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 October 2, 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 (I.R.S. Employer
incorporation or organization) Identification Number)

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

(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:

Class Outstanding at
----- November 4, 1999
Common Stock ----------------
$.01 par value 30,808,260 shares

PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements and Supplementary Data

EGGHEAD.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)

April 3, October 2,
ASSETS 1999 1999
------------------ -----------------
Current assets: (unaudited)

Cash and cash equivalents $ 119,467 $ 99,363
Accounts receivable, net of allowance for doubtful
accounts of $920 and $767, respectively 2,316 2,424
Merchandise inventories, net 12,599 9,500
Prepaid expenses and other current assets 759 1,688
--------- ---------
Total current assets 135,141 112,975

Property and equipment, net 9,196 12,017
Goodwill, net 31,631 30,773
Other assets 217 786
--------- ---------
$ 176,185 $ 156,551
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Accounts payable $ 16,276 $ 20,572
Accrued liabilities 12,398 10,239
Reserves and liabilities related to restructuring 6,517 2,423
--------- ---------
Total liabilities 35,191 33,234
--------- ---------

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 30,791,244 shares issued
and outstanding, respectively 307 308
Additional paid-in capital 249,927 250,448
Retained deficit (109,240) (127,439)
--------- ---------
Total shareholders' equity 140,994 123,317
--------- ---------
$ 176,185 $ 156.551
========= =========

See Notes to Consolidated Financial Statements.

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

13 Weeks Ended 26 Weeks Ended
(unaudited) (unaudited)
------------------------------------------------------------------------------

September October September October
26, 2, 26, 2,
1998 1999 1998 1999
----------- --------- ----------- ---------

Net sales $35,075 $ 43,350 $ 64,616 $ 83,959
Cost of sales 31,342 40,931 57,805 78,629
----------- --------- ---------- ----------

Gross margin 3,733 2,419 6,811 5,330

Selling and marketing expense 6,941 9,366 12,731 18,886
General and administrative expense 3,687 3,745 6,754 7,937
Restructuring - (2,735) (2,735)
Merger related expense - 536 708
Amortization of goodwill 429 430 848 859
Depreciation 507 1,213 872 2,316
----------- --------- ---------- ----------
Operating loss (7,831) (10,136) (14,394) (22,641)
Other income, net 632 2,455 1,646 4,442
----------- --------- ---------- ----------
Loss before income taxes (7,199) (7,681) (12,748) (18,199)
Income tax provision - - - -
----------- --------- ---------- ----------
Net loss $(7,199) $ (7,681) $(12,748) $(18,199)
=========== ========= ========== ==========

Basic loss per share $ (0.30) $ (0.25) $ (0.53) $ (0.59)
=========== ========= ========== ==========
Weighted average common shares outstanding 24,281 30,783 23,925 30,747
=========== ========= ========== ==========

See Notes to Consolidated Financial Statements.

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

26 Weeks Ended
(unaudited)
---------------------------------------------
September 26, October 2,
1998 1999
------------------- --------------------

Cash flows from operating activities:
Net loss from operations $(12,748) $(18,199)

Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,720 3,176
Deferred rent and other (3) (31)
(Gain) loss on disposition of assets (275) 38
Changes in assets and liabilities:
Accounts receivable, net 2,949 (108)
Merchandise inventories (3,748) 3,099
Prepaid expenses & other current assets 210 (929)
Other assets (76) (571)
Accounts payable (2,819) 4,296
Restructuring reserves (8,596) (4,094)
Accrued liabilities (443) (2,159)
------------------- --------------------
Net cash used in operating activities (23,829) (15,482)
------------------- --------------------
Cash flows from investing activities:
Additions to property and equipment (1,606) (5,144)
Proceeds from sale of property and equipment 7,102 -
------------------- --------------------
Net cash provided by (used in) investing activities 5,496 (5,144)
------------------- --------------------
Cash flows from financing activities:
Proceeds from stock issuances 10,475 522
------------------- --------------------
Net cash provided by financing activities 10,475 522
------------------- --------------------
Net decrease in cash and cash equivalents (7,858) (20,104)
Cash and cash equivalents at beginning of period 67,381 119,467
------------------- --------------------
Cash and cash equivalents at end of period $ 59,523 $ 99,363
=================== ====================
Supplemental disclosures of cash
paid (received) during the year:
Interest $ 6 $ -
Income taxes $ (233) $ (284)

See Notes to Consolidated Financial Statements.

