<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

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

      For the fiscal year ended January 31, 2000

                                       OR

[ ]   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 0-24871

                               FATBRAIN.COM, INC.
                       (FORMERLY COMPUTER LITERACY, INC.)
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

              Delaware                                    77-0389480
  (STATE OR OTHER JURISDICTION OF                      (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                     IDENTIFICATION  NO.)

                                2550 Walsh Avenue
                          Santa Clara, California 95051
           (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)

Issuer's telephone number, including area code:    (408) 845-0100

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

      Title of each class                 Name of Exchange on which registered
      -------------------                 ------------------------------------
              None                                        None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock
($0.001)

      Indicate by check mark whether the issuer: (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 issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

      Yes      X             No
           ----------            ----------
      Yes      X             No
           ----------            ----------

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

                            [Cover page 1 of 2 pages]


<PAGE>   2

      The Issuer's revenues for its most recent fiscal year are $35.3 million.

      The aggregate market value of voting stock held by non-affiliates of the
issuer, as of March 31, 2000 was approximately $87,613,806 (based on the closing
price for shares of the issuer's Common Stock as reported by the Nasdaq National
Market for the last trading day prior to that date). Shares of Common Stock held
by each executive officer, director, and holder of 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

      On March 31, 2000 approximately 12,958,130 shares of the issuer's Common
Stock, $0.001 par value, were outstanding.

      Transitional Small Business Disclosure Format (check one):

      Yes                    No      X
           ----------            ----------

                       DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement to be filed by the Company with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year are incorporated by reference in Part III of this Form 10-KSB.




                            [Cover Page 2 of 2 pages]


<PAGE>   3

                               Fatbrain.com, Inc.
                                   Form 10-KSB
                                      INDEX

<TABLE>
<CAPTION>
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<S>      <C>                                                                      <C>
PART I.

Item 1.  Business .................................................................2-17

Item 2.  Properties .................................................................18

Item 3.  Legal Proceedings ..........................................................18

Item 4.  Submission of Matters to a Vote of Security Holders ........................18

PART II.

Item 5.  Market for Common Equity and Related Shareholder Matters ...................18

Item 6.  Selected Financial Data and Management's Discussion and Analysis of
         Financial Condition and Results of Operations ...........................19-23

Item 7.  Financial Statements and Supplementary Data .............................24-40

Item 8.  Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure .......................................................41

PART III.

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act ..........................41

Item 10. Executive Compensation .....................................................41

Item 11. Security Ownership of Certain Beneficial Owners and Management .............41

Item 12. Certain Relationships and Related Transactions .............................41

Item 13. Exhibits and Reports on Form 8-K. ..........................................41

SIGNATURES ..........................................................................42
</TABLE>



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      The discussion in this report on Form 10-KSB contains forward-looking
statements that involve risks and uncertainties. The statements contained in
this Report that are not purely historical are forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, including
statements on our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this document are based on
information available to us on the date hereof. We assume no obligation to
update any such forward-looking statements. Our actual results could differ
materially from those indicated in such forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed under the heading "other Factors Affecting Operating Results,
Liquidity and Capital Resources" and the risks discussed in our other Securities
and Exchange Commission filings. This cautionary statement applies to all
forward-looking statements wherever they appear in this filing and in the
documents incorporated by reference in this filing.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

      Fatbrain.com, Inc. is the leader in managing, marketing and distributing
information for businesses. Our new Information Exchange product suite combines
our e-commerce expertise, our secure digital publishing technology known as
eMatter, a comprehensive professional bookstore, an established print-on-demand
infrastructure, and our world-class distribution and fulfillment services to
deliver a powerful and complete Web-based solution for outsourcing
mission-critical internal and external corporate information. The Information
Exchange solution also integrates with existing business processes to give the
customer organization control over procurement. Our business-to-business
solutions reach more than 2.25 million employee desktops at more than 300
Fortune 1000 corporations worldwide, including Hewlett-Packard Co, Sun
Microsystems Inc., Cisco Systems Inc, GTE Corp., Bank of America Corp. and
Lucent Technologies Inc. In addition to our business-to-business product
offerings, our professionally focused online store offers professional books,
technology based training solutions, corporate documentation and other
information resources to end users. Our online store features authoritative and
compelling content, competitive pricing, an easy-to-use navigational interface
and a variety of value-added services. We also operate two physical retail
stores that complement our online business by generating increased online
traffic and creating cross-promotional opportunities.

      We recently announced that we have created a new company - under the name
MightyWords - to address the mass market opportunities created by our successful
eMatter digital publishing initiative. We will continue to leverage the eMatter
technology to deliver secure document publishing services for our corporate
customers as part of the Information Exchange product suite. We are currently
seeking private equity funding for MightyWords, which will be operated as a
separate company.

      We believe that our Information Exchange product suite, combined with our
commitment to customer service and readily available product offerings, creates
valuable long-term relationships and repeat purchasing patterns. Since launching
our first custom online store in February 1996, we have experienced rapid online
revenue growth. For the three-year period ended January 31, 2000, we generated
total online revenues of $42.5 million ($10.3 million of which was generated
during the three months ended January 31, 2000). In addition, the number of
online customers has grown from approximately 1,600 as of January 31, 1997 to
approximately 246,000 as of January 31, 2000, and repeat purchases have
accounted for approximately 58% of our online revenue for the year ended January
31, 2000. See "Other Factors Affecting Operating Results, Liquidity and Capital
Resources - Our Limited Operating History May Prevent Us From Achieving Success
in Our Business; We Have Incurred Losses and We Expect Future Losses."

STRATEGY

      Fatbrain.com's objective is to revolutionize the way businesses manage,
market and distribute corporate information through our Information Exchange
product suite and to maintain and extend our leadership position as the online
solution for the information resource needs of professionals. Key elements of
our strategy to achieve this objective include:

      Expand Product Offerings. We have recently introduced our Information
Exchange product suite which combines our e-commerce expertise, secure digital
publishing technology known as eMatter, comprehensive



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professional bookstore, established print-on-demand infrastructure and
world-class distribution and fulfillment services to deliver a powerful and
complete Web-based solution for outsourcing mission-critical internal and
external corporate information. Using our Information Exchange product suite,
our corporate customers can now outsource the management, marketing and
distribution of this information while providing faster and better quality
service to those requiring the information.

      In addition, we have broadened our areas of content and expertise in
books, training materials and documentation to include the medical and
biotechnology industries. In these new markets, we will seek to deliver the same
subject expertise and special services to which our customers have become
accustomed, such as powerful search tools, expert reviews and custom
recommendations.

      Enhance the Customer Experience. We seek to provide our corporate
customers with advanced tools to manage, market and distribute corporate
information through our Information Exchange suite of products. We seek to
provide our individual customers with a superior online shopping experience by
offering an extensive selection, authoritative and compelling content,
convenience, value-added service, a strong commitment to customer service,
competitive pricing and an easy-to-use interface. We believe that enhancements
to our Information Exchange and online product offerings will enable us to
capture an increasing share of the worldwide market for information resources.
We expect to continue investing in our technology and product development to
enhance our Information Exchange suite of products and to maintain a
state-of-the-art, simple to use and content-rich online store, while broadening
and expanding our product offerings.

      Expand Corporate Relationships. We believe that there is a significant
opportunity to increase our sales by expanding our corporate sales force and
focusing their efforts to include additional Fortune 1000 companies in key
verticals such as telecommunications, hardware, software, automotive and
financial services. Such corporate relationships provide a cost-effective means
of acquiring a large number of loyal customers quickly and efficiently. In
addition, by integrating our Information Exchange suite into the business
processes of many of these corporate customers, we are able to secure and
leverage our position with the customer as the preferred solution for managing,
marketing and distributing corporate information.

      Build Brand Awareness. We believe we are the first company to provide an
integrated solution for outsourcing the management, marketing and distribution
of corporate information. To leverage our first-mover advantage, we seek to
expand awareness of our brand with a direct sales force and targeted advertising
and marketing programs, thereby reducing customer acquisition costs. Our
strategy is to promote, advertise and increase brand equity through excellent
customer service, effective marketing and promotion, and with strategic
alliances and partnerships.

      Encourage Customer Loyalty. We believe that our unique Information
Exchange solution, our commitment to customer service and readily available
product offerings create valuable long-term relationships and repeat purchasing
behavior. We intend to expand our current corporate relationships through the
integration of our entire suite of Information Exchange products with our
established customized online stores and devote significant resources to
encourage overall customer loyalty.

      Capitalize on Expanding Market. We intend to capitalize on the growing
market for information resources by leveraging our online platform and brand,
and by providing an extensive selection of products and services previously
unavailable through a single or centralized source. In addition, we will
consider developing incremental revenue opportunities by promoting our products
through affiliated sites and expanding into related product areas.

      Establish and Leverage Supplier Relationships. We intend to capitalize
upon the advantages associated with our online platform to create and sustain
strong relationships with publishers and other suppliers. We also intend to
leverage our market leadership position to expand cooperative marketing
campaigns with publishers, pursue direct supply relationships and improve volume
discounts. We plan to hire additional personnel primarily dedicated to
establishing and maintaining supplier relationships in order to improve
availability, delivery, pricing terms and, in certain circumstances,
exclusivity.

      Maintain Technology Focus and Expertise. Because speed, scalability and
ease-of-use are essential to effectively operating successful business to
business initiatives, our internal engineering group will continue to devote
substantial resources to develop, acquire and implement technological
enhancements to our Web site and transaction-processing systems. Among other
technology objectives, we intend to provide increasingly value-added



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services and make the user interface as intuitive, engaging and effective as
possible, while continuously improving the efficiency of our
transaction-processing and fulfillment activities.

FATBRAIN.COM'S ONLINE STORE

      Customers enter our professionally focused online store through our Web
site and, in addition to ordering technical and professional books,
technology-based training solutions, product manuals and research reports,
customers can conduct targeted searches, browse highlighted selections,
bestsellers and other features, read and post reviews, register for value-added
services, check order status and participate in promotions.

      Browsing. Our online store offers visitors a variety of highlighted
subject areas and special features. Popular features include "bestsellers,"
"what's hot" and "our recommendations," which enable individuals to view the
most popular and best selling items. The "what's hot" area directs customers to
information resources for particular subject categories such as Java or C++, and
"partner shelves" provides the user with titles and selections specific to
products from technology leaders such as Cisco, Hewlett-Packard, Microsoft and
Sun Microsystems. In addition, our home page presents a variety of other
features of topical or current-event interest, such as "what's new" which allows
customers to be notified of recent releases of new versions and "events
calendar" which provides the user information on store events and tradeshows.
Further, customers can click on the "suggestions" button, located at the bottom
of each page and make a suggestion to us.

      Searching. A primary feature of our online store is our interactive,
searchable catalog of more than 900,000 titles. We provide a selection of search
tools enabling users to quickly find information resources based on title,
subject, author, publisher or ISBN. Within a particular search, a customer can
choose to sort the selections in various orders of importance. We believe that
our focus on professional materials allows for an efficient search mechanism by
delivering search results of relevant materials. After a selection has been
located, we inform customers of related products which provides unique
up-selling and marketing opportunities.

      Ordering. To purchase products, customers simply click on an icon to add
books to their online shopping basket and can remove products from their
shopping baskets as they browse. To execute orders, customers click on the
"checkout" icon and are prompted to supply shipping and credit card details,
either online, by e-mail or by telephone. Customer account information is stored
on our secure servers and is automatically recalled for subsequent purchases.
Personal passwords allow repeat customers to automatically access previously
provided information, as well as book notification profiles. Our system
automatically confirms each order by e-mail within minutes after placing the
order and advises customers by e-mail shortly after orders are shipped.

      Reviews and Content. Our online store offers numerous forms of content to
entertain, engage and inform readers, and enhance the customer's shopping
experience. For many of our selections, customers are able to access reviews by
our in-house editorial staff and other industry leaders. In addition, customers
are encouraged to write and post their own reviews which are also available
under "more information available" icons. Within the "authors' domain" area of
the online store, customers can access other interviews and articles by industry
leaders. Due to the customer's need for credible advice, specific background
information about reviewers is posted, such as the reviewer's profession and
level of expertise. In addition our practice of displaying the table of contents
for many of our selections, and often sample chapters, enables the purchaser to
evaluate the content of the item being purchased.

      Availability and Fulfillment. We strive to ship 90% of all orders received
weekdays by 4:00 p.m. Pacific Time on the same day. Below each product offering
is a symbol that indicates whether such item is in stock. Customers select from
a variety of delivery options, including overnight and various international
shipping alternatives. We seek to provide rapid and reliable fulfillment of
customer orders and intend to continue to improve our record of availability and
fulfillment. See "Warehousing and Fulfillment."

      Customized Online Stores. Our Information Exchange product suite allows
our corporate customers the opportunity to outsource the management, marketing
and distribution of mission-critical internal and external corporate information
while providing faster and better service to those requiring the information.
One of the features of the product is to provide customized professional
bookstores within the customer's corporate networks which integrate with
existing business processes to give organizations control over procurement. The
program provides us with opportunities to be the preferred provider of
information resources to organizations and their employees and constituents.



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      In addition to our online stores, we maintain two retail stores located in
San Jose and Sunnyvale, California operating under the name Computer Literacy,
Inc. These stores supplement our operating results and provide a profitable
means of customer acquisition. Additionally, the existence of the stores enables
us to engage in unique cross-promotional efforts and offer in-store events such
as guest lectures. We periodically evaluate the location and productivity of our
stores, and may close, consolidate or relocate stores as conditions warrant. See
"Other Factors Affecting Operating Results, Liquidity and Capital Resources -
Our Quarterly Operating Results Are Volatile and Future Operating Results Remain
Uncertain."

CUSTOMERS

      Our customers consist of both corporate customers, who can take advantage
of our entire Information Exchange suite of products, and individual
professionals, who primarily purchase for business purposes. Through our
relationships with corporate customers, we sell primarily to purchasing agents,
corporate librarians and training departments as well as to individual employees
within these organizations. We have also leveraged these corporate customer
relationships into sales to constituents of the corporate customers. The number
of customer accounts has grown from approximately 1,600 as of January 31, 1997
to approximately 246,000 as of January 31, 2000 and repeat purchases have
accounted for approximately 58% of online revenue in the fiscal year ended
January 31, 2000. No single customer accounted for more than 10% of total
revenue for any fiscal year since inception. Set forth below is a case
study of a representative corporate customer relationship.

