<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-QSB


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

                  FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999

                                       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.
        (Exact name of small business issuer as specified in its charter)

             DELAWARE                                       77-0389480
  (State or other jurisdiction of                       (I.R.S. Employer
   incorporation or organization)                     Identification Number)


                                2550 WALSH AVENUE
                          SANTA CLARA, CALIFORNIA 95051
                    (Address of principal executive offices)

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

        Indicate by check [X] 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 past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days

                      (1)    Yes [X]        No
                                 ---           ---

                      (2)    Yes [X]        No
                                 ---           ---

        As of July 31, 1999 there were 11,340,384 shares of the Registrant's
common stock outstanding.

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<PAGE>   2

                               FATBRAIN.COM, INC.


                                   FORM 10-QSB

                                      INDEX

<TABLE>
<CAPTION>
PART I.    FINANCIAL INFORMATION                                                            PAGE
<S>        <C>                                                                              <C>
Item 1.    Financial Statements.............................................................  3

           Condensed Balance Sheets at January 31, 1999 and July 31, 1999...................  3

           Condensed Statements of Operations and Comprehensive Loss for the three and six
           months ended July 31, 1998 and July 31, 1999 ....................................  4

           Condensed Statements of Cash Flows for the three and six months ended
           July 31, 1998 and July 31, 1999..................................................  5

           Notes to Condensed Financial Statements..........................................  6

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of
           Operations.......................................................................  8

PART II.   OTHER INFORMATION................................................................ 24

Item 1.    Legal Proceedings................................................................ 24

Item 2.    Changes in Securities and Use of Proceeds........................................ 24

Item 3.    Defaults upon Senior Securities.................................................. 24

Item 4.    Submission of Matters to a Vote of Security Holders.............................. 24

Item 5.    Other Information................................................................ 24

Item 6.    Exhibits and Reports on Form 8-K................................................. 24

SIGNATURES.................................................................................. 26
</TABLE>


                                       2
<PAGE>   3

PART I.    FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

                               FATBRAIN.COM, INC.
                            CONDENSED BALANCE SHEETS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 January 31,      July 31,
                                                                    1999           1999
                                                                 -----------    -----------
                                                                                (unaudited)
<S>                                                               <C>            <C>
ASSETS
Current assets:
    Cash and equivalents                                          $  9,341       $  3,121
    Short-term investments                                           5,344             --
    Accounts receivable, net of allowance of $161 and $300           1,268          1,752
    Inventories                                                      3,204          5,871
    Prepaid expenses and other current assets                        1,068          1,514
                                                                  --------       --------
      Total current assets                                          20,225         12,258

Property and equipment, net                                          2,097          5,698
Investments                                                         14,181         10,522
Goodwill, net                                                        2,751          2,648
Other assets                                                           360            371
                                                                  --------       --------
      Total assets                                                $ 39,614       $ 31,497
                                                                  ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                              $  1,896       $  4,456
    Accrued expenses                                                 1,169          1,341
    Current portion of capital lease obligations                        18             18
                                                                  --------       --------
      Total current liabilities                                      3,083          5,815
Capital lease obligations                                               35             27
                                                                  --------       --------
      Total liabilities                                              3,118          5,842
Stockholders' equity:
    Preferred stock, $0.001 par value, 5,000 authorized,
      none issued and outstanding                                       --             --
    Common stock, $0.001 par value, 50,000 and 50,000
      shares authorized, 11,172 and 11,340 shares issued and
      outstanding at January 31, 1999 and July 31, 1999,
      respectively                                                      11             11
    Additional paid-in capital                                      50,270         50,584
    Warrants                                                            12             12
    Unrealized loss on investments                                     (47)           (64)
    Accumulated deficit                                            (13,750)       (24,888)
                                                                  --------       --------
      Total stockholders' equity                                    36,496         25,655
                                                                  --------       --------
      Total liabilities and stockholders' equity                  $ 39,614       $ 31,497
                                                                  ========       ========
</TABLE>


            See accompanying notes to condensed financial statements.


                                       3
<PAGE>   4

                               FATBRAIN.COM, INC.
            CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                            Three months ended July 31,   Six months ended July 31,
                                                            ---------------------------   -------------------------
                                                                1998          1999          1998           1999
                                                               --------      --------      --------      ---------
                                                                    (unaudited)                 (unaudited)
<S>                                                            <C>           <C>           <C>           <C>
Revenues:
      Online                                                   $ 2,464       $ 5,785       $ 4,225       $ 10,276
      Retail and other                                           2,351         1,577         4,984          3,229
                                                               -------       -------       -------       --------
         Total revenues                                          4,815         7,362         9,209         13,505
Cost of revenues:
      Online                                                     1,965         4,529         3,291          8,172
      Retail and other                                           1,538         1,033         3,226          2,104
                                                               -------       -------       -------       --------
         Total cost of revenues                                  3,503         5,562         6,517         10,276
                                                               -------       -------       -------       --------
Gross profit                                                     1,312         1,800         2,692          3,229
Operating expenses:
      Sales and marketing                                        2,070         5,266         4,056          9,936
      Development and engineering                                  594         1,299         1,148          2,419
      General and administrative                                   681         1,340         1,224          2,518
                                                               -------       -------       -------       --------
         Total operating expenses                                3,345         7,905         6,428         14,873
                                                               -------       -------       -------       --------
Loss from operations                                            (2,033)       (6,105)       (3,736)       (11,644)
Interest, net                                                       67           177            99            506
                                                               -------       -------       -------       --------
Net loss                                                        (1,966)       (5,928)       (3,637)       (11,138)
Other comprehensive loss - unrealized loss on investments           --           (13)           --            (17)
                                                               -------       -------       -------       --------
Comprehensive loss                                             $(1,966)      $(5,941)      $(3,637)      $(11,155)
                                                               =======       =======       =======       ========
Basic and diluted net loss per share                           $ (1.28)      $ (0.52)      $ (2.37)      $  (0.99)
                                                               =======       =======       =======       ========
Shares used in calculating basic and diluted
    net loss per share                                           1,539        11,300         1,533         11,263
                                                               =======       =======       =======       ========
</TABLE>


            See accompanying notes to condensed financial statements.