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

Common Stock Additional
-------------- Paid-in Retained
Shares Amount Capital (Deficit) Total
-------------------------------------------------

Balance, April 4, 1999 30,675 $307 $249,927 $(109,240) $140,994

Stock issued for cash, pursuant to employee stock
purchase plan 16 - 114 - 114
Stock issued for cash, pursuant to stock option plan 96 1 366 - 367
Stock grants 4 - 41 - 41
Net loss - - - (18,199) (18,199)
-------------------------------------------------
Balance, October 2, 1999 30,791 $308 $250,448 $(127,439) $123,317
=================================================

See Notes to Consolidated Financial Statements.

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 26 weeks ended October 2, 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 Merger

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 and 26-week periods ended October 2, 1999
and September 26, 1998.

Note 4 IncomeTaxes

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.

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 and six months ended
September 26, 1998 and October 2, 1999.

Note 5 Commitments and Contingencies

Significant Suppliers

During the three months ended October 2, 1999, one primary distributor accounted
for approximately 44% 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 October 2, 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 was approximately $458,000 and $333,000 for the three months
ended September 26, 1998 and October 2, 1999, and $669,000 and $753,000 for the
six months then ended, respectively. As of October 2, 1999, future minimum
rental payments under noncancelable operating leases for headquarters and
distribution facilities and equipment consisted of the following:

Operating
Leases
Fiscal Year (in thousands)
--------------

Remainder of 2000 $ 683
2001 1,095
2002 463
2003 467
Thereafter 583
------
Total minimum payments $3,291
======

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
$2.4 million at October 2, 1999, of which $2.2 million related to retail lease
obligations, which are not included in the above schedule of future minimum
rental payments.

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," "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 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 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. Egghead.com filed a proxy statement with the Securities and Exchange
Commission that was distributed to shareholders of record as of September 20,
1999. A special shareholder meeting of Egghead.com was held on November 4,
1999, to seek approval of the merger, and was adjourned until November 19, 1999
to allow additional time for shareholders to cast their votes. Egghead.com is
incorporated in Washington state, and therefore requires an affirmative vote of
two-thirds of the outstanding shares to authorize the merger. As of the time of
the November 4, 1999 adjournment, a majority of shareholders had voted in favor
of the merger with Onsale. 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 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 October 2, 1999, we had a retained deficit of $127.4
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 as compared with
comparable prior year periods, such growth rates may not be sustainable.
Additionally, we have experienced a historical trend of decreasing gross margin
percentage, which increases the volume of net sales necessary for us to achieve
profitability. 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.

Results of Operations--Three and Six Months Ended September 26, 1998 Compared
with the Three and Six Months Ended October 2, 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:

Percentage of Net Sales
---------------------------------------------------------------------------
13 weeks ended 26 weeks ended
---------------------------------------------------------------------------
September 26, October 2, September 26, October 2,
1998 1999 1998 1999
---------------------------------------------------------------------------

Net sales 100.0% 100.0% 100.0% 100.0%

Cost of sales 89.4 94.4 89.5 93.7
---------------------------------------------------------------------------

Gross margin 10.6 5.6 10.5 6.3

Selling and marketing expense 19.8 21.6 19.7 22.5
General and administrative expense 10.5 8.6 10.4 9.5
Restructuring - (6.3) - (3.3)
Merger related expense - 1.2 - 0.8
Depreciation and amortization expense 2.6 3.8 2.7 3.8
---------------------------------------------------------------------------
Operating loss (22.3) (23.4) (22.3) (27.0)
Other income, net 1.8 5.7 2.6 5.3
---------------------------------------------------------------------------
Loss before income taxes (20.5)% (17.7)% (19.7)% (21.7)%
===========================================================================

Net Sales. Total net sales for the second quarter of fiscal 2000 were
$43.4 million, a 23.6% increase from $35.1 million for the second quarter of
fiscal 1999. Net sales for the six months ended October 2, 1999 were $84.0
million, a 29.9% increase from $64.6 million for the same period in fiscal 1999.
The increases in net sales for the second quarter and first six-month period of
fiscal 2000 were 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, an increase in the categories and amount of merchandise offered and
advertising revenue. Our customer accounts increased to approximately 1.25
million as of October 2, 1999 from approximately 727,000 as of September 26,
1998.