      Sun Microsystems, Inc. Sun Microsystems has a centralized library resource
that serves its global corporate staff's information needs. Sun Microsystems was
looking for a partner who could provide a secure mechanism to enable employees
to browse and order important technical documents quickly. Sun Microsystems
chose Fatbrain.com because of our unique focus on the technical professional,
immediate inventory of over 30,000 technical titles, departmental billing,
centralized purchasing control and specialized content including recommended
reading lists. The Sun Microsystems Library acts as a central purchasing agent,
and Sun Microsystem's employees are able to browse and order at the co-branded
site developed and hosted by Fatbrain.com. The Sun Microsystems library and
Fatbrain.com work together to help serve the information needs of the worldwide
employee base, by promoting this online channel for information resources that
is co-branded with Sun Microsystems Library and Fatbrain.com logos.



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SALES AND MARKETING

      Our sales and marketing strategy is focused on the corporate
enterprise-wide customer. This approach is designed to cost-effectively
strengthen our brand name, increase customer traffic to our online store, build
customer loyalty and develop repeat revenue opportunities through our
distribution channels.

      Corporate Sales. We have an increasing number of sales personnel primarily
focused on fulfilling the information resource requirements of corporate
organizations and their employees and constituents. Our direct sales force is
headquartered in Santa Clara, California and each member is assigned to specific
strategic accounts. Each member of the direct sales organization, including
telesales personnel, is compensated with fixed and variable performance-based
compensation. See "Other Factors Affecting Operating Results, Liquidity and
Capital Resources -We Must Manage Our Growth and Expansion; We Must Attract
Additional Personnel; We Depend on Key Employees."

      Marketing and Mass Market Sales. We utilize a variety of programs and
promotional activities to increase traffic and purchases on our Web site and in
retail locations. We maintain a proprietary customer database of e-mail
addresses that allows for cost-effective personal notification and other
targeted marketing. We continue to build customer loyalty by delivering
customized services, promotions and products to our customers. We target the
individual customer through a mix of promotional activities and strategic
advertising. Over 10,000 Web sites have links to our online store. These links
are located primarily on Web sites concerning computers or other technical
topics, which are considered complementary to our online store. We also place a
limited number of advertisements on strategic Web sites. We advertise in a
number of trade journals, newspapers and magazines targeted to the information
technology professionals and information systems consultants.

      International Sales. For fiscal 2000, approximately 13% of online revenue
was derived from international sales. We believe that the Internet offers a
unique opportunity for us to rapidly expand our international presence on a
cost-effective basis and we intend to pursue this opportunity.

CUSTOMER SERVICE AND SUPPORT

      We are committed to providing superior customer service and support. Our
customer service and support personnel are trained to assist customers in
purchasing decisions, recommend complementary products and handle general
customer inquiries. We answer service and support questions through e-mail and
through our toll-free phone line from 5:00 a.m. to 8:00 p.m., Pacific Time on
weekdays and 9:00 a.m. to 5:00 p.m., Pacific Time on weekends. We have automated
certain portions of our customer service and support operations and intend to
enhance and provide further automation of such service and operations.

WAREHOUSING AND FULFILLMENT

      For fiscal 2000 we purchased approximately 34% of our inventory from
Ingram Book Company and 17% of our inventory from Pearson Education Division. We
rely to a large extent on rapid fulfillment from Ingram, Pearson and other
vendors. We generally have no commitments or arrangements with any of our
vendors that guarantee the availability of merchandise, the continuation of
particular payment terms or the extension of credit limits. There can be no
assurance our current vendors will continue to sell merchandise to us on current
terms or we will be able to establish new or extend current vendor relationships
to ensure acquisition of merchandise in a timely and efficient manner and on
acceptable commercial terms. If we were unable to develop and maintain
relationships with vendors that would allow us to obtain sufficient quantities
of merchandise on acceptable commercial terms, our business, financial condition
and results of operations could be materially adversely affected. See "Other
Factors Affecting Operating Results, Liquidity and Capital Resources - We Rely
on Selected Suppliers."

      We currently maintain a warehouse and distribution center in Erlanger,
Kentucky. We operate on a software supported warehousing and distribution
solution from Manhattan Associates, PKMS Warehouse Management System.

TECHNOLOGY AND PRODUCT DEVELOPMENT

      Using a combination of our internally developed proprietary technology and
commercially available licensed technology, we have implemented an integrated
system of site management, search engine, customer



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support, inventory management, network monitoring, quality assurance,
transaction processing and fulfillment services. Our technology architecture is
based on a distributed model that is extremely scalable, flexible and modular.

      Our current strategy is to focus our development efforts on creating and
enhancing the proprietary software unique to our business, especially as it
relates to interaction with customers. We license commercially available
technology in areas where we cannot create unique value. See "Other Factors
Affecting Operating Results, Liquidity and Capital Resources - We Depend on the
Continued Growth of Electronic Commerce; We Must Respond to Rapid Technological
Change and Evolving Industry Standards." Our integrated system consists of a
dynamic Web site and transaction processing components. Our dynamic Web site
allows customers to search, browse and view product information, monitor product
status and availability, compare different product options, and make purchase
decisions specific to their particular needs. We have implemented a transaction
processing system that supports corporate ordering, multiple account profiles
for individual and corporate users, custom integration and co-branding with
partner sites, the application of selective discounting and promotion codes, and
referral tracking and reporting. The system can accommodate large numbers of
products, across different product categories and millions of individual items,
offer users multiple shipping and delivery options and provide secure credit
card transactions. We have implemented a customer service system that manages
order adjustments, credits, returns, refunds, cancellations and customer account
information. Our back-end system is fully integrated and includes inventory
management, accounts payable, accounts receivable, general ledger, and retail
point of sale. Our engineering strategy includes enhancing the functionality of
our existing features, developing new features and integrating off-the-shelf
components into our environment. We are currently investing significant
resources in our system development and expect to continue to do so in the
future. We believe our future success depends on our ability to continue
developing and enhancing this system. The uninterrupted operation of our online
store and related system is essential to our business and the site operations
staff is responsible for ensuring its reliability. We use three Internet service
providers. We anticipate upgrading capacity to allow for faster
telecommunication services in the future. See "Other Factors Affecting Operating
Results, Liquidity and Capital Resources--We Must Manage Our Growth and
Expansion; Capacity Constraints and Our Reliance on Internally Developed Systems
Could Affect Our Business; System Failures Could Harm Our Business."

COMPETITION

      The electronic commerce market is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. We expect competition to continue to intensify in the
future. We currently or potentially compete with a variety of companies. These
competitors include:

-     A significant number of retail and online bookstores, including
      Amazon.com, Barnesandnoble.com, Borders Group, Inc. and other vendors of
      books, training products and product manuals;

-     Various computer super-stores that carry related information resources at
      retail locations, in catalogs and over the Internet;

-     A number of indirect competitors that specialize in electronic commerce or
      derive a substantial portion of their revenue from electronic commerce;
      and

-     With respect to MightyWords, 1stBooks, Books24x7, iUniverse.com,
      netLibrary, PublishOne and a variety of self-publishing and e-publishing
      sites.

There can be no assurance that we can maintain a competitive position against
current or future competitors as they enter the markets in which we compete,
particularly those with greater financial, marketing, service, support,
technical and other resources than us. Any failure to maintain a competitive
position within the market could have a material adverse effect on our business,
financial condition, results of operations and cash flows.

      We believe that the principal competitive factors on which we compete in
our market include:

-     Brand recognition;

-     Selection;

-     Personalized services;

-     Convenience;

-     Price;

-     Accessibility;



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-     Customer service;

-     Quality of search tools;

-     Quality of editorial and other site content; and - Reliability and speed
      of fulfillment.

Many of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than us. In addition, online retailers
may be acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Certain of our competitors
may be able to secure merchandise from vendors on more favorable terms, devote
greater resources to marketing and promotional campaigns, adopt more aggressive
pricing or inventory availability policies and devote substantially more
resources to Web site and systems development than us. Increased competition may
result in reduced operating margins, loss of market share and a diminished brand
franchise.

      As a strategic response to changes in the competitive environment, we may
from time to time make certain pricing, service or marketing decisions or
acquisitions that could result in reduced margins or otherwise have a material
adverse effect on our business, financial condition and results of operations.
New technologies and the expansion of existing technologies may increase the
competitive pressures on us. For example, applications that select specific
titles from a variety of Web sites may channel customers to online booksellers
that compete with us. Companies that control access to transactions through a
network or Web browsers could also promote our competitors or charge us a
substantial fee for inclusion. In addition, vendors of information resources
such as technology based training could provide direct access to training
programs online. There can be no assurance that we will be able to compete
successfully against current and future competitors, and the competitive
pressures we face may have a material adverse effect on our business, financial
condition and results of operations. See "Other Factors Affecting Operating
Results, Liquidity and Capital Resources--Our Markets Are Highly Competitive."

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

      We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success, and rely
on trademark and copyright law, trade secret protection and confidentiality
and/or license agreements with our employees, customers, partners and others to
protect our proprietary rights. We pursue the registration of our trademarks and
service marks in the U.S. and internationally, and have applied for the
registration of certain of our trademarks and service marks. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our products and services are made available
online. While we attempt to ensure that the quality of our brand is maintained
by such licensees, there can be no assurance that such licensees will not take
actions that might materially adversely affect the value of our proprietary
rights or reputation, which could have a material adverse effect on our
business, financial condition, results of operations and cash flows. There can
be no assurance that the steps we take to protect our proprietary rights will be
adequate or that third parties will not infringe or misappropriate our
copyrights, trademarks, trade dress and similar proprietary rights. In addition,
there can be no assurance that other parties will not assert infringement claims
against us. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources. We are not
currently aware of any legal proceedings pending or threatened against us.

      In addition, we display reviews and articles on technical subjects in our
online store. Some reviews and articles may be copyrighted and we may not have
explicit permission from the author for use of such intellectual property. There
can be no assurance that the authors will not assert infringement claims against
us. If a claim is asserted alleging that we have infringed the proprietary
rights of a third party, we may be required to seek licenses to continue to use
such intellectual property. The failure to obtain the necessary licenses or
other rights at a reasonable cost could have a material adverse effect on our
business, financial condition and results of operations. See "Other Factors
Affecting Operating Results, Liquidity and Capital Resources--Protection of Our
Intellectual Property is Limited; We May Be Found to Infringe Proprietary Rights
of Others."

EMPLOYEES

      As of January 31, 2000, we employed 286 full-time employees. In addition
we employed 29 part-time employees, primarily for our physical retail stores. We
also employ independent contractors and other temporary



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employees in our editorial, operations and finance and administration
departments. None of our employees are represented by a labor union, and we
consider our employee relations to be good.

      Competition for qualified personnel in our industry is intense,
particularly among software development and other technical staff. We believe
that our future success will depend in part on our continued ability to attract,
hire and retain a sufficient number of highly skilled personnel. See "Other
Factors Affecting Operating Results, Liquidity and Capital Resources--We Depend
on Key Personnel; We Must Attract Additional Personnel."

OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES

RISKS RELATED TO OUR BUSINESS

Our Limited Operating History May Prevent Us from Achieving Success in Our
Business

      We were incorporated in November 1994 to develop an online retail
strategy, and we began selling information resources, initially consisting of
technical books, through our online store on the World Wide Web, or the Web, in
February 1996. We expanded our product offerings to include training materials
in January 1998, corporate documentation in May 1998 and professional resources
for the engineering, science, mathematics and financial services industries in
March 1999. We introduced eMatter, a secure digital publishing technology that
allows authors and publishers to publish and sell works online, in October 1999.
More recently, we have introduced our Information Exchange product suite, as
well as information resources for the medical and biotechnology industries. As a
result, we have a very limited operating history from which to evaluate our
business and prospects.

      Our prospects must be considered in light of the risks, expenses and
uncertainties frequently encountered by companies in the early stages of
development, particularly companies in new and rapidly evolving markets,
including electronic commerce. These risks may include:

-     An evolving and unpredictable business model;

-     Management of an expanding business;

-     Fluctuations in sales and seasonality;

-     Entry into new business areas;

-     Competition;

-     Need for additional personnel and dependence on key personnel;

-     Limitations on our ability to establish and expand our brand; and

-     Capacity constraints and system failures.

To address these risks, we must, among other things:

-     Implement and successfully execute our business and marketing strategy;

-     Maintain and increase our customer base;

-     Continue to develop and upgrade our technology and transaction-processing
      systems;

-     Improve our online store;

-     Provide superior customer service and order fulfillment;

-     Respond to competitive developments; and

-     Attract, retain and motivate qualified personnel.

We may not successfully address these challenges and the failure to do so could
seriously harm our business, financial condition, operating results and cash
flows.

We Have Incurred Losses and We Expect Future Losses

      Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future. We
may not achieve profitability and if achieved, profitability may not be
sustained. As of January 31, 2000, we had an accumulated deficit of $44.0
million. We believe that our success will depend in large part on our ability
to:

- Integrate our Information Exchange suite of products into our business;



                                       9
<PAGE>   12

-     Enhance our customers' online shopping experience;

-     Expand corporate relationships and establish and utilize supplier
      relationships;

-     Build brand awareness;

-     Capitalize on the market for information resources;

-     Maintain our technology focus and expertise; and

-     Expand our expertise in the engineering, science, mathematics, financial
      services, medical and biotechnology industries.

As a result, we intend to invest heavily in our direct sales and telesales
organizations, systems and infrastructure development, and marketing and
promotion. These expenditures may not result in increased revenues or customer
growth. Additionally, while in recent periods we have experienced significant
growth in revenues, our customer base and repeat customer revenue, these growth
rates are not sustainable. These growth rates will decrease in the future and
are not indicative of actual growth rates that we may experience.