                                       4
<PAGE>   5

                               FATBRAIN.COM, INC.
                       CONDENSED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         Three months ended July 31,      Six months ended July 31,
                                                                         ---------------------------      --------------------------
                                                                            1998            1999            1998             1999
                                                                           --------        --------        --------        ---------
                                                                                 (unaudited)                     (unaudited)
<S>                                                                        <C>             <C>             <C>             <C>
Cash flows from operating activities:
   Net loss                                                                $(1,966)        $(5,928)        $(3,637)        $(11,138)
   Adjustments to reconcile net loss to net cash used in operations:
      Depreciation and amortization                                            125             281             232              516
      Options granted to consultants                                            --              --               5               --
      Amortization of premium on investments                                    --             102              --              193
   Changes in current assets and liabilities:
      Accounts receivable                                                       35            (384)           (358)            (484)
      Inventories                                                             (622)           (379)           (296)          (2,667)
      Prepaid expenses and other assets                                       (676)            284            (613)            (478)
      Accounts payable                                                       1,005             251             (42)           2,560
      Accrued expenses                                                         (79)           (252)            (87)             172
                                                                           -------         -------         -------         --------
      Net cash used in operations                                           (2,178)         (6,025)         (4,796)         (11,326)

Cash flows from investing activities:
      Purchase of property and equipment                                      (402)         (2,534)           (645)          (3,993)
      Sale of investments                                                       --           4,504              --            8,793
                                                                           -------         -------         -------         --------
      Net cash (used in)/provided by investing activities                     (402)          1,970            (645)           4,800

Cash flows from financing activities:
      Repayment of capital lease obligation                                     (5)             (4)             (9)              (8)
      Issuance of preferred stock, net                                       5,499              --           5,524               --
      Net exercise of stock options and warrants                                84              31              84               87
      Employee stock purchase plan purchases                                    --             227              --              227
                                                                           -------         -------         -------         --------
      Net cash provided by financing activities                              5,578             254           5,599              306
                                                                           -------         -------         -------         --------

Net increase (decrease) in cash and equivalents:                             2,998          (3,801)            158           (6,220)
      Cash and equivalents at beginning of period                            2,134           6,922           4,974            9,341
                                                                           -------         -------         -------         --------
      Cash and equivalents at end of period                                $ 5,132         $ 3,121         $ 5,132         $  3,121
                                                                           =======         =======         =======         ========

Non-cash investing activity:
      Unrealized loss on investments                                            --             (13)             --              (17)

Supplemental disclosure of cash flow information:
      Cash paid for interest                                                     1               2               3                3
      Cash paid for income tax                                                  --              --              --               --
</TABLE>

            See accompanying notes to condensed financial statements.


                                       5
<PAGE>   6

                               FATBRAIN.COM, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS

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 retailer of professional
    books, technology based training solutions, product manuals, research
    reports and other information resources, all of which are targeted to
    business and technical professionals. Business is transacted through the
    Company's online store or through its two physical retail locations. On
    March 29, 1999, the Company changed its name to Fatbrain.com, Inc.

    Unaudited Interim Financial Information

        The condensed financial statements of Fatbrain.com, Inc. included herein
    are unaudited and reflect all adjustments (consisting only of normal
    recurring adjustments) which are, in the opinion of management, necessary
    for a fair presentation of the financial position and operating results for
    the three and six months ended July 31, 1998 and July 31, 1999. These
    financial statements should be read in conjunction with the Company's
    audited financial statements as of January 31, 1999 and for the year then
    ended and notes thereto included in the Company's April 16, 1999 filing on
    Form 10-KSB. The results of operations for the three and six months ended
    July 31, 1999 are not necessarily indicative of the results to be expected
    for any subsequent quarter or for the year ending January 31, 2000.

2.  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. The information for the
    three and six months ended July 31, 1998 has been reclassified from the
    prior year's presentation to conform to the presentation for the three and
    six months ended July 31, 1999.

             Operating segments are defined as components of an enterprise about
    which separate financial information is available that is evaluated
    regularly by the Company's chief operating decision maker. By this
    definition, Fatbrain.com has three operating segments: internet commerce,
    retail stores, and online advertising. The segments presented here are those
    that were presented in the Company's filing on form 10-KSB for the year
    ended January 31, 1999, with the addition of the online advertising segment.
    These segments are differentiated based upon one of two criteria: the
    methods used to distribute product, or the nature of the product or service
    provided. 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. These operating segments had similar
    product offerings in the three and six months ended July 31, 1998 and in the
    three and six months ended July 31, 1999. The online advertising segment
    generates revenue through the sale of advertising space on the Company's
    website. The Company began generating online advertising revenues in the
    quarter ended April 30, 1999. Unallocated revenues are generated primarily
    from trade shows and book fairs.


