<PAGE>   1

================================================================================

                       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, 2000


                                       OR


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

                  FOR THE TRANSITION PERIOD FROM _____ TO _____



                         Commission file number 0-24871

                               Fatbrain.com, Inc.
        (Exact name of small business issuer as specified in its charter)


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


</TABLE>


                                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, 2000 there were 13,038,870 shares of the Registrant's
common stock outstanding.

================================================================================

<PAGE>   2

                       Fatbrain.com, INC. and Subsidiary

                                   FORM 10-QSB

                                      INDEX


<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       ----
<S>                                                                                    <C>
PART I.  FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements ..............................       3

        Condensed Consolidated Balance Sheets at January 31, 2000
        and July 31, 2000 ........................................................       3

        Condensed Consolidated Statements of Operations and Comprehensive Loss
        for the three and six months ended July 31, 1999 and July 31, 2000 .......       4

        Condensed Consolidated Statements of Cash Flows for the three and six
        months ended July 31, 1999 and July 31, 2000 .............................       5

        Notes to Condensed Consolidated 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 .......................................................................      25
</TABLE>



                                       2
<PAGE>   3

PART I.        FINANCIAL INFORMATION
ITEM 1.        FINANCIAL STATEMENTS.


                       Fatbrain.com, INC. and Subsidiary
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                       January 31,         July 31,
                                                                           2000              2000
                                                                       -----------         --------
<S>                                                                    <C>                 <C>
ASSETS
Current assets:
     Cash and cash equivalents                                           $ 15,367          $  4,889
     Short-term investments                                                 5,475                --
     Accounts receivable                                                    3,027             7,107
     Receivable from affiliate                                                 --             1,405
     Inventories                                                            5,798             6,015
     Prepaid expenses and other                                             3,471             3,410
                                                                         --------          --------
       Total current assets                                                33,138            22,826

Property and equipment, net                                                11,224            13,465
Investments                                                                 1,274             5,574
Goodwill, net                                                               2,545             2,442
Other assets                                                                  284               371
                                                                         --------          --------
       Total assets                                                      $ 48,465          $ 44,678
                                                                         ========          ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                    $  8,350          $ 10,005
     Accrued liabilities                                                    2,964             3,540
     Payable to affiliate                                                      --               300
     Current portion of capital lease obligations                              22                16
     Current portion of deferred revenue                                       --               162
                                                                         --------          --------
       Total current liabilities                                           11,336            14,023
Borrowings on Line of Credit                                                   --             1,421
Capital lease obligations                                                      12                 6
Deferred revenue                                                               --               270
                                                                         --------          --------
       Total liabilities                                                   11,348            15,720
Stockholders' equity:
     Preferred stock, $0.001 par value, 5,000 shares authorized,
       none issued and outstanding                                             --                --
    Common stock, $0.001 par value, 50,000 shares
       authorized, 12,951 and 13,039 shares issued and
       outstanding at January 31, 2000 and July 31, 2000,
       respectively                                                            13                13
     Additional paid-in capital                                            75,909            90,496
     Warrants                                                               5,261             5,212
     Accumulated loss on investments                                          (25)               --
     Accumulated deficit                                                  (44,041)          (66,763)
                                                                         --------          --------
       Total stockholders' equity                                          37,117            28,958
                                                                         --------          --------
       Total liabilities and stockholders' equity                        $ 48,465          $ 44,678
                                                                         ========          ========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>   4


                       Fatbrain.com, INC. and Subsidiary
     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
                      (in thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                     Three months ended July 31,          Six months ended July 31,
                                                     --------------------------          --------------------------
                                                       1999              2000              1999              2000
                                                     --------          --------          --------          --------
<S>                                                  <C>               <C>               <C>               <C>
Revenues:
     Online                                          $  5,785          $ 13,576          $ 10,276          $ 25,752
     Retail and other                                   1,577             1,768             3,229             3,633
                                                     --------          --------          --------          --------
        Total revenues                                  7,362            15,344            13,505            29,385
Cost of revenues:
     Online                                             4,529            10,450             8,172            20,338
     Retail and other                                   1,033             1,150             2,104             2,369
                                                     --------          --------          --------          --------
        Total cost of revenues                          5,562            11,600            10,276            22,707
                                                     --------          --------          --------          --------
Gross profit                                            1,800             3,744             3,229             6,678
Operating expenses:
     Sales and marketing                                5,266             7,401             9,936            17,896
     Development and engineering                        1,299             2,158             2,419             4,545
     General and administrative                         1,340             3,438             2,518             6,727
                                                     --------          --------          --------          --------
        Total operating expenses                        7,905            12,997            14,873            29,168
                                                     --------          --------          --------          --------
Loss from operations                                   (6,105)           (9,253)          (11,644)          (22,490)
Other expense                                              --              (397)               --              (397)
Interest income (expense), net                            177               (35)              506               165
                                                     --------          --------          --------          --------
Net loss                                               (5,928)           (9,685)          (11,138)          (22,722)
Other comprehensive income (loss) -
   unrealized gain (loss) on investments                  (13)               22               (17)               25
                                                     --------          --------          --------          --------
Comprehensive loss                                   $ (5,941)         $ (9,663)         $(11,155)         $(22,697)
                                                     ========          ========          ========          ========
Basic and diluted net loss per share                 $  (0.52)         $  (0.74)         $  (0.99)         $  (1.75)
                                                     ========          ========          ========          ========
Shares used in calculating basic and diluted
    net loss per share                                 11,300            13,027            11,263            13,005
                                                     ========          ========          ========          ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements






                                        4
<PAGE>   5

                       Fatbrain.com, INC. and Subsidiary
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                      Three months ended July 31,    Six months ended July 31,
                                                                      --------------------------     -------------------------
                                                                          1999           2000           1999           2000
                                                                        --------       --------       --------       --------
<S>                                                                   <C>              <C>            <C>            <C>
Cash flows from operating activities:
   Net loss                                                             $ (5,928)      $ (9,685)      $(11,138)      $(22,722)
   Adjustments to reconcile net loss to net cash used in operating
     activities:
       Depreciation and amortization                                         281            907            516          1,592
       Options and warrants granted to consultants and creditor               --             27             --            (49)
       Amortization of premium on investments                                102             24            193             11
   Changes in assets and liabilities:
       Accounts receivable                                                  (384)        (3,053)          (484)        (4,080)
       Receivable from affiliate                                              --         (1,405)            --         (1,405)
       Inventories                                                          (379)           630         (2,667)          (217)
       Prepaid expenses and other assets                                     284          1,363           (478)           (91)
       Accounts payable                                                      251         (1,756)         2,560          1,655
       Accrued liabilities                                                  (252)            (5)           172            576
       Payable to affiliate                                                   --            300             --            300
       Deferred revenue                                                       --            (40)            --            432
                                                                        --------       --------       --------       --------
       Net cash used in operations                                        (6,025)       (12,693)       (11,326)       (23,998)


Cash flows from investing activities:
       Purchase of property and equipment                                 (2,534)        (1,299)        (3,993)        (3,665)
       Sale of investments                                                 4,504          2,513          8,793          6,763
                                                                        --------       --------       --------       --------
       Net cash provided by investing activities                           1,970          1,214          4,800          3,098

Cash flows from financing activities:
       Borrowings (repayment) of line of credit                               --           (659)            --          1,421
       Repayment of capital lease obligation                                  (4)            (6)            (8)           (12)
       Net proceeds from exercise of stock options and warrants               31             66             87            128
       Proceeds from employee stock plan purchases                           227            285            227            285
       Proceeds from issuance of subsidiary preferred stock                   --          8,600             --          8,600
                                                                        --------       --------       --------       --------
       Net cash provided by financing activities                            254           8,286            306         10,422
                                                                        --------       --------       --------       --------

Net decrease in cash and equivalents:                                     (3,801)        (3,193)        (6,220)       (10,478)
       Cash and equivalents at beginning of period                         6,922          8,082          9,341         15,367
                                                                        --------       --------       --------       --------
       Cash and equivalents at end of period                            $  3,121       $  4,889       $  3,121       $  4,889
                                                                        ========       ========       ========       ========

Non-cash investing activity:
       Unrealized gain (loss) on investments                            $    (13)      $     22       $    (17)      $     25
                                                                        ========       ========       ========       ========
       Increase in investment in affiliate                              $     --       $  5,971       $     --       $  5,971
                                                                        ========       ========       ========       ========
Supplemental disclosure of cash flow information:
       Cash paid for interest                                           $      2       $     75       $      3       $     75
                                                                        ========       ========       ========       ========


     See accompanying notes to condensed consolidated financial statements.
</TABLE>




                                        5
<PAGE>   6

                       Fatbrain.com, INC. and Subsidiary

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.      BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

        Description of Business and Basis of Presentation

        Fatbrain.com, Inc. and subsidiary (the "Company") was incorporated in
California in November 1994 and reincorporated in Delaware in May 1998. The
Company is an online provider of professional books, technology based training
solutions, corporate documentation, and services that help organizations
streamline the management and distribution of professional information. In
October 1999, the Company introduced eMatter, a secure digital publishing
technology that allows authors and publishers to publish and sell works online.
In March 2000, the Company launched MightyWords, a subsidiary created to take
advantage of the mass-market opportunities presented by the eMatter digital
publishing initiative. On June 5, 2000, the Company completed a round of equity
funding for MightyWords, which is now operated as a separate company. Business
is transacted through the Company's Web site or through its two physical retail
locations.