Our Quarterly Operating Results Are Volatile and Future Operating Results Remain
Uncertain

      Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. Our future quarterly operating
results may vary significantly due to a variety of factors, many of which are
outside our control. Factors that could affect our quarterly operating results
include:

-     Our ability to establish and expand brand awareness;

-     Our ability to retain existing customers, attract new customers and
      continuously improve customer satisfaction;

-     Our ability to manage inventory and fulfillment operations;

-     Our ability to sustain or improve gross margin levels;

-     The announcement or introduction of new online stores, services and
      products by us or our competitors;

-     Price competition or higher wholesale prices in the industry;

-     The level of usage of and commerce on the Internet and online services
      generally;

-     Our ability to upgrade and develop our systems and infrastructure in a
      timely and effective manner;

-     Technical difficulties, system downtime or Internet brownouts;

-     The amount and timing of operating costs and capital expenditures relating
      to expansion of our business, operations and infrastructure;

-     The introduction of new product lines, including eMatter; and

-     Governmental regulation.

      We are unable to accurately forecast our future revenues because of our
limited operating history and the emerging nature of the markets in which we
compete. Revenues and operating results generally depend on the volume of,
timing of and ability to fulfill orders received. These factors have
historically been, and are likely to continue to be, difficult to forecast. Our
current and future expense levels are based largely on our operating plans and
estimates of future revenues and are, to a large extent, fixed. We may be unable
to adjust spending sufficiently quickly to compensate for any unexpected revenue
shortfall. As a result, any significant shortfall in revenues in relation to our
planned expenditures could seriously harm our business, financial condition,
operating results and cash flows. Further, we may, from time to time, make
selected pricing, product, service or marketing decisions as a strategic
response to changes in the competitive environment. These changes could also
seriously harm our business, financial condition, operating results and cash
flows.

      Further, we have, in the past, experienced seasonality in our business,
and we expect that we will continue to experience seasonality in the future.
Internet usage and the amount of purchases from individual and corporate
consumers tend to decline during August, November and December. During these
times professionals are either absent from the workplace, on vacation or
experience a holiday closure at their company. Our results in future quarters
may be negatively affected by seasonal trends.

      Due to the foregoing factors, we cannot predict with any significant
degree of certainty our quarterly revenue and operating results. Further, we
believe that period-to-period comparisons of our operating results are not
necessarily a meaningful indication of future performance. It is likely that in
one or more future quarters our results may fall below the expectations of
securities analysts and investors. In this event, the trading price of our
common stock could be seriously harmed.



                                       10
<PAGE>   13

The Risks and Expenses Associated with New Product Offerings May Harm Our
Business

      For the fiscal year ended January 31, 2000 approximately 86% of our online
revenues were derived from sales of books. We recently expanded our product
offerings to include our Information Exchange suite of products and resource
materials for professionals in the medical and biotechnology industries, and
future revenues from these new product offerings are difficult to forecast. The
lack of market acceptance for these efforts or our inability to generate
satisfactory revenues from such expanded services or products to offset related
increased costs could seriously harm our business, financial condition,
operating results and cash flows.

      In addition, we may choose to further expand our operations by promoting
new or complementary products and expanding the breadth and depth of products
and services offered. We may decide to utilize third-party relationships to
extend our brand or establish additional co-branded online stores. We may pursue
the acquisition of new or complementary businesses, products or technologies.
However, we have no present commitments or agreements for any material
acquisitions or investments. We may not be able to expand our product offerings
and related operations in a cost-effective or timely manner. These efforts may
fail to increase online traffic and purchases from our online or physical retail
stores or to increase our overall market acceptance. Furthermore, any new
business or online store launched by us that is not favorably received by
individuals, corporate customers or their employees or constituents could damage
our reputation or the Fatbrain.com brand. Expansion of our operations in this
manner would also require significant additional expenses and development,
operations and editorial resources. These efforts may strain our management,
financial and operational resources.

The Risks and Expenses Associated with Our Entry into New Business Areas May
Harm Our Business

      We recently introduced eMatter, a secure digital publishing technology
which allows authors and publishers to publish and sell works online. We also
announced that we have created a new company - under the name MightyWords - to
address the mass market opportunities created by the eMatter technology. We are
currently seeking private equity funding for MightyWords, which will be operated
as a separate company. Future revenues from this new business area and this new
company are difficult to forecast. Further, the development and expansion of
eMatter and MightyWords require additional expenses and the diversion of
resources. The lack of market acceptance for eMatter or MightyWords, our
inability to secure funding for MightyWords, or our inability to generate
satisfactory revenues from eMatter or MightyWords to offset related increased
costs could seriously harm our business, financial condition, operating results
and cash flows.

Our Markets Are Highly Competitive

      The electronic commerce market is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. The electronic publishing market is also new and rapidly
evolving. We expect competition to continue to intensify in the future. We
currently or potentially compete with a variety of companies. These competitors
include:

-     A significant number of traditional retail and online bookstores,
      including Amazon.com, Barnesandnoble.com, Borders Group, Inc. and other
      vendors of books, training products and product manuals;

-     Various computer super-stores that carry related technical information
      resources at retail locations, in catalogs and over the Internet;

-     A number of indirect competitors that specialize in electronic commerce or
      derive a substantial portion of their revenue from electronic commerce and
      other companies with substantial customer bases in the computer and other
      technical and professional fields; and

-     With respect to MightyWords, 1stBooks, Books24x7, iUniverse.com,
      netLibrary, PublishOne and a variety of self-publishing and e-publishing
      sites.

      We believe that the principal competitive factors on which we compete in
our markets include:

-     Brand recognition;

-     Selection, personalized services and overall customer service;

-     Convenience and accessibility;

-     Price;

-     Quality of search tools;



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<PAGE>   14

-     Quality of editorial and other site content; and

-     Reliability and speed of fulfillment.

      We may not be able to maintain a competitive position against current or
future competitors as they enter the markets in which we compete. This is true
particularly with respect to competitors with longer operating histories, larger
customer bases and greater financial, marketing, service, support, technical and
other resources than us. In addition, online retailers may be acquired by,
receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies as use of the Internet and
other online services increases. Some of our competitors may be able to secure
merchandise from vendors on more favorable terms, devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing or inventory
availability policies and devote substantially more resources to Web site and
systems development than we can. Our failure to maintain a competitive position
within our markets could seriously harm our business, financial condition,
operating results and cash flows.

      In addition, increased competition may result in reduced operating
margins, loss of market share and a diminished brand franchise. We may from time
to time make selected pricing, service or marketing decisions or acquisitions as
a strategic response to changes in the competitive environment. These actions
could result in reduced margins or otherwise seriously harm our business,
financial condition, operating results and cash flows.

      Further, new technologies and the expansion of existing technologies may
increase the competitive pressure we experience. For example, applications that
select specific titles from a variety of Web sites may channel customers to
online booksellers that are our competitors. Companies that control access to
transactions through a network or Web browsers could also promote our
competitors or charge us a substantial fee for inclusion. In addition, vendors
of information resources such as technology based training materials could
provide direct access to training programs online.

We Must Manage Our Growth and Expansion

      We have rapidly expanded our operations and we anticipate that further
expansion will be required to address potential growth in our customer base and
market opportunities. Specifically, we expect to significantly increase our
direct corporate and telesales organization and marketing initiatives. This
expansion has placed, and future expansion is expected to place, a significant
strain on our management, operational and financial resources. In addition, the
introduction and development of eMatter is anticipated to divert management
attention and resources. Our management will be required to maintain and expand
our relationships with:

-     Various suppliers and freight companies;

-     Other Web sites and other Web service providers;

-     Internet and other online service providers; and

-     Other third parties necessary to our business.

      Our new employees include a number of key managerial, technical and
operations personnel who have not yet been fully integrated and we expect to add
additional key personnel in the near future. To manage the expected growth of
our operations and personnel, we will need to improve existing and implement new
transaction-processing, operational and financial systems, procedures and
controls. In addition, we will need to expand, train and manage an increasing
employee base. We will also need to expand our finance, administrative and
operations staff.

        Our current and planned personnel, systems, procedures and controls may
be inadequate to support our future operations. Further, management may be
unable to attract, retain, motivate and manage required personnel or to
successfully identify, manage and exploit existing and potential market
opportunities. If we are unable to manage growth effectively, our business,
financial condition, operating results and cash flows could be seriously harmed.

Capacity Constraints and Our Reliance on Internally Developed Systems Could
Affect Our Business

      A key element of our strategy is to generate a high volume of traffic on,
and use of, our online store. As a result, the satisfactory performance,
reliability and availability of the online store, transaction-processing systems
and network infrastructure are critical to our reputation. These factors are
similarly critical to our ability to attract



                                       12
<PAGE>   15

and retain customers and maintain adequate service and customer support levels.
Our revenues depend on the number of visitors who shop at our online store and
the volume of orders we fulfill. Any system interruptions that cause our online
store to be unavailable or impair order fulfillment performance would reduce the
volume of goods sold and the attractiveness of our product and service
offerings. We have experienced periodic system interruptions, which we believe
will continue to occur from time to time. If there is a substantial increase in
the volume of traffic on our online store or the number of orders placed by
customers, we will need to expand and further upgrade our technology,
transaction-processing systems and network infrastructure. We may be unable to
accurately project the rate or timing of increases, if any, in the use of our
online store or timely expand and upgrade our systems and infrastructure to
accommodate such increases.

      We use an internally developed system, which is supplemented by
commercially available licensed technology, for:

-     Our online store;

-     Our search engine;

-     Our secure digital publishing channel for eMatter; and

-     Substantially all aspects of our transaction processing systems, including
      order management, cash and credit card processing, purchasing, inventory
      management and shipping.

We intend to upgrade and expand our transaction-processing systems and to
integrate newly developed and purchased modules with our existing systems in
order to improve our accounting, control and reporting methods and support
increased transaction volume. We may be unable to add additional software and
hardware or to develop and further upgrade our existing technology,
transaction-processing systems or network infrastructure to accommodate
increased traffic through our online store or increased sales volume. Any
inability to do so may result in:

-     Unanticipated system disruptions;

-     Slower response times;

-     Degradation in levels of customer service;

-     Impaired quality and speed of order fulfillment; and

-     Delays in reporting accurate financial information.

      We may be unable in a timely manner to effectively upgrade and expand our
transaction-processing system or to smoothly integrate any newly developed or
purchased modules with our existing systems. Any inability to do so could
seriously harm our business, financial condition, operating results and cash
flows.

We Must Attract Additional Personnel

      Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. Competition for such personnel is intense,
particularly in the San Francisco Bay area, where our headquarters are located.
As a result, we may be unable to successfully attract, assimilate or retain
qualified personnel. We have encountered difficulties in attracting a sufficient
number of qualified software developers for our online store and
transaction-processing systems. Further, we may be unable to retain those
developers we currently employ or attract additional developers. The failure to
retain and attract the necessary personnel could seriously harm our business,
financial condition, operating results and cash flows.

Changes in State Sales and Other Tax Collection Regulations Could Harm Our
Business

      We do not currently collect sales or other similar taxes for shipments of
goods into states other than California and Kentucky. However, one or more
states or foreign countries may seek to impose sales tax collection obligations
on out-of-state or foreign companies which engage in electronic commerce. In
addition, any new operations we establish in states outside California and
Kentucky could subject shipments into these states to state sales taxes. A
successful assertion by one or more states or any foreign country that we should
collect sales or other similar taxes on the sale of merchandise could seriously
harm our business, financial condition, operating results and cash flows.

System Failures Could Harm Our Business



                                       13
<PAGE>   16

      Our success, in particular our ability to successfully receive and fulfill
online orders and provide high quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. Substantially all of our computer and communications hardware
is currently located at a single leased facility in Santa Clara, California. We
have experienced minor and infrequent system interruptions in the past. We do
not presently have a formal disaster recovery plan and do not carry sufficient
business interruption insurance to compensate us for losses that may occur.
Despite our implementation of network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions. These disruptions could lead to interruptions, delays, loss of data
or the inability to accept and fulfill customer orders. The occurrence of any of
the foregoing risks could seriously harm our business, financial condition,
operating results and cash flows.

      Our systems and operations are vulnerable to damage or interruption from a
number of sources, including:

-     Fire;

-     Flood;

-     Power loss or telecommunications failure;

-     Break-ins; and

-     Earthquake and similar events.

We Rely on Selected Suppliers

      For the fiscal year ended January 31, 2000, we purchased approximately 34%
of our products from Ingram Book Company and 17% of our products from Pearson
Education Division. We rely to a large extent on rapid fulfillment from Ingram,
Pearson and other vendors. We generally have no commitments or arrangements with
any of our vendors that guarantee the availability of merchandise, the
continuation of particular payment terms or the extension of credit limits. Our
current vendors may not continue to sell merchandise to us on current terms. In
addition, we may be unable to establish new or extend current vendor
relationships to ensure acquisition of merchandise in a timely and efficient
manner and on acceptable commercial terms. If we were unable to develop and
maintain relationships with vendors that would allow us to obtain sufficient
quantities of merchandise on acceptable commercial terms, our business,
financial condition, operating results and cash flows could be seriously harmed.

We Depend on Key Personnel

      Our performance is substantially dependent on the continued services and
on the performance of our senior management and other key personnel. The loss of
the services of any of our executive officers or other key employees could
seriously harm our business, financial condition, operating results and cash
flows.

      We have entered into employment agreements with several members of our
senior management, including:

-     Mr. MacAskill, our Chief Executive Officer;

-     Mr. Orumchian, our Executive Vice President of Product Development; and

-     Mr. Capovilla, our President and Chief Operating Officer.

Each employment agreement specifies the officer's base salary and general
employee benefits, including acceleration of a portion of the employee's common
stock option vesting.

Risks Associated with International Sales

      For the fiscal year ended January 31, 2000, international sales accounted
for approximately 13% of our online revenue. We expect that our percentage of
online revenue from international markets will continue to represent a
significant portion of our total revenue. Our international business activities
are subject to a variety of potential risks, including the adoption of laws,
political and economic conditions and actions by third parties that would
restrict or eliminate our ability to do business in some jurisdictions. Although
we currently transact business in U.S. dollars, to the extent that we determine
to transact business in foreign currencies, we will become subject to the risks
attendant to transacting in foreign currencies, including potential adverse
effects of exchange rate fluctuations.