                                       6
<PAGE>   7

        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
(for example, direct salaries, rent, etc.) and exclude all corporate overhead
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.

SEGMENT CONTRIBUTION

<TABLE>
<CAPTION>
                                  Three months ended July 31,    Six months ended July 31,
                                  ---------------------------    -------------------------
                                       1998          1999           1998          1999
                                     --------      --------       --------      ---------
                                        (in thousands)                (in thousands)
<S>                                  <C>           <C>            <C>           <C>
Revenues (1):
  Internet commerce                  $ 2,464       $ 5,625        $ 4,225       $  9,831
  Retail stores                        2,343         1,576          4,973          3,195
  Online advertising                      --           160             --            445
  Unallocated                              8             1             11             34
                                     -------       -------        -------       --------
     Consolidated net revenues         4,815         7,362          9,209         13,505

Gross profit (1):
  Internet commerce                      499         1,096            934          1,659
  Retail stores                          803           544          1,770          1,113
  Online advertising                      --           160             --            445
  Unallocated                             10             0            (12)            12
                                     -------       -------        -------       --------
      Consolidated margin              1,312         1,800          2,692          3,229

Contribution (2):
  Internet commerce                      (49)         (438)           (21)        (1,082)
  Retail stores                          176           132            500            299
  Online advertising                      --           160             --            445
  Unallocated                              9            (3)           (15)           (12)
                                     -------       -------        -------       --------
      Consolidated contribution      $   136       $  (149)       $   464       $   (350)
                                     =======       =======        =======       ========
</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>
<S>                                  <C>           <C>            <C>           <C>
Consolidated Contribution            $   136       $  (149)       $   464       $   (350)
Interest income, net                      67           177             99            506
Indirect expenses                     (2,169)       (5,956)        (4,200)       (11,294)
                                     -------       -------        -------       --------
Net loss                             $(1,966)      $(5,928)       $(3,637)      $(11,138)
                                     =======       =======        =======       ========
</TABLE>

        Geographic information. International sales, measured as shipments to
addresses outside the United States were 13% and 11%, respectively, of total
revenues for the three and six month periods ended July 31, 1998 and 11% and
12%, respectively, of total revenues for the three and six month periods ended
July 31, 1999. 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 consolidated revenues for the three and six months ended July 31, 1998
and July 31, 1999.


                                       7
<PAGE>   8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

        The following discussion and analysis of financial conditions and
results of operations contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in "Risk Factors That May Affect Future
Results" as well as those discussed in this section and elsewhere in this
Report, and the risks discussed in the "Risk Factors" section included in our
Registration Statement on Form SB-2 as declared effective by the Securities and
Exchange Commission on November 19, 1998 (Reg. No. 333-67397).

OVERVIEW

        Fatbrain.com, Inc. is the leading online retailer of information
resources singularly focused on technical and business professionals. With over
300,000 information resource titles from more than 8,000 publishers, we offer
our customers online access to a broad and comprehensive selection of technical
and professional books, technology based training solutions, product manuals,
research reports 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 were incorporated in November 1994 as Computer Literacy Corporation
and began selling technical books in February 1996, technology based training
solutions in January 1998, product manuals in May 1998, research reports in June
1998, and professional resources for the engineering, science, mathematics and
financial services industries in March 1999. We generate revenues from sale of
these products through our online store, certain co-branded corporate online
stores and our two retail locations as well as through trade shows and book
fairs. We recognize revenue from our online store upon shipment and, from our
physical retail stores, trade shows and book fairs, at the time of sale. In the
three and six month periods ended July 31, 1999, 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 three month periods ended July
31, 1998 and July 31, 1999, we purchased approximately 34% and 35%,
respectively, of our books from Ingram Book Company ("Ingram"), an indirect
reseller. In the six month periods ended July 31, 1998 and July 31, 1999 we
purchased approximately 36% and 37%, respectively, of our books from Ingram.
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 three and
six month periods ended July 31, 1999 we purchased approximately 17% and 18%,
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
profitability is achieved, it will be sustained. As of July 31, 1999 we had an
accumulated deficit of $24.9 million. We believe that our success will depend in
large part on our ability to enhance our customers' online shopping experience,
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 and financial services
industries. Accordingly, we intend to invest heavily in marketing and promotion,
our direct sales and telesales organizations, and infrastructure development.
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
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



                                       8
<PAGE>   9

expenses as a percentage of total revenues, are not necessarily meaningful and
should not be relied upon as an indication of future performance. See "Risk
Factors--Limited Operating History; Accumulated Deficit; Anticipated Losses."

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                          Quarter ended July 31,      Six months ended July 31,
                                          ----------------------      -------------------------
                                            1998           1999           1998           1999
                                           -----          -----          -----          -----
<S>                                        <C>            <C>            <C>            <C>
Revenues:
      Online                                51.2%          78.6%          45.9%          76.1%
      Retail and other                      48.8           21.4           54.1           23.9
                                           -----          -----          -----          -----
         Total revenues                    100.0          100.0          100.0          100.0
Cost of revenues (1):
      Online                                79.7           78.3           77.9           79.5
      Retail and other                      65.4           65.5           64.7           65.2
                                           -----          -----          -----          -----
         Total cost of revenues             72.8           75.6           70.8           76.1
                                           -----          -----          -----          -----
Gross profit                                27.2           24.4           29.2           23.9
Operating expenses:
      Sales and marketing                   43.0           71.5           44.0           73.6
      Development and engineering           12.3           17.6           12.5           17.9
      General and administrative            14.1           18.2           13.3           18.6
                                           -----          -----          -----          -----
         Total operating expenses           69.4          107.3           69.8          110.1
                                           -----          -----          -----          -----
    Loss from operations                   (42.2)         (82.9)         (40.6)         (86.2)
    Interest, net                            1.4            2.4            1.1            3.7
                                           -----          -----          -----          -----
    Net loss                               (40.8)%        (80.5)%        (39.5)%        (82.5)%
                                           =====          =====          =====          =====
</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.