Gross Margin. Gross margin consists of net merchandise sales and
advertising revenue 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 $2.4 million, or 5.6% of sales, for the second quarter of fiscal 2000,
a reduction from gross margin of 10.6% of sales for the comparable prior year
period. Gross margin from net sales was $5.3 million, or 6.3% of sales, for the
six months ended October 2, 1999, compared with gross margin of 10.5% of sales
for the same period in fiscal 1999. Gross margin in the second quarter and
first six-month period of fiscal 2000 reflects continued downward pressure due
to certain competitors' competitive pricing strategies, which was partially
offset by freight and handling revenue. 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 second quarter fiscal 2000
gross margins when compared to our historical online gross margins. 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 third 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 have increased $2.4 million and
$6.2 million for the second quarter and first six-month period of fiscal 2000,
respectively, from the comparable periods in fiscal year 1999. The increases in
selling and marketing expenses were primarily attributable to our efforts to
improve customer service performance, enhance our brand name recognition, and
expand our online shopping capabilities. However, we cannot assure you that the
increases in such expenses will actually result in the intended increases and
expansions.

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 second quarter of
fiscal 2000 decreased 10.6% to $3.7 million, or 8.6% of sales, as compared with
$4.2 million, or 10.3% of sales for the first quarter of fiscal 2000. The
general and administrative expenses have remained unchanged at $3.7 million for
the second quarter of fiscal 2000 from the comparable period in fiscal year
1999, while these expenses have increased $1.2 million for the comparable six-
month periods. This increase was primarily due to increased payroll and other
overhead costs to support our sales growth.

Restructuring. Restructuring income of $2.7 million reflects a change in
management's estimate of costs remaining to complete the closure of our retail
network, which is substantially complete. The revision in estimates during the
quarter ended October 2, 1999 primarily related to the resolution of certain
lease obligations for former retail facilities.

Merger related expense. Merger related expense of $0.5 million and $0.7
million for the second quarter and first six-month period of fiscal 2000
represents costs incurred related to the proposed merger with Onsale, for which
recognition has not been deferred, primarily related to employee retention.

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 of $1.2 million and $2.3 million for
the second quarter and first six-month period of fiscal 2000, respectively,
increased compared with $0.5 million and $0.9 million for the comparable periods
in fiscal year 1999. Net property and equipment increased $2.8 million to $12.0
million at

October 2, 1999 from $9.2 million at April 3, 1999. 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
second quarters of fiscal 2000 and fiscal 1999 at $0.4 million.

Other Income, Net. Other income, net for the second quarter and first six-
month period of fiscal 2000 was $2.4 million and $4.4 million, respectively,
compared with $0.6 million and $1.6 million for the same periods of fiscal 1999.
These increases were primarily attributable to an increase in interest income,
resulting from higher cash balances 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. In addition, other income, net for
the quarter ended October 2, 1999 includes approximately $0.5 million of non-
recurring income primarily related to the final settlement of certain pre-
acquisition contingencies from the purchase of Surplus Direct in August 1997.

Income Taxes. Due to our ongoing net operating losses, we did not record a
provision for income taxes for the second quarter of fiscal 2000 or 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, 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 $99.4 million as of October 2, 1999
from $119.5 million at April 3, 1999. The decrease in the cash balance was
primarily due to net cash used in operating activities of $15.5 million and net
cash used in investing activities of $5.1 million.

Cash used in operating activities of $15.5 million for the first six-month
period of fiscal 2000 was primarily due to the net loss of $18.2 million, a
decrease in accrued liabilities of $2.2 million, and a $4.1 million decrease in
the restructure reserve liability, partially offset by depreciation and
amortization of $3.2 million, a $3.1 million decrease in inventory, and a $4.3
increase in accounts payable.

Net cash used in investing activities of $5.1 million for the first six-month
period of fiscal 2000 consisted of capital expenditures, primarily related to
the upgrading of the Web site software platforms and related hardware, and
leasehold improvements to the new distribution facility.