                                       14
<PAGE>   17

Protection of Our Intellectual Property Is Limited

      We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success. Further,
we rely on trademark and copyright law, trade secret protection and
confidentiality and license agreements with our employees, customers, partners
and others to protect our proprietary rights. We pursue the registration of our
trademarks and service marks in the U.S. and internationally, and have applied
for the registration of selected trademarks and service marks. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our products and services are made available
online. While we attempt to ensure that the quality of our brand is maintained
by our licensees, our licensees may take actions that could seriously harm the
value of our proprietary rights or reputation and in turn our business,
financial condition, operating results and cash flows. The steps we have taken
to protect our proprietary rights may not be adequate and third parties may
infringe or misappropriate our copyrights, trademarks, trade dress and similar
proprietary rights.

We May Be Found to Infringe Proprietary Rights of Others

      Other parties may assert infringement claims against us. These claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources. We are not currently aware of any legal
proceedings pending or threatened against us. In addition, we display reviews
and articles on technical subjects in our online store. Some reviews and
articles may be copyrighted and we may not have explicit permission from the
author for use of such intellectual property. The authors may assert
infringement claims against us. If a claim is asserted alleging that we have
infringed the proprietary rights of a third party, we may be required to seek
licenses to continue to use this intellectual property. The failure to obtain
the necessary licenses or other rights at a reasonable cost could seriously harm
our business, financial condition, operating results and cash flows.

RISKS RELATED TO OUR INDUSTRY

We Depend on the Continued Growth of Electronic Commerce

      Our future revenues and profits, if any, substantially depend upon the
acceptance and use of the Internet and other online services as an effective
medium of commerce by our target customers. Rapid growth in the use of and
interest in the Internet, the Web and online services is a recent phenomenon. As
a result, acceptance and use may not continue to develop at historical rates and
a sufficiently broad base of consumers may not adopt, and continue to use, the
Internet and other online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty and there exist few proven services and
products. Our target customer has historically used traditional means of
commerce to purchase information resources. For us to be successful, these
customers must accept and utilize our online store to satisfy their information
resource needs.

      In addition, the Internet may not be accepted as a viable long-term
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that the
Internet continues to experience significant expansion in the number of users,
frequency of use or bandwidth requirements, the infrastructure for the Internet
may be unable to support the demands placed upon it. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased governmental regulation. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in slower response times and adversely affect usage of the
Internet generally and of us in particular. If any of the foregoing events occur
our business, financial condition, operating results and cash flows could be
seriously harmed.

We Must Respond to Rapid Technological Change and Evolving Industry Standards

      To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online operations. The
Internet and the electronic commerce industry are characterized by:

-     Rapid technological change;

-     Changes in user and customer requirements and preferences;



                                       15
<PAGE>   18

-     Frequent new product and service introductions embodying new technologies;
      and

-     The emergence of new industry standards and practices.

      The evolving nature of the Internet could render our existing online store
and proprietary technology and systems obsolete. Our success will depend, in
part, on our ability to:

-     License leading technologies useful in our business;

-     Enhance our existing services;

-     Develop new services and technology that address the increasingly
      sophisticated and varied needs of our current and prospective customers;
      and

-     Respond to technological advances and emerging industry standards and
      practices on a cost-effective and timely basis.

      The development of our Web site and other proprietary technology entails
significant technical and business risks. We may not successfully use new
technologies effectively or adapt our online store, proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner, in response to changing market conditions or
customer requirements, our business, financial condition, operating results and
cash flows could be seriously harmed.

Security Breaches of Third-Party Technology Could Affect Our Business

      A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology licensed from third parties to provide
the security and authentication necessary for secure transmission of
confidential information, including customer credit card numbers. If any
compromise of our security were to occur, it could expose us to a risk of loss
or litigation and possible liability, as well as seriously harm our reputation,
business, financial condition, operating results and cash flows. 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
used by us to protect customer transaction data. A party who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. We may be required to expend significant
capital and other resources to protect against security breaches or to alleviate
problems caused by breaches.

      Concerns over the security of the Internet and other online transactions
and the privacy of users may also inhibit the growth of the Internet and other
online services generally, and the Web in particular, especially as a means of
conducting commercial transactions. If these concerns limit or reduce the use of
the Internet as a means of conducting commercial transactions, our business,
financial condition, operating results and cash flows could be seriously harmed.

We May Face Increased Governmental Regulation and Legal Uncertainties

      We are not currently subject to direct regulation by any domestic or
foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to electronic
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted in connection
with the Internet, relating to:

-     User privacy;

-     Pricing;

-     Content;

-     Copyrights;

-     Distribution; and

-     Characteristics and quality of products and services.

      Furthermore, the growth and development of the market for electronic
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional laws or regulations may decrease the expansion of the
Internet. A decline in the growth of the Internet could decrease demand for our
products and services and increase our cost of



                                       16
<PAGE>   19

doing business, or otherwise seriously harm our business. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues like property ownership, sales tax, libel and personal privacy
is uncertain and may take years to resolve. If any of these changes were to
occur our business, financial condition, operating results and cash flows could
be seriously harmed.

      As our service is offered over the Internet in multiple states and foreign
countries, these jurisdictions may claim that we are required to qualify to do
business as a foreign corporation in each of these states and foreign countries.
The failure by us to qualify as a foreign corporation in a jurisdiction where it
is required to do so could subject us to taxes and penalties for the failure to
qualify. It is possible that the governments of other states and foreign
countries also might attempt to regulate the content of our online store or
prosecute us for violations of their laws. Violations of local laws may be
alleged or charged by state or foreign governments. Further, we might
unintentionally violate these laws and these laws may be modified and new laws
may be enacted in the future.

      In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission in the same manner as other telecommunications services. The growing
popularity and use of the Internet has burdened the existing telecommunications
infrastructure and many areas with high Internet use have begun to experience
interruptions in phone service. As a result, local exchange carriers have
petitioned the Federal Communications Commission to regulate Internet Service
Providers in a manner similar to long distance telephone carriers and to impose
access fees on Internet Service Providers. If any effort to increase regulation
of Internet Service Providers is successful, the expense of communicating on the
Internet could increase substantially, potentially slowing the growth in the use
of the Internet. Any new legislation or regulation or application or
interpretation of existing laws could seriously harm our business, financial
condition, operating results and cash flows.

Possible Volatility of Our Stock Price

      The trading prices of our common stock may be subject to wide fluctuations
in response to a number of factors, some of which are beyond our control,
including:

-     Actual or anticipated variations in quarterly operating results;

-     Announcements of technological innovations or new products or services by
      us or our competitors;

-     Changes in financial estimates by securities analysts;

-     Conditions or trends in the Internet and electronic commerce industries;

-     Announcements of significant acquisitions, strategic partnerships, joint
      ventures or capital commitments; and

-     Additions or departures of key personnel.

      In addition, stock markets in general and the market for Internet-related
and technology companies in particular, have experienced extreme price and
volume trading volatility in recent years. This volatility has had a substantial
effect on the market prices of the securities of many high technology companies
for reasons frequently unrelated to the operating performance of specific
companies. These broad market fluctuations could aversely affect the market
price of our common stock. In addition, in the past, following periods of
volatility in the market price of a company's securities, securities
class-action litigation has often been instituted against that company. If this
type of litigation were instituted against us, it could result in substantial
costs and a diversion of management's attention and resources, which could
seriously harm our business, financial condition, operating results and cash
flows.

We Have Implemented Anti-Takeover Provisions

      Our Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of common stock
will be subject to, and may be seriously harmed by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a third-party
from acquiring us without further action by our stockholders. We have no present
plans to issue shares of preferred stock. Further, selected provisions of our
Second Amended and Restated Certificate of Incorporation and Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company.



                                       17
<PAGE>   20

ITEM 2. PROPERTIES

      Our principal administrative, engineering, marketing, customer service and
merchandising facility totals approximately 64,750 square feet and is located in
Santa Clara, California under a master lease that expires in 2006. In addition,
we lease a 40,000 square foot warehousing facility in Erlanger, Kentucky. We
also lease two physical stores located in San Jose and Sunnyvale, California. We
do not own any real property. We expect that our current facilities will be
sufficient for the foreseeable future. We periodically evaluate the location and
productivity of our stores, and may close, consolidate or relocate stores as
conditions warrant.

ITEM 3. LEGAL PROCEEDINGS

      We are not currently aware of any legal proceedings pending or threatened
against us.

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

      No matters were submitted to a vote of the stockholders during the fourth
quarter of fiscal 2000.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

      Our Common Stock is listed on the Nasdaq National Market ("Nasdaq") under
the symbol "FATB." Our stock has been traded on that market since November 20,
1998. Prior to that date, when we completed our initial public offering, there
was no public market for our Common Stock. As of January 31, 2000, there were
approximately 245 holders of record of our Common Stock. The following table
sets forth, for the periods indicated, the high and low closing sales prices, as
to Nasdaq prices of shares of Fatbrain.com's Common Stock:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 2000                       HIGH         LOW
                                                       --------     --------
<S>                                                    <C>          <C>
Fourth Quarter                                         $39 3/4      $16 1/2
Third Quarter                                          $24 1/16     $12 1/4
Second Quarter                                         $19 3/8      $13 5/16
First Quarter                                          $28 1/4      $12 1/4
</TABLE>

DIVIDEND POLICY

      We have not paid any cash dividends on our Common Stock since inception
and do not anticipate paying cash dividends in the foreseeable future. We
currently anticipate that we will retain our earnings, if any, for use in the
operation of our business and do not expect to pay cash dividends on our capital
stock in the foreseeable future.



                                       18
<PAGE>   21

ITEM 6. SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SELECTED FINANCIAL DATA

      The following selected financial data should be read in conjunction with
the Financial Statements and related Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included herein.

<TABLE>
<CAPTION>
(in thousands, except per share data)                                    Year ended January 31,
                                                 --------------------------------------------------------------------
                                                   1996           1997           1998           1999           2000
                                                 --------       --------       --------       --------       --------
<S>                                              <C>            <C>            <C>            <C>            <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
    Online                                       $     --       $    180       $  3,021       $ 10,662       $ 28,776
    Retail and other                                   --             --          7,927          9,118          6,562
                                                 --------       --------       --------       --------       --------
        Total revenues                                 --            180         10,948         19,780         35,338
Cost of revenues:
    Online                                             --            150          2,189          8,433         23,191
    Retail and other                                   --             --          5,216          5,967          4,286
                                                 --------       --------       --------       --------       --------
        Total cost of revenues                         --            150          7,405         14,400         27,477
                                                 --------       --------       --------       --------       --------
Gross profit                                           --             30          3,543          5,380          7,861
Operating expenses:
    Sales and marketing                                 3            130          4,192          9,918         25,121
    Development and engineering                        65            110            860          2,858          6,598
    General and administrative                         26            412          1,674          2,909          7,354
                                                 --------       --------       --------       --------       --------
        Total operating expenses                       94            652          6,726         15,685         39,073
                                                 --------       --------       --------       --------       --------
Loss from operations                                  (94)          (622)        (3,183)       (10,305)       (31,212)
Interest, net                                          --             55             (7)           413            921
                                                 --------       --------       --------       --------       --------
Net loss                                         $    (94)      $   (567)      $ (3,190)      $ (9,892)      $(30,291)
                                                 ========       ========       ========       ========       ========
Basic and diluted net loss per share             $  (0.10)      $  (0.38)      $  (2.11)      $  (2.87)      $  (2.61)
                                                 ========       ========       ========       ========       ========
Shares used in computing net loss per share           960          1,504          1,509          3,441         11,627
</TABLE>

<TABLE>
<CAPTION>
                                                                           As of January 31,
                                                 --------------------------------------------------------------------
                                                   1996           1997           1998           1999           2000
                                                 --------       --------       --------       --------       --------
<S>                                              <C>            <C>            <C>            <C>            <C>
BALANCE SHEET DATA:
Cash and equivalents                             $     29       $  3,228       $  4,974       $  9,341       $ 15,367
Working capital                                        29          3,242          5,630         17,142         21,802
Total assets                                          101          3,583         13,598         39,614         48,465
Total liabilities                                      49            182          3,673          3,118         11,348
Total stockholders' equity                             52          3,401          9,925         36,496         37,117
</TABLE>



                                       19

<PAGE>   22

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

      The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and Notes thereto included elsewhere in this Form 10-KSB. This document contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that might cause such differences include, but are not
limited to, fluctuations in customer demand, our ability to manage our growth,
risks associated with competition and risks identified in our most recent
Securities and Exchange Commission filings, including, but not limited to, those
discussed in this Form 10-KSB under the heading "Other Factors Affecting
Operating Results, Liquidity and Capital Resources."

Overview

      Fatbrain.com, Inc. is the leader in managing, marketing and distributing
information for businesses. Fatbrain.com's new Information Exchange product
suite combines Fatbrain.com's e-commerce expertise, secure digital publishing
technology known as eMatter, comprehensive professional bookstore, established
print-on-demand infrastructure, and world-class distribution and fulfillment
services to deliver a powerful and complete Web-based solution for outsourcing
mission-critical internal and external corporate documentation. With over
900,000 information resource titles from more than 25,000 publishers, we offer
our customers online access to a broad and comprehensive selection of technical
and professional books, technology based training solutions, corporate
documentation and other information resources. In addition to our extensive
product offering, our online store features authoritative and compelling
content, competitive pricing, an easy-to-use navigational interface and a
variety of value-added services. We also operate two physical retail stores that
complement our online business by generating increased online traffic and
creating cross-promotional opportunities.

      We recently announced that we have created a new company - under the name
MightyWords - to address the mass market opportunities created by our successful
eMatter digital publishing initiative. We will continue to leverage the eMatter
technology to deliver document publishing services for our corporate customers
as part of the Information Exchange product suite. We are currently seeking
private equity funding for MightyWords, which will be operated as a separate
company.

      We were incorporated in November 1994 as Computer Literacy Corporation and
began selling technical books in February 1996, technology based training
solutions in January 1998, corporate documentation in May 1998, and professional
resources for the engineering, science, mathematics and financial services
industries in March 1999. In October 1999 we began offering eMatter at our
online store. More recently, we have introduced our Information Exchange product
suite, as well as information resources for the medical and biotechnology
industries. We generate revenues from sale of our products through our
professionally focused online store, certain co-branded corporate online stores
and our two retail locations as well as through trade shows and book fairs. We
generally recognize revenue from our online store upon shipment , from eMatter
sales when the content is downloaded by the customer and from our physical
retail stores, trade shows and book fairs, at the time of sale. In the year
ended January 31, 2000, we generated additional revenue by selling advertising
space on our Web site.