THREE MONTHS ENDED JULY 31, 1998 COMPARED TO THREE MONTHS ENDED JULY 31, 1999

        Online Revenue. Online revenue is comprised of revenue from online sales
of information resources, associated outbound shipping charges, net of returns
and, to a lesser extent, the sale of advertising space on our web site. Online
revenue increased from $2.5 million, or 51.2% of total revenues in the three
months ended July 31, 1998, to $5.8 million, or 78.6% of total revenues in the
three months ended July 31, 1999 primarily as a result of significant increases
in our customer base (from 44,302 to 138,725), and repeat purchases from our
existing customers.

        International sales represented approximately 26% and 14% of online
revenue for the three months ended July 31, 1998 and the three months ended July
31, 1999, 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
$2.4 million, or 48.8% of total revenues for the three months ended July 31,
1998, to $1.6 million, or 21.4% of total revenues in the three months ended July
31, 1999, 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. The
Company periodically evaluates the location and productivity of its 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 $2.0 million, or
79.7% of online revenue for the three months ended July 31, 1998, to $4.5
million, or 78.3% of


                                       9
<PAGE>   10

online revenue in the three months ended July 31, 1999. The increase in absolute
dollars was attributable 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 and outbound shipping
costs. Cost of retail and other revenue decreased from $1.5 million, or 65.4% of
retail and other revenue in the three months ended July 31, 1998, to $1.0
million, or 65.5% of retail and other revenue in the three months ended July 31,
1999 primarily as a result of the decrease in retail and other sales.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 27.2% in the three months ended July 31, 1998 to 24.4% in the three months
ended July 31, 1999. The percentage decrease was primarily a result of the
increase in online sales as a percent of total revenues, as well as our
implementation of an online competitive pricing policy. We have offered, and
expect to continue to offer in the foreseeable future, discounts on various
product offerings 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, product manuals and research reports.

        Sales and Marketing Expenses. Sales and marketing expenses consist of
direct expenses associated with our retail stores, as well as advertising,
promotional and public relations expenditures, payroll and related expenses for
personnel engaged in corporate sales, marketing and fulfillment. Sales and
marketing expenses increased from $2.1 million, or 43.0% of total revenues in
the three months ended July 31, 1998, to $5.3 million, or 71.5% of total
revenues in the three months ended July 31, 1999. 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 name change. 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
pursue aggressive branding, marketing and telesales campaigns to generate
increased online traffic and acquire customers. Accordingly, we expects sales
and marketing expenses to increase in absolute dollars for the foreseeable
future, but decrease as a percentage of total revenues as total revenues
increase.

        Development and Engineering Expenses. Development and engineering
expenses primarily consist of costs associated with systems and
telecommunications infrastructure, editorial operations and content acquisition.
Development and engineering expenses increased from $594,000, or 12.3% of total
revenues in the three months ended July 31, 1998, to $1.3 million, or 17.6% of
total revenues in the three months ended July 31, 1999. 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. 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 and, as a result, expect development and engineering expenses to
increase significantly in absolute dollars for the foreseeable future, but
decrease as a percentage of total revenues as total revenues increase.

        General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$681,000, or 14.1% of total revenues in the three months ended July 31, 1998, to
$1.3 million or 18.2% of total revenues in the three months ended July 31, 1999.
This increase in absolute dollars was primarily due to increased salaries and
related expenses associated with the hiring of additional personnel and
increases in professional fees. We expect general and administrative expenses to
increase in absolute dollars as we expand our staff and incur additional costs
related to the expansion of our business and the costs resulting from being a
public company, but decrease as a percentage of total revenues as total revenues
increase.

        Interest, Net. Net interest income increased from $67,000 in the three
months ended July 31, 1998, to $177,000 in the three months ended July 31, 1999
due to interest earned on the remaining proceeds from our initial public
offering in November 1998.

SIX MONTHS ENDED JULY 31, 1998 COMPARED TO SIX MONTHS ENDED JULY 31, 1999


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<PAGE>   11

        Online Revenue. Online revenue increased from $4.2 million, or 45.9% of
total revenues in the six months ended July 31, 1998, to $10.3 million, or 76.1%
of total revenues in the six months ended July 31, 1999 primarily as a result of
significant increases in our customer base (from 44,302 to 138,725), and repeat
purchases from our existing customers.

        International sales represented approximately 23% and 16% of online
revenue for the six months ended July 31, 1998 and the six months ended July 31,
1999, respectively.

        Retail and Other Revenue. Retail and other revenue decreased from $5.0
million, or 54.1% of total revenues for the six months ended July 31, 1998, to
$3.2 million, or 23.9% of total revenues in the six months ended July 31, 1999
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.

