the effective date of a Change of Control (as defined in Attachment A
to the Agreement) or October 31, 1999.

B. Termination Prior to the End of Term.

The first sentence of Section 4.1(a)(i) is hereby amended to read as
follows: "In the event that Executive exercises his right under this subsection,
he shall provide notice of his intent to terminate the Agreement not less than
five (5) days before the effective date of the termination." The first sentence
of Section 4.1(a)(ii) is hereby amended by inserting the phrase "to terminate
this Agreement without Cause" directly after the phrase "In the event that the
Company exercises its right".

C. Duties of the Executive and Termination for Good Reason

The Executive and the Company agree that the Company may modify the
Executive's status, duties and/or responsibilities under Section 3.1 of the
Agreement during the remaining term of his employment under the Agreement.
Executive and the Company mutually agree to amend Subsection 4.1(b) of the
Agreement to read as follows:
<PAGE>

b) Executive may, at his option, terminate this Agreement prior to
the end of the term for Good Reason. For purposes of this subsection,
Executive will have Good Reason to terminate his employment under this
Agreement if Executive is relocated to a facility other than the
Company's office in Spokane, Washington; or the Company has materially
breached its obligations under the Agreement (provided that the
Company has been given warning and notice of its alleged material
breach and a reasonable opportunity to correct the alleged material
breach) other than its obligations under Section 3.1 of the Agreement.
Executive's resignation at the conclusion of the term of this
Agreement, as amended herein, shall also be deemed a termination for
Good Reason, entitling Executive to severance benefits described in
Section 4.2 of the Agreement.

D. Termination Prior to the End of Term

Section 4.1(c) of the Agreement is hereby amended by deleting the phrase,

"provided that Executive's right to exercise stock options awarded
pursuant to the EGGHEAD, INC. 1993 STOCK OPTION PLAN shall be governed
by the terms of that plan"

and inserting in lieu thereof the phrase,

"provided that Executive's right to exercise stock options awarded
pursuant to the EGGHEAD, INC. 1993 STOCK OPTION PLAN, as amended or
restated from time to time (the "Plan"), shall be governed by the
terms of the Plan."

E. Severance Benefits, Change of Control

The following parenthetical in the first sentence of Section 4.2(a) is
hereby deleted: "(the 'Initial Period')." The first sentence of Section 4.2(b)
is hereby amended by deleting the phrase "prior to the end of the Initial
Period," and inserting in lieu thereof the phrase, "prior to the first
anniversary of the Termination Date (such period, the "Initial Period"), then
from the end of the Initial Period".

F. Severance Benefits, Change of Control

Section 4.2(c) of the Agreement is hereby amended by deleting the phrase,

-2-
<PAGE>

"Any stock option(s) issued to Executive pursuant to the EGGHEAD, INC.
1993 STOCK OPTION PLAN (the "Plan")"

and inserting in lieu thereof the phrase,

"Any stock option(s) issued to Executive pursuant to the Plan"

G. Severance Benefits; Change of Control.

Subsection 4.2(e) of the Agreement is hereby amended by adding the
following clause to the end of the sentence in subsection 4.2(e):

", except that any stock options issued to the Executive pursuant to
the Plan after January 1, 1999 ("Post-1998 Options") shall not be
subject to this subsection 4.2(e)"

H. Severance Benefits; Change of Control

A new Subsection 4.2(f) shall be added as follows:

f) The Company and Executive shall enter into a Pledge
Agreement in substantially the form attached hereto as Attachment B
for the purpose of holding any sums that may become payable pursuant
to Subsection 4.2(a) in the event of a termination or resignation.

I. Non-Solicitation

Section 5.2 of the Agreement is amended by deleting the term "Severance
Period" in the first sentence and replacing that term with the term "Initial
Period."

J. Confirmation

Except as expressly modified by this Amendment, all terms and conditions in
the Agreement and any other amendments thereto are hereby confirmed and remain
in full force and effect.

-3-
<PAGE>

WHEREFORE, effective June 30, 1999, the undersigned parties accept and agree to
these amendments to the Agreement.

EGGHEAD.COM, INC. BRIAN BENDER

By /s/ George Orban /s/ Brian Bender
----------------- ----------------

Its Chief Executive Officer

-4-

<PAGE>
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