      Cost of revenues includes costs of products and inbound and outbound
freight. These costs may vary as a percentage of total revenues in any given
period due to a number of factors, including increased price competition, varied
levels of cooperative advertising dollars received from certain publishers of
books, changes in the size and timing of discounts and other promotional
activities, and changes in product mix. For the fiscal year ended January 31,
1999 and January 31, 2000, we purchased approximately 37% and 34%, respectively,
of our books from Ingram Book Company ("Ingram"), an indirect reseller. Although
the primary advantage associated with purchasing from Ingram is just in time
inventory management, we believe we will make a larger number of our purchases
directly from publishers as our sales volume increases, thereby enabling us to
take advantage of favorable volume discounts. For the fiscal year ended January
31, 1999 and January 31, 2000 we purchased approximately 22% and 17%,
respectively, of our books from Pearson Education Division.

      Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future.
There can be no assurance that we will achieve profitability or that, if



                                       20
<PAGE>   23

profitability is achieved, it will be sustained. As of January 31, 2000 we had
an accumulated deficit of $44.0 million. We believe that our success will depend
in large part on our ability to integrate our Information Exchange suite of
products with our new and potential customer base, to enhance our customers'
online shopping experience, offer and market new products, expand corporate
relationships, build brand awareness, encourage customer loyalty, capitalize on
the market for information resources, establish and leverage supplier
relationships, maintain our technical focus and expand our expertise in the
engineering, science, mathematics, financial services, medical and biotechnology
industries. Accordingly, we intend to invest heavily in our direct sales and
telesales organizations, infrastructure development, and marketing and
promotion. There can be no assurance that such expenditures will result in
increased revenues or customer growth. Additionally, while in recent periods we
have experienced significant growth in revenues, our customer base and repeat
customer revenue, such growth rates are not sustainable, will decrease in the
future and are not indicative of actual growth rates that we may experience in
future periods. In view of the rapidly evolving nature of our business and our
limited operating history, we believe that period-to-period comparisons of our
operating results, including our operating expenses as a percentage of total
revenues, are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Other Factors Affecting Operating
Results, Liquidity and Capital Resources - We Have Incurred Losses and We Expect
Future Losses; Our Limited Operating History May Prevent Us from Achieving
Success in Our Business."

Results Of Operations

      The following table presents our results of operations as a percentage of
total revenues for the periods indicated.

<TABLE>
<CAPTION>
                                             Year ended January 31,
                                        --------------------------------
                                         1998         1999         2000
                                        ------       ------       ------
<S>                                       <C>          <C>          <C>
Revenues:
      Online                              27.6%        53.9%        81.4%
      Retail and other                    72.4         46.1         18.6
                                        ------       ------       ------
         Total revenues                  100.0        100.0        100.0
                                        ------       ------       ------
Cost of revenues (1):
      Online                              72.5         79.1         80.6
      Retail and other                    65.8         65.4         65.2
                                        ------       ------       ------
         Total cost of revenues           67.6         72.8         77.8
                                        ------       ------       ------
Gross profit                              32.4         27.2         22.2
Operating expenses:
      Sales and marketing                 38.3         50.1         71.1
      Development and engineering          7.8         14.5         18.6
      General and administrative          15.3         14.7         20.8
                                        ------       ------       ------
         Total operating expenses         61.4         79.3        110.5
                                        ------       ------       ------
    Loss from operations                 (29.1)       (52.1)       (88.3)
    Interest, net                         (0.1)         2.1          2.6
                                        ------       ------       ------
    Net loss                            (29.1%)      (50.0%)      (85.7%)
                                        ======       ======       ======
</TABLE>

(1)   Cost of online revenue and cost of retail and other revenue are shown as a
      percentage of related online revenue and retail and other revenue,
      respectively.

Fiscal 1999 Compared To Fiscal 2000

      Online Revenue. Online revenue is comprised of revenue from online sales
of information resources, net of returns, associated outbound shipping charges
and, to a lesser extent, the sale of advertising space on our Web site. Online
revenue increased from $10.7 million, or 53.9% of total revenues in the fiscal
year ended January 31, 1999, to $28.8 million, or 81.4% of total revenues in the
fiscal year ended January 31, 2000, primarily as a result of significant
increases in our customer base (from 77,956 at January 31, 1999 to 246,175 at
January 31, 2000), and repeat purchases from our existing customers.



                                       21
<PAGE>   24

      International sales represented approximately 21% and 13% of online
revenue for the fiscal year ended January 31, 1999 and the fiscal year ended
January 31, 2000, respectively.

      Retail and Other Revenue. Retail and other revenue is comprised primarily
of revenue generated by our physical retail stores and, to a lesser extent, by
trade shows and book fairs. Retail and other revenue decreased from $9.1
million, or 46.1% of total revenues for the fiscal year ended January 31, 1999,
to $6.6 million, or 18.6% of total revenues in the fiscal year ended January 31,
2000, primarily as a result of an increased focus of our sales and marketing on
the online business, as well as the closure of two retail stores, located in
Cupertino, California and Vienna, Virginia, at the end of fiscal 1999. We
periodically evaluate the location and productivity of our retail stores and may
close, consolidate or relocate stores as conditions warrant. Any closure,
consolidation or relocation of a retail store is likely to decrease retail and
other revenue.

      Cost of Online Revenue. Cost of online revenue is comprised primarily of
the cost of merchandise sold through our online store and associated inbound and
outbound shipping costs. Cost of online revenue increased from $8.4 million, or
79.1% of online revenue for the fiscal year ended January 31, 1999, to $23.2
million, or 80.6% of online revenue in the fiscal year ended January 31, 2000,
primarily due to increased online sales volume.

      Cost of Retail and Other Revenue. Cost of retail and other revenue is
comprised of the cost of merchandise sold through our retail stores and at trade
shows and book fairs and includes associated inbound shipping costs. Cost of
retail and other revenue decreased from $6.0 million, or 65.4% of retail and
other revenue in the fiscal year ended January 31, 1999, to $4.3 million, or
65.2% of retail and other revenue in the fiscal year ended January 31, 2000. The
decrease in absolute dollars was attributable to the decrease in retail and
other sales.

      Gross Profit. Gross profit as a percentage of total revenues decreased
from 27.2% in the fiscal year ended January 31, 1999, to 22.2% in the fiscal
year ended January 31, 2000. The percentage decrease was primarily a result of
the increase in online sales as a percent of total revenues, as well as our
online competitive pricing policy and discounted shipping offerings. We have
offered, and expect to continue to offer in the foreseeable future, discounts on
various product offerings and on outbound shipping to encourage new customers
and online traffic. Such pricing pressure is likely to reduce gross margins in
the future but may be partially offset by the change in mix of products sold
towards higher margin technology based training materials and corporate
documentation.

      Sales and Marketing Expenses. Sales and marketing expenses consist of
payroll and related expenses for personnel engaged in corporate sales, marketing
and fulfillment, advertising, promotional and public relations expenditures, and
direct expenses associated with our retail stores. Sales and marketing expenses
increased from $9.9 million, or 50.1% of total revenues in the fiscal year ended
January 31, 1999, to $25.1 million, or 71.1% of total revenues in the fiscal
year ended January 31, 2000. The increase in absolute dollars was primarily
attributable to the expansion of our online store and its direct sales force,
plus an increase in advertising, branding, public relations and other
promotional expenditures to support our introduction of the Fatbrain.com brand
and eMatter. The increase was also due to the increased personnel and related
expenses required to implement our marketing strategy and fulfill customer
demand. We intend to continue to enhance our corporate sales force to generate
increased online traffic and acquire customers and to pursue branding, marketing
and telesales campaigns.

      Development and Engineering Expenses. Development and engineering expenses
primarily consist of costs associated with systems and telecommunications
infrastructure, as well as editorial operations. Development and engineering
expenses increased from $2.9 million, or 14.5% of total revenues in the fiscal
year ended January 31, 1999, to $6.6 million, or 18.6% of total revenues in the
fiscal year ended January 31, 2000. The increase in absolute dollars was
primarily attributable to increased staffing and associated costs related to
enhancing the features, content and functionality of our online store and
transaction-processing systems, as well as increased investments in systems and
telecommunications infrastructure. Additionally, we incurred significant costs
associated with the development and introduction of the Fatbrain.com brand and
eMatter due to both increased staffing and systems infrastructure costs. To
date, all development and engineering costs have been expensed as incurred. We
believe that continued investment in systems and infrastructure development is
critical to attaining our strategic objectives.

      General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, facilities expense, recruiting, professional service
fees, information technology costs and other general corporate expenses. General
and administrative expenses increased from $2.9 million, or 14.7% of total
revenues in the fiscal year ended January 31, 1999, to $7.4 million or 20.8% of
total revenues in the fiscal year ended January 31, 2000. This increase in
absolute dollars was



                                       22
<PAGE>   25

primarily due to increased salaries and related expenses associated with the
hiring of additional personnel and increases in facilities related costs
associated with our move to a new larger facility in July 1999.

      Interest, Net. Net interest income increased from $413,000 in the fiscal
year ended January 31, 1999, to $921,000 in the fiscal year ended January 31,
2000 due to the investment of increased cash balances on hand.

      Liquidity And Capital Resources. Since inception, we have financed our
operations through private sales of Preferred Stock which totaled approximately
$19.3 million net of issuance costs, public sale of Common Stock in November
1998 which totaled approximately $30.8 million net of issuance costs and private
sale of Common Stock and Warrants in November 1999 which totaled approximately
$29.9 million net of issuance costs.

      Net cash used in operating activities was $11.1 million in fiscal 1999 and
$26.7 million in fiscal 2000. Cash used in operating activities in fiscal 1999
primarily resulted from a net loss of $9.9 million plus increases of $1.1
million in accounts receivable and $826,000 in prepaid expenses and other
assets, as well as a decrease in accounts payable of $622,000, offset by a
reduction in inventory of $479,000 as well as depreciation and amortization of
$648,000. For fiscal 2000, cash used in operating activities primarily resulted
from a net loss of $30.3 million plus increases of $1.8 million in accounts
receivable and $2.6 million in inventories, and $2.3 million in prepaid expenses
and other assets, offset by an increase in accounts payable and accrued expenses
of $8.2 million as well as depreciation and amortization of $1.6 million.

      Net cash used in investing activities was $21.0 million in fiscal 1999
while cash provided by financing activities was $2.1 million in fiscal 2000.
Cash used in investing activities in fiscal 1999 was primarily attributable to
$19.6 million in purchases of investment securities, as well as purchases of
property and equipment of $1.4 million. Cash provided by investing activities in
fiscal 2000 was primarily due to the sale of $12.5 million in investment
securities, partially offset by purchases of property and equipment of $10.5
million.

      Cash provided by financing activities was $36.5 million and $30.6 million
in fiscal 1999 and fiscal 2000, respectively. Cash provided by financing
activities in fiscal 1999 consisted primarily of proceeds from the issuance of
common stock in an initial public offering of $30.8 million net of issuance
costs, as well as proceeds from the issuance of preferred stock of $5.5 million.
Cash provided by financing activities in fiscal 2000 consisted primarily of
proceeds from the issuance of common stock and warrants for $29.9 million in a
private equity financing. We had a $4 million line of credit which expired on
December 31, 1999.

      As of January 31, 2000, we had $15.4 million of cash and equivalents. As
of that date, our principal commitments consisted of obligations outstanding
under a purchase agreement with SmartForce (formerly CBT Systems, Ltd.) and
operating and capital leases. Although we have no material long-term commitments
for capital expenditures, we anticipate a substantial increase in our capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel.



                                       23
<PAGE>   26

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SELECTED QUARTERLY RESULTS OF OPERATIONS

      The following table sets forth certain unaudited selected quarterly
results of operations data for the eight quarters ended January 31, 2000 as well
as such data expressed as a percentage of total revenue. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited Financial Statements appearing elsewhere in this Form 10-KSB. The
operating results for any quarter are not necessarily indicative of results for
any future period (in thousands).