        Cost of Online Revenue. Cost of online revenue increased from $3.3
million, or 77.9% of online revenue for the six months ended July 31, 1998, to
$8.2 million, or 79.5% of online revenue in the six months ended July 31, 1999.
The increase in absolute dollars was attributable to increased online sales
volume.

        Cost of Retail and Other Revenue. Cost of retail and other revenue
decreased from $3.2 million, or 64.7% of retail and other revenue in the six
months ended July 31, 1998, to $2.1 million, or 65.2% of retail and other
revenue in the six months ended July 31, 1999 primarily as a result of the
decrease in retail and other sales.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 29.2% in the six months ended July 31, 1998 to 23.9% in the six months
ended July 31, 1999 as the higher margin retail and other revenue represented a
smaller portion of total revenue.

        Sales and Marketing Expenses. Sales and marketing expenses increased
from $4.1 million, or 44.0% of total revenues in the six months ended July 31,
1998, to $9.9 million, or 73.6% of total revenues in the six months ended July
31, 1999. 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 name change. The increase was also due to the increased personnel
and related expenses required to implement our marketing strategy and fulfill
customer demand.

        Development and Engineering Expenses. Development and engineering
expenses increased from $1.1 million, or 12.5% of total revenues in the six
months ended July 31, 1998, to $2.4 million, or 17.9% of total revenues in the
six months ended July 31, 1999. 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.

        General and Administrative Expenses. General and administrative expenses
increased from $1.2 million, or 13.3% of total revenues in the six months ended
July 31, 1998, to $2.5 million or 18.6% of total revenues in the six months
ended July 31, 1999. This increase in absolute dollars was primarily due to
increased salaries and related expenses associated with the hiring of additional
personnel and increases in professional fees.

        Interest, Net. Net interest income increased from $99,000 in the six
months ended July 31, 1998, to $506,000 in the six months ended July 31, 1999
due to interest earned on the remaining proceeds from our initial public
offering in November 1998.

LIQUIDITY AND CAPITAL RESOURCES

        Since inception, we have financed our operations primarily through
private sales of preferred stock which totaled approximately $19.3 million (net
of issuance costs), and public sale of common stock in our initial public
offering in November 1998 which totaled approximately $30.8 million net of
issuance costs.

        Net cash used in operating activities was $2.2 million in the three
months ended July 31, 1998 and $6.0 million in the three months ended July 31,
1999. Cash used in operating activities in the three months ended July 31,


                                       11
<PAGE>   12

1998 was primarily attributable to a net loss of $2.0 million and increases of
$622,000 and $676,000, respectively, in inventories and prepaid expenses and
other assets, partially offset by an increase of $1.0 million in accounts
payable, as well as depreciation and amortization. For the three months ended
July 31, 1999, cash used in operating activities primarily resulted from a net
loss of $5.9 million plus increases of $384,000 and $379,000, respectively, in
accounts receivable and inventories and a decrease of $252,000 in accrued
expenses, offset by a decrease in prepaid expenses and other assets of $284,000
and an increase in accounts payable of $251,000, as well as depreciation and
amortization.

        Net cash used in operating activities was $4.8 million in the six months
ended July 31, 1998 and $11.3 million in the six months ended July 31, 1999.
Cash used in operating activities in the six months ended July 31, 1998 was
primarily attributable to a net loss of $3.6 million and increases of $358,000,
$296,000 and $613,000, respectively, in accounts receivable, inventories and
prepaid expenses and other assets, partially offset by depreciation and
amortization. For the six months ended July 31, 1999, cash used in operating
activities primarily resulted from a net loss of $11.1 million plus increases of
$484,000, $2.7 million and $478,000, respectively, in accounts receivable,
inventories, and prepaid expenses and other current assets, partially offset by
a $2.6 million increase in accounts payable, as well as depreciation and
amortization.

        Net cash used in investing activities was $402,000 in the three months
ended July 31, 1998, and was attributable to purchases of property and
equipment. Net cash provided by investing activities was $2.0 million in the
three months ended July 31, 1999 and was attributable to $4.5 million in sales
of investments, offset by $2.5 million used to purchase property and equipment.
Net cash used in investing activities was $645,000 in the six months ended July
31, 1998, and was attributable to purchases of property and equipment. Net cash
provided by investing activities was $4.8 million in the six months ended July
31, 1999 and was attributable to $8.8 million in sales of investments, offset by
$4.0 million used to purchase property and equipment.

        Cash provided by financing activities was $5.6 million in the three
months ended July 31, 1998 and was primarily attributable to a $5.5 million
preferred stock issuance. Cash provided by financing activities was $254,000 in
the three months ended July 31, 1999 and was due primarily to $227,000 in
purchases under our employee stock purchase plan, as well as stock option
exercises. Cash provided by financing activities was $5.6 million in the six
months ended July 31, 1999. Cash provided by financing activities was $306,000
in the six months ended July 31, 1999. We have a $4.0 million line of credit
which expires on December 31, 1999. As of July 31, 1999, we had no borrowings
outstanding under our line of credit.

        As of July 31, 1999 we had $3.1 million of cash and equivalents and
$10.5 million of investments. As of that date, our principal commitments
consisted of obligations outstanding under an agreement with 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.


                                       12
<PAGE>   13

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

        We operate in a rapidly changing environment that involves a number of
risks, some of which are beyond our control. The following discussion highlights
some of these risks. These risks should be read in conjunction with the "Risk
Factors" section included in our Registration Statement on Form SB-2 as declared
effective by the Securities and Exchange Commission on November 19, 1998 (Reg.
No. 333-67397).