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

As of October 2, 1999, our principal source of liquidity was $99.4 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
October 2, 1999, there were no borrowings outstanding under these lines of
credit. As of October 2, 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 approximately $5.0 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

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. As of October 2, 1999, we had completed these
three phases of addressing our Year 2000 issues.

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 have funded Year 2000-related
costs through funds provided by operations. Future costs 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 have taken 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. However, we cannot assure you that the
efforts taken to date will result in the intended level of Year 2000 compliance,
that we will not incur significant additional expenses in dealing with Year 2000
issues, that the third parties upon which our business 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.

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 October 2, 1999, we had a retained deficit of $127.4 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;

. 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 and reimburse Onsale for expenses incurred in connection with the
proposed merger, including investment banking, legal and accounting expenses;

. 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."

The special shareholders meeting that was held on November 4, 1999 to seek
approval of the merger was adjourned until November 19, 1999, because there was
an insufficient number of shareholder votes on November 4,

1999 to approve the merger. We cannot assure you that a further adjournment of
the meeting will not occur or that the proposed merger will ultimately be
consummated.

We face risks relating to 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. 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. We have completed our Year 2000
readiness program, but cannot assure you that 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 at least 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.

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. 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.

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:

. Companies with electronic commerce sites such as Amazon.com, Inc., Beyond.com
Corporation, Buy.com Inc. and Cyberian Outpost, Inc., Dell Computer
Corporation, 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.,
Best Buy and Circuit City;

. Manufacturers such as Dell Computer Corporation and Gateway, 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.

. 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.

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 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 44% of our aggregate merchandise
purchases for the three months ended October 2, 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 Egghead.com. As a
result of our proposed merger with Onsale, some of our executive officers or key
employees may experience uncertainty about their future roles and may elect to
leave the Company. 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.

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
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.

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 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.

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

ITEM 6. Exhibits and Reports On Form 8-K

a. Exhibits

2.1 Form of Company Voting Agreement dated July 13, 1999 between Onsale, Inc.
and certain shareholders of Egghead.com, Inc. (incorporated herein by
reference to Exhibit 2.4 to registrant's report on Form 8-K dated July 13,
1999)

2.2 Form of Parent Voting Agreement dated July 13, 1999 between Egghead.com,
Inc. and certain stockholders of Onsale, Inc. (incorporated herein by
reference to Exhibit 2.4 to registrant's report on Form 8-K dated July 13,
1999)

10.1 Amendment No. 1 to Egghead.com, Inc. Restated Nonemployee Director Stock
Option Plan.

10.2 Amendment No. 2 to Egghead.com, Inc. Restated Nonemployee Director Stock
Option Plan.

10.3 Executive Employment Agreement between Egghead.com, Inc., DJ & J Software
Corporation and George P. Orban, dated September 20, 1999.

10.4 Employment Agreement between Egghead.com, Inc., Surplus Software, Inc. and
Jonathan W. Brodeur, dated October 25, 1999.

10.5 Rentention Bonus Agreement between Egghead.com, Inc. and Jonathan W.
Brodeur, dated July 13, 1999.

10.6 Second Amendment to Employment Agreement between Egghead.com, Inc. and
Brian W. Bender, effective October 26, 1999.

10.7 Pledge Agreement by Egghead.com, Inc. for the benefit of Brian W. Bender,
entered into as of September 9, 1999.

10.8 Form of Pledge Agreement by Egghead.com, Inc. for the benefit of each of
the persons listed on Schedule 1 to the Agreement.

10.9 Pledge Agreement by Egghead.com, Inc. for the benefit of Jonathan W.
Brodeur, entered into as of November 15, 1999.

10.10 Supplemental Retention Bonus Agreement between Egghead.com, Inc. and
James Kalasky, entered into as of October 1, 1999

10.11 Promissory note signed by James Kalasky

10.12 Promissory note signed by Tommy Collins

27.1 Financial Data Schedule

b. Reports on Form 8-K

We filed a report on Form 8-K, dated July 13, 1999, to report, under Item 5
of Form 8-K, that we had entered into a definitive Agreement and Plan of
Merger with Onsale, Inc. and EO Corporation, a wholly owned subsidiary of
Onsale, Inc.

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 16th day of November, 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)

EXHIBIT INDEX
Exhibits