<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                 ----------------------------------------------------------------------------------------------
                                 April 30,   July 31,    Oct. 31,    Jan. 31,    April 30,   July 31,     Oct. 31,     Jan. 31,
                                   1998        1998        1998        1999        1999        1999        1999         2000
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
<S>                              <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>
Revenues:
   Online                        $  1,761    $  2,464    $  2,934    $  3,503    $  4,491    $  5,785    $   8,248    $  10,252
   Retail and other                 2,633       2,351       2,296       1,838       1,652       1,577        1,731        1,602
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
       Total revenues               4,394       4,815       5,230       5,341       6,143       7,362        9,979       11,854
Cost of revenues:
   Online                           1,326       1,965       2,347       2,795       3,643       4,529        6,711        8,308
   Retail and other                 1,688       1,538       1,501       1,240       1,071       1,033        1,124        1,058
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
       Total cost of revenues       3,014       3,503       3,848       4,035       4,714       5,562        7,835        9,366
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
Gross profit                        1,380       1,312       1,382       1,306       1,429       1,800        2,144        2,488
Operating expenses:
   Sales and marketing              1,986       2,070       2,759       3,103       4,670       5,266        7,589        7,596
   Development and engineering        554         594         763         947       1,120       1,299        1,830        2,349
   General and administrative         543         681         799         886       1,178       1,340        1,959        2,877
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
       Total operating expenses     3,083       3,345       4,321       4,936       6,968       7,905       11,378       12,822
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
Loss from operations               (1,703)     (2,033)     (2,939)     (3,630)     (5,539)     (6,105)      (9,234)     (10,334)
Interest, net                          32          67          45         269         329         177           89          326
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
Net loss                         $ (1,671)   $ (1,966)   $ (2,894)   $ (3,361)   $ (5,210)   $ (5,928)   $  (9,145)   $ (10,008)
                                 ========    ========    ========    ========    ========    ========    =========    =========
</TABLE>

<TABLE>
<CAPTION>
                                                                      Three Months Ended
                                 ----------------------------------------------------------------------------------------------
                                 April 30,   July 31,    Oct. 31,    Jan. 31,    April 30,   July 31,     Oct. 31,     Jan. 31,
                                   1998        1998        1998        1999        1999        1999        1999         2000
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
<S>                              <C>         <C>         <C>         <C>         <C>         <C>         <C>          <C>
As a Percentage of Total
   Revenues
Revenues:
   Online                            40.1%       51.2%       56.1%       65.6%       73.1%       78.6%        82.7%        86.5%
   Retail and other                  59.9        48.8        43.9        34.4        26.9        21.4         17.3         13.5
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
       Total revenues               100.0       100.0       100.0       100.0       100.0       100.0        100.0        100.0
Cost of revenues(1):
   Online                            75.3        79.7        80.0        79.8        81.1        78.3         81.4         81.0
   Retail and other                  64.1        65.4        65.4        67.5        64.8        65.5         65.0         66.0
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
       Total cost of revenues        68.6        72.8        73.6        75.5        76.7        75.6         78.5         79.0
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
Gross profit                         31.4        27.2        26.4        24.5        23.3        24.4         21.5         21.0
Operating expenses:
   Sales and marketing               45.2        43.0        52.7        58.1        76.1        71.5         76.1         64.1
   Development and engineering       12.6        12.3        14.6        17.7        18.2        17.6         18.3         19.8
   General and administrative        12.4        14.1        15.3        16.6        19.2        18.2         19.6         24.3
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
       Total operating expenses      70.2        69.4        82.6        92.4       113.5       107.3        114.0        108.2
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
Loss from operations                (38.8)      (42.2)      (56.2)      (67.9)      (90.2)      (82.9)       (92.5)       (87.2)
Interest, net                         0.7         1.4         0.9         5.0         5.4         2.4          0.9          2.8
                                 --------    --------    --------    --------    --------    --------    ---------    ---------
Net loss                           (38.0%)     (40.8%)     (55.3%)     (62.9%)     (84.8%)     (80.5%)      (91.6%)      (84.4%)
                                 ========    ========    ========    ========    ========    ========    =========    =========
</TABLE>

(1)   Cost of online revenues and cost of retail and other revenues are shown as
      a percentage of related online revenue and retail and other revenue,
      respectively.



                                       24
<PAGE>   27

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Fatbrain.com, Inc.
Santa Clara, California

We have audited the accompanying balance sheets of Fatbrain.com, Inc. as of
January 31, 1999 and 2000, and the related statements of operations and
comprehensive loss, stockholders' equity and cash flows for each of the three
years in the period ended January 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Fatbrain.com, Inc. as of January 31, 1999
and 2000, and the results of its operations and its cash flows for each of the
three years in the period ended January 31, 2000 in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP
San Jose, California
March 7, 2000



                                       25
<PAGE>   28

                               FATBRAIN.COM, INC.
                                 BALANCE SHEETS
           (in thousands, except per share data and par value amounts)
<TABLE>
<CAPTION>
                                                                           January 31,
                                                                     -----------------------
                                                                       1999           2000
                                                                     --------       --------
<S>                                                                  <C>            <C>
ASSETS
Current assets:
    Cash and cash equivalents                                        $  9,341       $ 15,367
    Short-term investments                                              5,344          5,475
    Accounts receivable, net of allowance of $161 and $654
      in 1999 and 2000, respectively                                    1,268          3,027
    Inventories                                                         3,204          5,798
    Prepaid expenses and other                                          1,068          3,471
                                                                     --------       --------
      Total current assets                                             20,225         33,138

Property and equipment, net                                             2,097         11,224
Investments                                                            14,181          1,274
Goodwill, net                                                           2,751          2,545
Other assets                                                              360            284
                                                                     --------       --------
      Total assets                                                   $ 39,614       $ 48,465
                                                                     ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                 $  1,896       $  8,350
    Accrued liabilities                                                 1,169          2,964
    Current portion of capital lease obligations                           18             22
                                                                     --------       --------
      Total current liabilities                                         3,083         11,336
Capital lease obligations                                                  35             12
                                                                     --------       --------
      Total liabilities                                                 3,118         11,348
Commitments and Contingencies (Note 9)
Stockholders' equity:
    Preferred stock, $0.001 par value, 5,000 shares authorized,
      none issued and outstanding                                          --             --
    Common stock, $0.001 par value, 50,000 and 50,000
      shares authorized, 11,172 and 12,951 shares issued and
      outstanding at January 31, 1999 and January 31, 2000,
      respectively                                                         11             13
    Additional paid-in capital                                         50,270         75,909
    Warrants                                                               12          5,261
    Accumulated loss on investments                                       (47)           (25)
    Accumulated deficit                                               (13,750)       (44,041)
                                                                     --------       --------
      Total stockholders' equity                                       36,496         37,117
                                                                     --------       --------
      Total liabilities and stockholders' equity                     $ 39,614       $ 48,465
                                                                     ========       ========
</TABLE>

                       (See Notes to Financial Statements)



                                       26
<PAGE>   29

                               FATBRAIN.COM, INC.
                 STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                          Year ended January 31,
                                                  --------------------------------------
                                                    1998           1999           2000
                                                  --------       --------       --------
<S>                                               <C>            <C>            <C>
Revenues:
      Online                                      $  3,021       $ 10,662       $ 28,776
      Retail and other                               7,927          9,118          6,562
                                                  --------       --------       --------
         Total revenues                             10,948         19,780         35,338
Cost of revenues:
      Online                                         2,189          8,433         23,191
      Retail and other                               5,216          5,967          4,286
                                                  --------       --------       --------
         Total cost of revenues                      7,405         14,400         27,477
                                                  --------       --------       --------
Gross profit                                         3,543          5,380          7,861
Operating expenses:
      Sales and marketing                            4,192          9,918         25,121
      Development and engineering                      860          2,858          6,598
      General and administrative                     1,674          2,909          7,354
                                                  --------       --------       --------
         Total operating expenses                    6,726         15,685         39,073
                                                  --------       --------       --------
Loss from operations                                (3,183)       (10,305)       (31,212)
Interest, net                                           (7)           413            921
                                                  --------       --------       --------
Net loss                                            (3,190)        (9,892)       (30,291)
Other comprehensive income/(loss) -
    unrealized gain/(loss) on investments               --            (47)            22
                                                  --------       --------       --------
Comprehensive loss                                $ (3,190)      $ (9,939)      $(30,269)
                                                  ========       ========       ========
Basic and diluted net loss per share              $  (2.11)      $  (2.87)      $  (2.61)
                                                  ========       ========       ========
Shares used in calculating basic and diluted
    net loss per share                               1,509          3,441         11,627
                                                  ========       ========       ========
</TABLE>

                       (See Notes to Financial Statements)



                                       27
<PAGE>   30

                               FATBRAIN.COM, INC.
                        STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                          Accumulated
                                            Convertible                                      Other
                                             Preferred      Common    Additional            Compre-                  Total
                                               Stock        Stock      Paid-In              hensive   Accumulated Stockholders'
                                          Shares Amount Shares Amount  Capital   Warrants     Loss      Deficit      Equity
                                          ------ ------ ------ ------ ---------- -------- ----------- ----------- -------------

<S>                                       <C>    <C>    <C>    <C>    <C>        <C>      <C>         <C>         <C>
Balances, January 31, 1997                 2,435   $ 2   1,504   $ 2   $  4,065   $    --     $ --     $   (668)  $  3,401

Issuance of Preferred Series B                19    --      --    --         31        --       --           --         31

Issuance of Preferred Series C
  (net of issuance costs of $5)            1,042     1      --    --      2,494        --       --           --      2,495

Issuance of Preferred Series D
  (net of issuance costs of $56)           1,726     2      --    --      7,192        --       --           --      7,194

Issuance of stockholder note receivable       --    --      --    --        (25)       --       --           --        (25)

Exercise of stock options                     --    --      23    --          4        --       --           --          4

Options granted to consultants                --    --      --    --          3        --       --           --          3

Warrants granted to creditor                  --    --      --    --         --        12       --           --         12

Net loss                                      --    --      --    --         --        --       --       (3,190)    (3,190)
                                           -----   ---  ------   ---   --------   -------     ----     --------   --------
Balances, January 31, 1998                 5,222     5   1,527     2     13,764        12       --       (3,858)     9,925

Repayment of stockholder note receivable      --    --      --    --         25        --       --           --         25

Options granted to consultants                --    --      --    --         19        --       --           --         19

Exercise of stock options                     --    --     116    --        129        --       --           --        129

Issuance of Preferred Series E
  (net of issuance costs of $24)             857     1      --    --      5,498        --       --           --      5,499

Issuance of common stock in Initial
  Public Offering (net of issuance
  costs of $1,247)                            --    --   3,450     3     30,835        --       --           --     30,838

Conversion of preferred stock to
  common in connection with Initial
  Public Offering                         (6,079)   (6)  6,079     6         --        --       --           --         --

Unrealized loss on investments                --    --      --    --         --        --      (47)          --        (47)

Net Loss                                      --    --      --    --         --        --       --       (9,892)    (9,892)
                                           -----   ---  ------   ---   --------   -------     ----     --------   --------
Balance, January 31, 1999                     --    --  11,172    11     50,270        12      (47)     (13,750)    36,496

Warrants granted to consultant
  and creditor                                --    --      --    --         --       264       --           --        264

Exercise of stock options                     --    --     280     1        271        --       --           --        272

Repurchase of shares                          --    --     (11)   --         --        --       --           --         --

Exercise of stock warrants                    --    --      19    --         32       (32 )     --           --         --

Sale of stock under employee stock
  purchase plan purchases                     --    --      53    --        489        --       --           --        489

Issuance of warrants and common
  stock in private placement (net of
  issuance costs of $135)                     --    --   1,438     1     24,847     5,017       --           --     29,865

Unrealized gain on investments                --    --      --    --         --        --       22           --         22

Net Loss                                      --    --      --    --         --        --       --      (30,291)   (30,291)
                                           -----   ---  ------   ---   --------   -------     ----     --------   --------
Balance, January 31, 2000                     --    --  12,951   $13   $ 75,909   $ 5,261     $(25)    $(44,041)  $ 37,117
                                           =====   ===  ======   ===   ========   =======     ====     ========   ========


</TABLE>
                      (See Notes to Financial Statements)


                                       28
<PAGE>   31

                               FATBRAIN.COM, INC.
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                       Year ended January 31,
                                                                                  ---------------------------------
                                                                                    1998        1999         2000
                                                                                  -------     --------     --------
<S>                                                                               <C>         <C>          <C>
Cash from operating activities:
   Net loss                                                                       $(3,190)    $ (9,892)    $(30,291)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                   297          648        1,602
      Write-off of fixed assets in connection with closing of stores                   --           61           --
      Options and warrants granted to consultants and creditor                         15           19          184
      Amortization of premium on investments                                           --           44          253
   Changes in current assets and liabilities:
      Accounts receivable                                                             (35)      (1,115)      (1,759)
      Inventories                                                                  (1,145)         479       (2,594)
      Prepaid expenses and other assets                                              (173)        (826)      (2,316)
      Accounts payable                                                              1,680         (622)       6,454
      Accrued liabilities                                                            (117)          85        1,795
                                                                                  -------     --------     --------
      Net cash used in operating activities                                        (2,668)     (11,119)     (26,672)
                                                                                  -------     --------     --------

Cash from investing activities:
      Purchase of property and equipment                                             (941)      (1,371)     (10,454)
      Sale/(purchase) of investment securities                                         --      (19,616)      12,545
      Acquisition of CLBI, net of cash acquired                                    (4,334)          --           --
                                                                                  -------     --------     --------
      Net cash provided by/(used in) investing activities                          (5,275)     (20,987)       2,091
                                                                                  -------     --------     --------

Cash from financing activities:
      Repayment of capital lease obligation                                           (10)         (18)         (19)
      Issuance of preferred stock, net                                              9,695        5,524           --
      Proceeds from sale of common stock in private placement                          --           --       24,848
      Issuance of warrants to investor                                                 --           --        5,017
      Net exercise of stock options                                                     4          129          272
      Employee stock purchase plan purchases                                           --           --          489
      Net proceeds from initial public offering                                        --       30,838           --
                                                                                  -------     --------     --------
      Net cash provided by financing activities                                     9,689       36,473       30,607
                                                                                  -------     --------     --------

Net increase in cash and equivalents:                                               1,746        4,367        6,026
      Cash and equivalents at beginning of period                                   3,228        4,974        9,341
                                                                                  -------     --------     --------
      Cash and equivalents at end of period                                       $ 4,974     $  9,341     $ 15,367
                                                                                  =======     ========     ========

Non-cash investing and financing activities:
      Conversion of preferred stock into common stock                             $    --     $ 19,268     $     --
      Equipment acquired through capital lease transactions                       $    42     $     --     $     --
      Sale of preferred stock for note receivable                                 $    25     $     --     $     --
      Unrealized gain/(loss) on investments                                       $    --     $    (47)    $     22
      Warrants issued for services (Note 6 and 7)                                 $    --     $     --     $    138
      Cash paid to acquire CLBI, net of cash acquired:
        Assets acquired                                                           $ 2,926
        Liabilities assumed                                                        (1,897)
        Excess of purchase price over net assets acquired                           3,095
        Covenant not to compete                                                       210
                                                                                  -------
        Cash paid to acquire CLBI, net of cash acquired                           $ 4,334
                                                                                  =======
Supplemental disclosure of cash flow information:
      Cash paid for interest                                                      $    74     $      6     $     24
                                                                                  =======     ========     ========
      Cash paid for income taxes                                                  $     1     $      1     $     --
                                                                                  =======     ========     ========

</TABLE>

                      (See Notes to Financial Statements)


                                       29
<PAGE>   32

                               FATBRAIN.COM, INC.
                          Notes to Financial Statements
                   Years Ended January 31, 1998, 1999 and 2000

1.    BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

      Fatbrain.com, Inc., formerly Computer Literacy, Inc., (the "Company") was
incorporated in California in November 1994 and reincorporated in Delaware in
May 1998. The Company is an online provider of professional books, technology
based training solutions, corporate documentation and other information
resources, all of which are targeted to business and technical professionals. In
October 1999, the Company introduced eMatter, a secure digital publishing
technology that allows authors and publishers to publish and sell works online.
Business is transacted through the Company's Web site or through its two
physical retail locations.