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES

        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 (the "Web") in
February 1996. We expanded our product offerings to include training materials
in January 1998, product manuals in May 1998, research reports in June 1998 and
professional resources for the engineering, science, mathematics and financial
services industries in March 1999. Accordingly, 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 such as
electronic commerce. Such risks for us may include:

           - An evolving and unpredictable business model;

           - Management of an expanding business;

           - Fluctuations in sales;

           - 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;

           - Capacity constraints;

           - Systems failures;

           - Announcements by current or potential competitors;

           - Changes in the needs of technical and business professionals; and

           - The other Risk Factors discussed herein.

        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 be successful in addressing such risks, and the failure to do
so would seriously harm our business, financial condition, results of
operations, and cash flows.

        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 July 31, 1999, we had an accumulated deficit of $24.9 million.
We believe that our success will depend in large part on our ability to:

           - Enhance our customers' online shopping experience;

           - Expand corporate relationships;

           - Build brand awareness;


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<PAGE>   14

           - Encourage customer loyalty;

           - Capitalize on the market for information resources;

           - Establish and utilize supplier relationships;

           - Maintain our technology focus and expertise; and

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

        Accordingly, we intend to invest heavily in marketing and promotion, our
direct sales and telesales organizations, and systems and infrastructure
development. Such 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, such growth
rates are not sustainable. Such growth rates will decrease in the future and are
not indicative of actual growth rates that we may experience.

UNPREDICTABILITY OF FUTURE REVENUES; POTENTIAL FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS; SEASONALITY

        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. Accordingly, any significant shortfall in revenues in relation to our
planned expenditures would seriously harm our business, financial condition,
results of operations, and cash flows. Further, we may, from time to time, make
certain pricing, product, service or marketing decisions as a strategic response
to changes in the competitive environment. Such changes could seriously harm our
business, financial condition, results of operations, and cash flows.

        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;

           - Announcements of, and market anticipation for, new technology
             offerings for which information resources may be sought;

           - 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;

           - Increasing customer acceptance of the Internet for the purchase
             of information resources such as those offered by us;

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

           - The level of traffic on our online store;

           - The sales mix of our product offerings;

           - 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 books, technology based training solutions,
             product manuals, and research reports;

           - The level of merchandise returns we experience;

           - Governmental regulation; and

           - General economic conditions and economic conditions specific to
             the Internet, electronic commerce and the technical and
             professional resource industries.


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<PAGE>   15

        In the past, we have experienced seasonality in our business and we
expect that we will continue to experience such 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 many technical and business 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 such event, the trading price of the
Common Stock would likely be seriously harmed.

RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS

        For the three and six month periods ended July 31, 1999 approximately
81% of our online revenues were derived from sales of books. We recently
expanded our product offerings to include technology based training materials,
product manuals and research reports, and future revenues from these new product
offerings are difficult to forecast. Additionally, we expanded our focus to
include resource materials for professionals in the engineering, science,
mathematics and financial services industries, and future revenues from these
new areas are difficult to forecast.

        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. In addition, 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.
Such 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. Such efforts may strain our
management, financial and operational resources. The lack of market acceptance
of such efforts (including our recent expansion of product offerings to include
technology based training materials, manuals and research reports, as well as
our expanded focus in new industries) 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, results of
operations, and cash flows.

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 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.

        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 greater financial, marketing,
service, support, technical and other resources than Fatbrain.com. Our failure
to maintain a competitive


                                       15
<PAGE>   16

position within the market could seriously harm 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;

           - 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 Fatbrain.com. 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 we can.

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

        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 may be unable to compete
successfully against current and future competitors, and competitive pressures
faced by us could seriously harm our business, financial condition, results of
operations, and cash flows.

MANAGEMENT OF EXPANDING BUSINESS; LIMITED SENIOR MANAGEMENT RESOURCES

        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. Our new employees
include a number of key managerial, technical and operations personnel who have
not yet been fully integrated into the Company, 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 management will be
required to maintain and expand our relationships with:

           - Various suppliers;

           - Freight companies;

           - Other Web sites;

           - Other Web service providers;


                                       16
<PAGE>   17

           - Internet and other online service providers; and

           - Other third parties necessary to our business.

        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, results of operations, and cash flows could be seriously
harmed.

RISKS ASSOCIATED WITH NEW BRAND

        We believe we must establish, maintain and enhance our "Fatbrain.com"
brand. We have only been operating under the "Fatbrain.com" name since the end
of March 1999. To attract and retain online users and to promote and maintain
our new brand, we may need to substantially increase our marketing expenditures
to create and maintain strong brand loyalty among our customers. Additionally,
customers may react negatively to our new brand. Our business could be adversely
affected if our customers react negatively, our marketing efforts are
unproductive or if we cannot increase our brand awareness and acceptance. If we
fail to promote and maintain our brand, or if we incur excessive expenses in an
attempt to do so, our business, results of operations, financial condition and
cash flows would be seriously harmed.

RISK OF CAPACITY CONSTRAINTS; RELIANCE ON INTERNALLY DEVELOPED SYSTEMS; SYSTEM
DEVELOPMENT RISKS

        A key element of our strategy is to generate a high volume of traffic
on, and use of, our online store. Accordingly, 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 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;

           - Search engine; and

           - Substantially all aspects of transaction processing, 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.