Cash equivalents

      Cash equivalents are highly liquid debt instruments with original
maturities of three months or less when purchased.

Concentration of Credit Risk

      Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash equivalents, accounts
receivables and investments. Risks associated with cash and cash equivalents are
mitigated by banking with credit worthy institutions. Risks associated with
accounts receivables are mitigated as the Company performs on-going credit
evaluations of its customers and requires deposits for sales on credit, when
deemed necessary. The Company maintains reserves for estimated credit losses.
The recorded carrying amount of cash and cash equivalents, accounts receivable
and investments approximate fair market value. One customer accounted for 27% of
accounts receivable at January 31, 1999. No one customer accounted for 10% or
more of accounts receivable at January 31, 2000.

      The objective of the Company's investment policy is conservation of
capital and maintenance of liquidity until funds are needed for use in business
operations. Funds are diversified to minimize risk and concentrations of
investments. Under policy guidelines, the following are considered eligible
investments: obligations of the U.S. Treasury, U.S. government agencies, certain
financial institutions and corporations, as well as investment in money market
funds. All investments are limited to those highly rated by outside
organizations and derivative instruments are ineligible as investments.

Inventories

      Inventories are valued at the lower of average cost (first in, first out
method) or market. The Company's two largest vendors accounted for approximately
59% and 51% of the Company's book purchases in fiscal 1999 and 2000,
respectively.

Property and Equipment

      Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements and assets recorded under
capital lease are amortized on a straight-line basis over the lesser of the
lease term or the estimated useful life. Property and equipment included within
projects in progress is depreciated in the month after the asset is placed into
service.

Investments

      Investments represent debt securities, which are stated at fair value
based on quoted market prices. All investments are classified as
available-for-sale securities based on the Company's intended use. The
difference between amortized cost and fair value representing unrealized holding
gains and losses is recorded as a separate



                                       30
<PAGE>   33

component of stockholders' equity as accumulated other comprehensive loss. Gains
or losses on the sales of securities are determined on a specific identification
basis.

Long-lived Assets

      Goodwill arising from the acquisition of Computer Literacy Bookshops, Inc.
(Note 2) is amortized over its estimated life of 15 years. Accumulated
amortization was approximately $344,000 and $550,000 at January 31, 1999 and
2000, respectively. The Company evaluates the recoverability of its long-lived
assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires recognition of impairment of
long-lived assets in the event that the net book value of such assets exceeds
the future undiscounted cash flows attributable to such assets. No such
impairments have been identified. The Company assesses the impairment of
long-lived assets when events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable.

Revenue Recognition

      The Company recognizes revenue, net of discounts, when persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered,
the price is fixed and determinable and collectibility is reasonably assured.
For online revenue, this generally occurs at the time of shipment, except in the
case of eMatter revenue which is generally recognized when the content is
downloaded by the customer. Retail and other revenue is generally recognized at
the time of sale.

Fair Value of Financial Instruments

      The recorded carrying amounts of the Company's financial instruments, cash
and equivalents and investments, approximate their value and are based on quoted
market prices.

Advertising Costs

      The cost of advertising is expensed as incurred. For the years ended
January 31, 1998, 1999 and 2000, the Company incurred advertising expense of
approximately $0.9 million, $3.0 million and $10.0 million, respectively.

Product Development

      Product development expenses primarily consist of costs associated with
the systems and telecommunications infrastructure, editorial operations and
content acquisition. All product development costs have been expensed as
incurred.

Income Taxes

      Income taxes are accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes," an approach which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's financial and tax reporting.
In estimating future tax consequences, management generally considers all
expected future events other than enactments of changes in the tax laws or
rates. Under the provisions of SFAS No. 109, a valuation allowance is provided
when it is more likely than not that some portion or all of the deferred tax
assets recorded will not be recognized.

Stock-Based Compensation

      The Company accounts for stock-based awards to employees using the
intrinsic value method in accordance with Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees". The Company accounts
for stock-based awards to non-employees in accordance with Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock Based
Compensation".

Net Loss Per Share



                                       31
<PAGE>   34

      Basic loss per share excludes dilution and is computed by dividing net
loss by the weighted average number of common shares outstanding. There were
2,188 and 22,127 shares subject to repurchase at January 31, 1999 and 2000,
respectively. Diluted net loss per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock (warrants and
common stock options) were exercised or converted into common stock. Common
stock equivalents are excluded from the computation in loss periods, as their
effect would be anti-dilutive.

Comprehensive Loss

      In accordance with SFAS No. 130 "Reporting Comprehensive Income," the
Company reports by major components and as a single total, the change in its net
assets during the period from non-owner sources. Statements of comprehensive
loss for the years ended January 31, 1998, 1999 and 2000 have been included
within the statement of operations.

New Accounting Standard

      In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
statement 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. SFAS
No. 133 will be effective for the Company beginning in the first quarter of
fiscal year 2002. Although the Company has not fully assessed the implications
of SFAS No. 133, management does not believe that the adoption of this statement
will have a significant impact on the Company's financial position, results of
operations or cash flows.

Use of Estimates

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Such estimates include, but are not limited to, the level of
inventory reserves for excess or slow moving inventory, evaluation of goodwill
for impairment, accrued expenses, reserve for sales returns and a valuation
allowance against net deferred tax assets. Actual results could differ from
those estimates.

Reclassifications

      Certain prior year amounts in the accompanying financial statements have
been reclassified to conform to current year presentation. These
reclassifications had no effect on the results of operations or financial
position for any year presented.


2.    ACQUISITION

      On May 31, 1997, the Company completed the acquisition of all of the
outstanding capital stock of Computer Literacy Bookshops, Inc., a retailer of
computer books, with four stores located in California and Virginia. The
purchase price was approximately $5.1 million. The acquisition was accounted for
using the purchase method of accounting and accordingly, the assets acquired and
liabilities assumed were recorded at their estimated fair values as of the date
of acquisition. The principal assets acquired and liabilities assumed were cash
($759,000), inventory ($2.4 million), prepaid expenses and other current assets
($272,000), covenant not to compete ($210,000), property and equipment
($142,000), accounts receivable ($119,000), and accounts payable and accrued
expenses ($1.9 million). The excess of the purchase price over the net
identifiable assets acquired of $3.1 million is being amortized over a 15 year
period on a straight-line basis.



                                       32
<PAGE>   35

3.    PROPERTY AND EQUIPMENT

      Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                   January 31,    January 31,
                                                      1999           2000
                                                   -----------    -----------
                                                         (in thousands)
<S>                                                <C>            <C>
Computer and office equipment                       $  1,595       $  5,619
Software                                                 780          1,610
Leasehold improvements                                   232          1,325
Furniture and fixtures                                   121          1,367
Projects in progress                                     172          3,358
                                                    --------       --------
                                                       2,900         13,279
Less accumulated depreciation and amortization          (803)        (2,055)
                                                    --------       --------
Property and equipment, net                         $  2,097       $ 11,224
                                                    ========       ========
</TABLE>

4.    INVESTMENTS

      The amortized cost and fair value of available-for-sale securities are
presented in the tables below:

<TABLE>
<CAPTION>
                                              January 31, 1999
                                    -------------------------------------
                                                (in thousands)

                                                 Unrealized
                                    Amortized   Holding Gains      Fair
                                      Cost       And (Losses)     Value
                                    ---------   --------------   --------
<S>                                 <C>         <C>              <C>
Corporate debt securities            $18,049         $(39)       $18,010

Debt securities of states
  and of the U.S. and political
  subdivisions of the states           1,523           (8)         1,515
                                     -------         ----        -------
Total                                $19,572         $(47)       $19,525
                                     =======         ====        =======
</TABLE>

<TABLE>
<CAPTION>
                                              January 31, 2000
                                    -------------------------------------
                                                (in thousands)

                                                 Unrealized
                                    Amortized   Holding Gains      Fair
                                      Cost       And (Losses)     Value
                                    ---------   --------------   --------
<S>                                 <C>         <C>              <C>

Discount commercial paper              4,223            3          4,226

Corporate debt securities              2,551          (28)         2,523
                                     -------         ----        -------
Total                                $ 6,774         $(25)       $ 6,749
                                     =======         ====        =======
</TABLE>



                                       33
<PAGE>   36

The contractual maturities of the Company's investments in debt securities at
January 31, 2000 are as follows:

<TABLE>
<CAPTION>
                                             Within one    One to
                                                year     Five Years
                                             ----------  ----------
                                                 (in thousands)
<S>                                          <C>         <C>
Discount commercial paper                      $4,226      $   --
Corporate debt securities                       1,249       1,274
                                               ------      ------
Total                                          $5,475      $1,274
                                               ======      ======
</TABLE>

5.    ACCRUED LIABILITIES

      Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                            January 31,  January 31,
                                                1999        2000
                                            -----------  -----------
                                                  (in thousands)
<S>                                         <C>          <C>
Accrued compensation and related benefits      $  659      $1,807
Store and mail order credits                      184         171
Accrued sales tax payable                          79         492
Other                                             247         494
                                               ------      ------
Total                                          $1,169      $2,964
                                               ======      ======
</TABLE>

6.    LINE OF CREDIT

      During fiscal 1998, the Company entered into a line of credit arrangement
which expired during fiscal 2000. In connection with establishing the line of
credit, the Company issued warrants to the bank to purchase up to 20,832 shares
of the Company's Series C Preferred Stock at a price of $2.40 per share. Such
warrants were converted to warrants to purchase common stock at the time of the
Company's initial public offering. Vesting of these warrants occurred, as
defined in the warrant agreement, based on outstanding balance thresholds.
Accordingly, the Company recorded the fair value of such warrants as expense
when it was deemed probable that the outstanding balance thresholds would be
met.

      In fiscal 2000, all vested warrants were exercised. The net value of the
warrants (total market value of the exercised warrants less the total price paid
to exercise the warrants) was divided by the market price of the Company's
common stock on the date of exercise to calculate the net shares issued. This
"net issuance" method resulted in 19,337 shares of common stock issued to the
warrant holder.

7.    STOCKHOLDERS' EQUITY

Common Stock

      At January 31, 2000, the Company had 50,000,000 shares of common stock
authorized of which 12,950,507 were issued and outstanding. At January 31, 2000,
the Company had reserved shares of common stock for issuance as follows:

<TABLE>
<CAPTION>
                                                   (in thousands)
<S>                                                <C>
      Options outstanding under stock plans            3,306
      Issuance under stock option plans                  503
      Issuance under employee stock purchase plan        247
      Conversion of warrants                             481
                                                       -----
         Total shares reserved                         4,537
                                                       =====
</TABLE>



                                       34
<PAGE>   37

Preferred Stock

      The Company is authorized to issue 5,000,000 shares of preferred stock,
none of which was outstanding January 31, 1999 or 2000.

1998 Employee Stock Purchase Plan

      In 1998, the Company adopted an Employee Stock Purchase Plan ("the ESPP").
A total of 300,000 shares of common stock are reserved for issuance under the
ESPP. Under the ESPP, eligible employees may purchase common stock over certain
offering periods through payroll deductions, which may not exceed 15% of the
employee's compensation, nor more than 500 shares on any purchase date. Unless
the Board of Directors shall determine otherwise, each offering period will run
for 24 months commencing on each June 1 and December 1, except that the first
offering period commenced on November 19, 1998 and will end on November 30,
2000. The price at which common stock may be purchased under the ESPP is equal
to 85% of the fair market value of common stock on the first or last day of the
applicable offering period, whichever is lower. In fiscal year 2000, the first
year of grant under the plan, 53,149 shares were issued at the weighted average
price of $9.20. At January 31, 2000 approximately $230,000 had been contributed
by employees that will be used to purchase shares in fiscal 2001 at a price
determined under the terms of the 1998 Purchase Plan. At January 31, 2000, the
Company had 246,851 shares of its common stock reserved for future issuance
under this plan.

Stock Option Plan

      Under the 1996 Stock Option Plan (the "Plan" or the "1996 Stock Plan"),
the Company may grant options to purchase up to 1,215,686 shares of common stock
to employees, directors and consultants at prices not less than the fair market
value at the date of grant for incentive stock options and not less than 85% of
fair value for nonstatutory stock options. These options generally vest 25% one
year from the vest start date and ratably over the next 36 months and expire 10
years from the date of grant. Shares issued upon exercise of options that are
unvested are subject to repurchase by the Company upon termination of employment
or services. There were 22,127 shares issued and outstanding under the 1996
Stock Plan at January 31, 2000 that were subject to repurchase. Upon adoption of
the 1998 Omnibus Equity Incentive Plan (the "1998 Plan"), the Company
transferred all shares available for grant under the Plan to the 1998 Plan.

      The 1998 Omnibus Equity Incentive Plan was adopted by the Board of
Directors on July 13, 1998 and became effective on November 19, 1998. The
Company has reserved 3,000,000 shares, plus the aggregate number of shares
remaining available for issuance under the 1996 Stock Plan, for issuance under
the 1998 Plan. As of January 31, 2000, 2,912,205 of options had been granted
under the 1998 Plan and 502,629 shares are available for option grant.