                                       17
<PAGE>   18

        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, results of operations, and
cash flows.

NEED FOR 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, results of operations, and cash flows.

FULFILLMENT CENTER RELOCATION

         We moved our warehousing and fulfillment of orders to Erlanger,
Kentucky in May 1999 in order to be closer to certain publishers, wholesalers,
distributors and delivery services. At the same time we moved from a manual
distribution process to a software-supported solution from Manhattan Associates,
PKMS Warehouse Management System. Relocating such services and moving to an
automated distribution process may not result in operating efficiencies or may
cause a significant disruption in the fulfillment of orders, the distraction of
management and other key personnel and the expenditure of significant financial
and other resources. Any such disruption, distraction or expenditure could
seriously harm our business, financial condition, results of operations, and
cash flows.

SALES AND OTHER TAX COLLECTION

        We do not currently collect sales or other similar taxes in respect of
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 such 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, results of operations, and
cash flows.

RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE

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

           - Fire;

           - Flood;

           - Power loss;

           - Telecommunications failure;

           - Break-ins; and

           - Earthquake and similar events.

        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. Such disruptions could lead to interruptions, delays,


                                       18
<PAGE>   19


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, results of operations, and cash flows.

RELIANCE ON CERTAIN SUPPLIERS

        For the three and six months ended July 31, 1999, we purchased
approximately 35% and 37%, respectively, of our products from Ingram Book
Company ("Ingram") and 17% and 18%, respectively, of our products from Pearson
Education Division. We rely to a large extent on rapid fulfillment from Ingram
and other vendors. We generally have no commitments to 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, results of operations, and cash flows would be seriously
harmed.

DEPENDENCE ON KEY PERSONNEL

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

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

           - Mr. MacAskill, our President and Chief Executive Officer;

           - Mr. Orumchian, our Vice President of Engineering;

           - Mr. Alvarez, our Vice President of Finance and Chief Financial
             Officer; and

           - Mr. Cudd, our Vice President of Marketing.

        Each employment agreement sets forth the officer's base salary and
general employee benefits, including acceleration of a portion of such
employee's Common Stock option vesting. We maintain $2.0 million of key person
life insurance on Chris MacAskill, our President and Chief Executive Officer.

DEPENDENCE ON 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 Fatbrain.com in particular. Our business, financial
condition, results of operations, and cash flows would be seriously harmed if:


                                       19
<PAGE>   20

           - Use of the Internet and other online services does not continue to
             increase or increases more slowly than expected;

           - The infrastructure for the Internet and other online services does
             not effectively support expansion that may occur; or

           - The Internet and other online services do not become a viable
             commercial marketplace.

RAPID TECHNOLOGICAL CHANGE

        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;

           - 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, results of operations,
and cash flows could be seriously harmed.

ELECTRONIC COMMERCE SECURITY RISKS

        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, such as customer credit card numbers. 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. If any such compromise of our
security were to occur, it could seriously harm our reputation, business,
financial condition, results of operations, and cash flows. 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 such security breaches or to alleviate problems caused by such
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. To the extent that
our activities or those of third-party contractors involve the storage and
transmission of proprietary information, such as credit card numbers, security
breaches could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our security measures may not prevent
security breaches and failure to prevent such security breaches may seriously
harm our business, financial condition, results of operations, and cash flows.

RISKS ASSOCIATED WITH INTERNATIONAL SALES


                                       20
<PAGE>   21

        For the three and six months ended July 31, 1999, international sales
accounted for approximately 14% and 16%, respectively, 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
certain 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.

YEAR 2000 COMPLIANCE

        Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and cannot
distinguish dates in the 1900's from dates in the 2000's. This could result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although we believe that our products
and internal systems are Year 2000 compliant, we utilize third-party equipment
and software that may not be Year 2000 compliant. Failure of such third-party
equipment or software to operate properly with regard to the Year 2000 and
thereafter could require us to incur unanticipated expenses to remedy any
problems, which could seriously harm our business, results of operations,
financial condition and cash flows.

        Any failure to make our products Year 2000 compliant could result in:

           - A decrease in sales of our products;

           - An increase in the allocation of resources to address Year 2000
             problems of our customers without additional revenue commensurate
             with such dedication of resources; and

           - An increase in litigation costs relating to losses suffered by our
             customers due to such Year 2000 problems.

        Furthermore, the purchasing patterns of customers or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products and services such as
those offered by us, which could seriously harm our business, financial
condition, results of operations and cash flows. We have conducted a preliminary
review of our internal computer systems to identify the systems that could be
affected by the Year 2000 issue and to develop a plan to resolve the issue.
Based on this preliminary review, we currently have no reason to believe that
our internal software systems are not Year 2000 compliant. However, we will
continue to evaluate our systems and in the event we conclude that our systems
are not Year 2000 compliant, we will develop a contingency plan to address these
issues. There can be no assurance that Year 2000 compliance issues will not have
a material adverse effect on our business, financial condition, results of
operations and cash flows.

TRADEMARKS AND PROPRIETARY RIGHTS; UNLICENSED ARRANGEMENTS AND MATERIALS

        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 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, such licensees may take actions that could seriously harm the
value of our proprietary rights or reputation and in turn our business,
financial condition, results of operations, 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.


                                       21
<PAGE>   22

        In addition, other parties may 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. 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 such intellectual property. The failure to obtain
the necessary licenses or other rights at a reasonable cost could seriously harm
our business, financial condition, results of operations, and cash flows.