                                       35
<PAGE>   38

      Option activity under the 1996 Stock Option Plan and 1998 Omnibus Equity
Incentive Plan is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                              Number of      Weighted
                                                Shares       Exercise
                                              ---------      ---------
<S>                                           <C>            <C>
Outstanding, February 1, 1997
  (8 vested at a weighted average $0.18)           277       $    0.18
  Options granted (weighted average
  fair value of $0.09 per                          795            0.57
  Options                                          (23)          (0.18)
  Options                                         (183)          (0.26)
                                                 -----
Outstanding, January 31, 1998
  (118 vested at a weighted average $0.28)         866            0.52
  Options granted (weighted average
  fair value of $0.88 per                          431            5.24
  Options                                         (116)          (1.12)
  Options                                         (135)          (1.05)
                                                 -----
Outstanding, January 31, 1999
  (284 vested at a weighted average $0.61)       1,046            2.33
  Options granted (weighted average
  fair value of $11.58 per                       2,912           17.83
  Options                                         (280)          (1.18)
  Options                                         (372)          (8.85)
                                                 -----
Outstanding, January 31, 2000
  (382 vested at a weighted average $2.20)       3,306       $   15.35
                                                 =====
</TABLE>

      Additional information regarding options outstanding as of January 31,
2000 is as follows:

<TABLE>
<CAPTION>
                                   Options Outstanding                             Options Vested
                  --------------------------------------------------------   ---------------------------
                                       Weighted Avg                            Number       Weighted
    Range of        Number of     Remaining Contractual   Weighted Average   of Shares       Average
 Exercise Price   Shares (000's)        Life (Yrs)         Exercise Price     (000's)     Exercise Price
 --------------   --------------  ---------------------   ----------------   ---------    --------------
<S>               <C>             <C>                     <C>                <C>          <C>
  $0.18 - 0.24         265                7.1                  $ 0.20           220          $ 0.20
  $0.72 - 0.96          28                7.7                  $ 0.89            23          $ 0.87
  $2.00 - 3.40         122                7.7                  $ 2.24            74          $ 2.21
  $6.00 - 8.00         162                8.5                  $ 7.42            48          $ 7.04
 $13.50 - 19.94      2,681                9.7                  $17.92            17          $15.75
 $21.88 - 36.13         48                9.8                  $24.30            --          $   --
                     -----                                                      ---
  $0.18 - 36.13      3,306                9.3                  $15.35           382          $ 2.20
                     -----                                                      ---
</TABLE>

Additional Stock Plan Information

      Since the Company continues to account for its stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25, SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of
pro forma net income (loss) and earnings (loss) per share had the Company
adopted the fair value method for employee awards as of the beginning of 1996.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective assumptions,
including future stock price volatility and expected time to exercise, which
greatly affect the calculated values. The Company's fair value calculations on
stock-based awards to employees under the 1996 and 1998 Stock Plans were made
using the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 4 years from the date of grant in 1998, 1999 and
2000; stock volatility, 0% in 1998, 92.3% in 1999 and 85% in 2000; risk-free
interest rate, 5.5% in 1998 and 1999, and 5.8% in 2000; and no dividends during
the expected term.



                                       36
<PAGE>   39

The Company's calculations are based on a single option award valuation
approach, and forfeitures are recognized as they occur. For fiscal year 2000,
the Company's fair value calculations on stock-based awards under the 1998
Purchase Plan were also made using the Black-Scholes option pricing model with
the following weighted average assumptions: expected life of six months; stock
volatility of 85%; risk free interest rate of 4.8%; and no dividends during the
expected term. If the computed fair values of the fiscal 1998, 1999 and 2000
employee awards granted had been amortized to expense over the vesting period of
the awards, pro forma net loss would have been approximately $3,300,000 ($2.19
per share), $9,950,000 ($2.89 per share), and $33,282,00 ($2.86 per share),
respectively.

      During fiscal 1998 and 1999 the Company granted 29,301 and 16,151 options
to consultants at exercise prices ranging from $0.18 to $8.00 per share, and
recorded expense of approximately $3,000 to $19,000, respectively. All options
vested in the year of grant.

      In November 1999, the Company received net proceeds of $29,865,000 in a
private placement of 1,437,470 shares of common stock, of which $5,017,000 was
allocated to the fair value (using the Black Scholes pricing model) of warrants
to purchase 431,241 shares of common stock issued in conjunction with the
private placement. The warrants are exercisable at $26.09 and expire in November
2004. The common stock and warrants were registered with the SEC in January
2000.

      In October 1999, the Company issued warrants to purchase 50,000 shares of
common stock at $18.44 per share for eMatter content acquisition. Such warrants
vest and become exercisable upon the achievement of certain pre-defined
milestones. In accordance with SFAS No. 123 and related interpretations, the
Company accounted for these performance based awards under the fair value method
and as variable awards. The Company believes that the achievement of all
milestones is probable and, accordingly, has recorded $138,000 of sales and
marketing expense in the accompanying statement of operations for the portion of
the awards deemed to be earned. Additionally, the fair value of the first
milestone (contract signing) of $106,000 was capitalized into other current
assets and is being amortized over the 15 month contractual period of
performance. The warrants expire in October 2002.

8.    INCOME TAXES

      The Company's deferred tax balances at consist of the following:

<TABLE>
<CAPTION>
                                                      January 31,
                                               ------------------------
                                                 1999            2000
                                               --------        --------
                                                    (in thousands)
<S>                                            <C>             <C>
      Net operating loss carryforwards         $  4,873        $ 15,466
      Expenses not currently deductible             492             951
      Allowance for bad debts                        71             267
                                               --------        --------
                                                  5,436          16,684
      Valuation allowance                        (5,436)        (16,684)
                                               --------        --------
      Net deferred tax asset                   $     --        $     --
                                               ========        ========
</TABLE>

      The Company's effective tax rate differs from the expected benefit at the
federal statutory tax rate as follows:

<TABLE>
<CAPTION>
                                                Year ended January 31,
                                               ------------------------
                                                 1999            2000
                                               --------        --------
<S>                                            <C>             <C>
      Federal Statutory Tax Rate                    (35)%           (35)%
      State Taxes, Net of Federal Benefit            (6)             (6)
      Other                                           1               1
      Valuation Allowance                            40              40
                                               --------        --------

      Effective Tax Rate                              0%              0%
                                               --------        --------
</TABLE>



                                       37
<PAGE>   40

      A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance of $5,436,000 and $16,684,000 as of January
31, 1999 and 2000, respectively, due to the uncertainty of realizing future tax
benefits from its net operating loss carryforwards and other deferred tax
assets.

      At January 31, 2000 the Company had federal and state net operating loss
carryforwards of approximately $40,794,000 and $20,478,000 which expire
beginning in 2011 and in 2004, respectively.

      The extent to which the loss carryforwards can be used to offset future
taxable income may be limited depending on the extent of ownership changes
within any three-year period as provided in the Tax Reform Act of 1986 and the
California Conformity Act of 1987.

9.    COMMITMENTS AND CONTINGENCIES

Lease Commitments

      The Company leases telecommunications services under a noncancelable
service agreement which began in fiscal year 1999. Expenses related to these
services for fiscal 1999 and 2000 were $35,000 and $36,000, respectively.

      The Company leases office and warehouse space, retail store space and
equipment under noncancelable operating leases which expire on various dates
through 2006. Rental expense under operating lease agreements, net of sublease
income, for the years ended January 31, 1998, 1999 and 2000 was approximately
$390,000, $612,000, and $1,301,000, respectively.

      At January 31, 1999 and 2000, the Company leased equipment with a cost of
$84,000 under capital leases. Accumulated amortization was approximately $37,000
and $56,000 for the fiscal years 1999 and 2000, respectively.

      Future minimum lease commitments under noncancelable service, operating
and capital leases as of January 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>

Years ending                                     Service   Operating   Capital
 January 31,                                    Agreement    Leases    Leases
---------------                                 ---------  ---------   -------
<S>                                             <C>        <C>         <C>
    2001                                          $ 36       $1,533      $25
    2002                                            36        1,567       12
    2003                                            --        1,288       --
    2004                                            --        1,235       --
    2005                                            --        1,246       --
Thereafter                                          --        1,283       --
                                                  ----       ------      ---
     Future minimum lease payments                $ 72       $8,152       37
                                                  ====       ======
Amounts representing interest (8%)                                        (3)
                                                                         ---
Present value of future minimum lease payments                            34
Current portion                                                          (22)
                                                                         ---
Long-term lease obligations                                              $12
                                                                         ===
</TABLE>

Purchase commitments

      In March 1999, the Company entered into a revised agreement with
Smartforce (formerly CBT Systems, Ltd.). The agreement requires that the Company
make a $2,250,000 minimum purchase commitment of Smartforce training products,
as follows: fiscal 2001: $430,000; fiscal 2002: $470,000; and fiscal 2003:
$635,000. In fiscal 1999 and 2000, the Company made timely payments of $300,000
and $415,000, respectively, towards this commitment.



                                       38
<PAGE>   41

10.   EMPLOYEE BENEFIT PLAN

      The Company sponsors the Fatbrain.com, Inc. 401(k) Plan (the "401(k)
Plan"), formerly the Computer Literacy, Inc. 401(k) Plan, which qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
All full-time equivalent employees, over 21 years of age, are eligible and may
participate in the 401(k) Plan six months subsequent to their hire date. Under
the 401(k) Plan, participating employees may defer a portion of their pretax
earnings not to exceed 15% of their total compensation. The Company matches 50%
for the first 4% contributed by the employee. Total Company contributions were
$7,000, $31,000 and $81,000 in fiscal 1998, 1999 and 2000, respectively.

11.   SEGMENT INFORMATION

      On January 31, 1999, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which established standards
for reporting information about operating segments in annual financial
statements, along with related disclosures about products and services,
geographic areas, and major customers.

      Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated by the Company's
chief operating decision-maker. By this definition, Fatbrain.com has three
operating segments: internet commerce, retail stores, and eMatter. These
segments are differentiated based upon the method used to distribute product.
For the internet commerce segment, products are ordered via the Company's Web
site and mailed directly to the customer through the Company's distribution
system. The retail stores maintain inventory within the store in a traditional
retail environment. eMatter is downloaded via the Company's Web site. These
operating segments had similar product offerings in the year ended January 31,
2000. Unallocated revenues are generated primarily from trade shows, book fairs
and sale of advertising space.

      The Company evaluates segment performance based on gross profit. The
Company does not analyze the segments individually below the gross profit line.
Direct operating expenses are those directly related to the operating segment
(e.g. direct salaries, rent, etc.) and exclude all corporate office expenses.
Segment assets are not presented as all assets of the Company are commingled and
are not available by segment. The accounting policies of the segments are the
same as those described in the summary of significant accounting policies.



                                       39
<PAGE>   42

<TABLE>
<CAPTION>

SEGMENT CONTRIBUTION
(in thousands)                               Year ending January 31,
                                     --------------------------------------
                                       1998           1999           2000
                                     --------       --------       --------
<S>                                  <C>            <C>            <C>
Revenues(1):
  Internet commerce                  $  3,021       $ 10,662       $ 28,275
  Retail stores                         7,143          9,008          6,507
  eMatter                                  --             --             56
  Unallocated                             784            110            500
                                     --------       --------       --------
     Consolidated net revenues         10,948         19,780         35,338

Gross profit(1):
  Internet commerce                       832          2,229          5,128
  Retail stores                         2,464          3,128          2,262
  eMatter                                  --             --             12
  Unallocated                             247             23            459
                                     --------       --------       --------
      Consolidated margin               3,543          5,380          7,861

Contribution(2):
  Internet commerce                       332           (283)         2,862
  Retail stores                         1,078            744            694
  eMatter                                  --             --         (3,919)
  Unallocated                              38             (4)           430
                                     --------       --------       --------
      Consolidated contribution      $  1,448       $    457       $     67
                                     ========       ========       ========
</TABLE>

(1)   The presentation of revenues and gross profit is consistent with the
      Company's internal presentation of financial information to management.

(2)   Contribution is defined as gross profit, less direct operating expenses.

RECONCILIATION OF CONTRIBUTION TO NET LOSS

<TABLE>
<CAPTION>
<S>                                  <C>            <C>            <C>
Consolidated contribution            $  1,448       $    457       $     67
Interest income, net                       (7)           413            921
Indirect expenses                      (4,631)       (10,762)       (31,279)
                                     --------       --------       --------
Net loss                             $ (3,190)      $ (9,892)      $(30,291)
                                     ========       ========       ========
</TABLE>

Geographic Information

      International sales are measured as shipments to addresses outside the
United States. For the year ended January 31, 1998, international sales were
less than 10% of total revenues. For both of the years ended January 31, 1999
and 2000, international sales were 11% of total revenue. No foreign country or
geographical area accounted for more than 10% of revenue in any of the periods
presented.

Major Customers

      No individual customer accounted for 10% or more of the Company's revenues
for fiscal years 1998, 1999 or 2000.



                                       40
<PAGE>   43

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         Not applicable.

                                    PART III

Certain information required by Part III is omitted from this Report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

         The information required by this item is incorporated by reference to
         the registrant's Proxy Statement.

ITEM 10. EXECUTIVE COMPENSATION

         The information required by this item is incorporated by reference to
         the registrant's Proxy Statement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The information required by this item is incorporated by reference to
         the registrant's Proxy Statement.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information required by this item is incorporated by reference to
         the registrant's Proxy Statement.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

         The information required by this Item is incorporated by reference to
         the registrant's Proxy Statement except that the following exhibits are
         filed as part of this Report:

                  23.1 - Independent Auditors' Consent

                  27.01 - Financial Data Schedule



                                       41
<PAGE>   44

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 25, 2000.

                                          FATBRAIN.COM, INC.



                                          By /s/ CHRIS MACASKILL
                                            -----------------------------------
                                             Chris MacAskill
                                             Chief Executive Officer



                                POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Chris MacAskill, as his true and lawful
attorneys-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Report on Form
10-KSB, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

SIGNATURE                           TITLE                                     DATE
---------                           -----                                     ----
<S>                                 <C>                               <C>
/s/ CHRIS MACASKILL                 Chief Executive Officer           _______4/25/00________
-----------------------------       Chairman of the Board
Chris MacAskill

/s/ KEITH BENJAMIN                  Director                          _______4/25/00________
-----------------------------
Keith Benjamin

/s/ PETER G. BODINE                 Director                          _______4/25/00________
-----------------------------
Peter G. Bodine

/s/ DIANE DAGGAT                    Director                          _______4/25/00________
-----------------------------
Diane Daggat

/s/ ALAN S. FISHER                  Director                          _______4/25/00________
-----------------------------
Alan S. Fisher

/s/ PETER C. WENDELL                Director                          _______4/25/00________
-----------------------------
Peter C. Wendell

/s/ JANET L. HALL                   Interim Vice President of Finance _______4/25/00________
----------------------              and Chief Financial Officer
Janet L. Hall
</TABLE>


<PAGE>   45
                                 EXHIBIT INDEX



Exhibit        Description
-------        -----------

23.1           Independent Auditors' Consent

27.01          Financial Data Schedule