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 with respect to
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 doing business, or otherwise
seriously harm our business, financial condition, results of operations, and
cash flows. Moreover, the applicability to the Internet of existing laws in
various jurisdictions governing issues such as property ownership, sales tax,
libel and personal privacy is uncertain and may take years to resolve. Our
business, financial condition, results of operations, and cash flows could be
seriously harmed by:

           - Any such new legislation or regulation;

           - The application of laws and regulations from jurisdictions whose
             laws do not currently apply to our business; or

           - The application of existing laws and regulations to the Internet
             and other online services.

        As our service is offered over the Internet in multiple states and
foreign countries, such jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each such state and foreign country.
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 such laws and such 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 (the "FCC") 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 FCC to regulate Internet Service Providers ("ISPs")
in a manner similar to long distance telephone carriers and to impose access
fees on the ISPs. If any effort to increase regulation of ISPs is successful,
the expense of communicating on the Internet could increase substantially,
potentially slowing the growth in the use of the Internet. Any such new
legislation or regulation or application or interpretation of existing laws
could seriously harm our business, financial condition, results of operations,
and cash flows.


                                       22
<PAGE>   23

POSSIBLE VOLATILITY OF STOCK PRICE

        The trading price of our Common Stock is likely to be highly volatile
and could be subject to wide fluctuations in price in response to such factors
as:

           - Actual or anticipated variations in quarterly operating results;

           - Announcements of technological innovations;

           - New sales formats 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;

           - Changes in the market valuations of other Internet, online service
             or retail companies;

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

           - Additions or departures of key personnel;

           - Sales of Common Stock; and

           - Other events or factors, many of which are beyond our control.

        In addition, the stock market in general, and the Nasdaq National Market
and the market for Internet-related and technology companies in particular, has
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect price earnings ratios substantially above historical levels. These
trading prices and price earnings ratios may not be sustained. These broad
market and industry factors may seriously harm the market price of the Common
Stock, regardless of our operating performance. 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 such company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would seriously harm our business,
financial condition, results of operations, and cash flows.

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW

        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 change in
control of the Company without further action by the stockholders and may
seriously harm the voting and other rights of the holders of Common Stock. We
have no present plans to issue shares of Preferred Stock. Further, certain
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.


                                       23
<PAGE>   24
<TABLE>
<CAPTION>
PART II.       OTHER INFORMATION

<S>            <C>
ITEM 1.        LEGAL PROCEEDINGS.

               None

ITEM 2.        CHANGES IN SECURITIES AND USE OF PROCEEDS.

               Not applicable

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES.

               Not applicable

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

               The Company's annual meeting of stockholders was held on June 29,
               1999 in Santa Clara, California. Of the 11,109,210 shares
               outstanding as of the record date, 9,049,046 shares were present
               or represented by proxy at the meeting. The following matters
               were submitted to a vote of security holders:

               1. The following nominees were elected as directors, each to hold
               office until his successor is elected and qualified, by the vote
               set forth below:
</TABLE>

<TABLE>
<CAPTION>
               ---------------------- ------------------- -------------------
               Nominee                For                 Withheld
               ---------------------- ------------------- -------------------
               <S>                    <C>                 <C>
               Chris MacAskill        9,030,528           18,518
               ---------------------- ------------------- -------------------
               Kim Orumchian          9,030,528           18,518
               ---------------------- ------------------- -------------------
               Peter G. Bodine        9,030,528           18,518
               ---------------------- ------------------- -------------------
               Alan S. Fisher         9,030,528           18,518
               ---------------------- ------------------- -------------------
               Tod H. Francis         9,030,528           18,518
               ---------------------- ------------------- -------------------
               David C. Schwab        9,030,528           18,518
               ---------------------- ------------------- -------------------
               Peter C. Wendell       9,030,528           18,518
               ---------------------- ------------------- -------------------
</TABLE>

<TABLE>
<S>            <C>
               2. Ratification of the appointment of Deloitte & Touche, LLP, as
               independent accountants of the Company for the fiscal year ended
               January 31, 2000:
</TABLE>

<TABLE>
<CAPTION>
               ---------------------- ------------------- -------------------
               For                    Opposed             Abstained
               ---------------------- ------------------- -------------------
               <S>                    <C>                 <C>
               9,032,478              3,338               13,230
               ---------------------- ------------------- -------------------
</TABLE>

<TABLE>
<S>            <C>
ITEM 5.        OTHER INFORMATION.

               Not applicable

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K.

               (a) The following exhibit is filed as part of this report:
</TABLE>


                                       24
<PAGE>   25

<TABLE>
<S>            <C>
                   27.01 - Financial Data Schedule

               (b) Reports on Form 8-K

                   No Reports on Form 8-K were filed during the three months
                   ended July 31, 1999.
</TABLE>


                                       25
<PAGE>   26

                                   SIGNATURES

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

September 10, 1999                     FATBRAIN.COM, INC.
                                       (Registrant)



                                       By: /s/ Donald P. Alvarez
                                          --------------------------------------
                                           Donald P. Alvarez
                                           Vice President of Finance and
                                           Administration and Chief Financial
                                           Officer (Duly Authorized Officer and
                                           Principal Financial Officer)


                                       26
<PAGE>   27
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
No.                     Description
---                     -----------
<S>            <C>
27.01          Financial Data Schedule
</TABLE>