        Unaudited Interim Financial Information

        The condensed consolidated financial statements of Fatbrain.com, Inc.
and subsidiary 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, 1999 and July 31,
2000. These financial statements should be read in conjunction with the
Company's audited financial statements as of January 31, 2000 and for the year
then ended and notes thereto included in the Company's April 25, 2000 filing on
Form 10-KSB. The results of operations for the three and six months ended July
31, 2000 are not necessarily indicative of the results to be expected for any
subsequent quarter or for the year ending January 31, 2001.

        In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which provides the SEC staff's views on selected revenue
recognition issues. The guidance in SAB 101 must be adopted during the fourth
quarter of fiscal 2001 and the effects, if any, are required to be recorded
through a retroactive, cumulative-effect adjustment as of the beginning of the
fiscal year, with a restatement of all prior interim quarters in the year. Our
management has completed its evaluation of the effects that SAB 101 and does not
believe that it will have a material effect, if any, on the Company's income
statement presentation, operating results or financial position.



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, 1999 has been reclassified from the prior year's
presentation to conform to the presentation for the three and six months ended
July 31, 2000.

        Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated by the
Company's chief operating decision-maker. By this definition, the Company has
three operating segments: Internet commerce, retail stores, and eMatter. These
segments are differentiated based upon the method used to distribute product.
For the Internet commerce segment, products are ordered via the Company's Web
site and mailed directly to the customer through the Company's distribution
system. The retail stores maintain inventory within the store in a traditional
retail environment. eMatter is downloaded via the Company's Web site. The
Internet commerce and retail store segments had similar product offerings in the
three and six months ended July 31, 1999 and July 31, 2000. Unallocated revenues
are generated primarily from trade shows, book fairs and the sale of advertising
space.




                                        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,
                                          1999              2000              1999              2000
                                        --------          --------          --------          --------
                                             (in thousands)                        (in thousands)
<S>                                     <C>               <C>               <C>               <C>
Revenues(1):
  Internet commerce                     $  5,625          $ 13,551          $  9,831          $ 25,664
  Retail stores                            1,576             1,749             3,195             3,608
  eMatter                                     --                25                --                88
  Unallocated                                161                19               479                25
                                        --------          --------          --------          --------
     Consolidated net revenues             7,362            15,344            13,505            29,385

Gross profit(1):
  Internet commerce                        1,096             3,114             1,659             5,371
  Retail stores                              544               614             1,113             1,258
  eMatter                                     --                13                --                44
  Unallocated                                160                 3               457                 5
                                        --------          --------          --------          --------
      Consolidated margin                  1,800             3,744             3,229             6,678

Contribution(2):
  Internet commerce                         (438)              778            (1,082)              229
  Retail stores                              132               221               299               486
  eMatter                                     --            (1,243)               --            (5,786)
  Unallocated                                157                (1)              433                 0
                                        --------          --------          --------          --------
      Consolidated contribution         $   (149)         $   (245)         $   (350)         $ (5,071)
                                        ========          ========          ========          ========
</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               $   (149)         $   (245)         $   (350)         $ (5,071)
Interest income, net                         177               (35)              506               165
Indirect expenses                         (5,956)           (9,405)          (11,294)          (17,816)
                                        --------          --------          --------          --------
Net loss                                $ (5,928)         $ (9,685)         $(11,138)         $(22,722)
                                        ========          ========          ========          ========
</TABLE>




                                       7
<PAGE>   8

        Geographic information. International sales, measured as shipments to
addresses outside the United States were 11% and 12%, respectively, of total
revenues for the three and six month periods ended July 31, 1999 and 15% and
13%, respectively, of total revenues for the three and six month periods ended
July 31, 2000. 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, 1999
and July 31, 2000.

3.      RECENT DEVELOPMENTS

        On June 5, 2000, the Company's subsidiary, MightyWords(TM), closed a $36
million financing in venture capital investments. MightyWords is now operated as
an independent, privately held company. The investments include $20 million from
Barnes & Noble.com, $10 million from Vulcan Ventures Inc. and an additional $6
million from other investors, including Millennium Technology Ventures, Highland
Capital Partners and APV Technology Partners. The Company will retain an
approximately 24 percent ownership in MightyWords, while Barnes & Noble.com will
own an approximately 30 percent ownership in MightyWords.

        As part of the arrangement, the Company received approximately $10.1
million from MightyWords as reimbursement for expenses incurred and additional
cash spent on behalf of the subsidiary prior to the financing. The Company
recorded the reimbursement as additional paid in capital in accordance with
Staff Accounting Bulletin No. 51. The Company signed an operating agreement with
MightyWords on June 5, 2000, whereas MightyWords is responsible for monthly
reimbursements to the Company for all cash related expenses, and the Company is
responsible to MightyWords' vendors for payment of all of their expenses. The
operating agreement ends on January 31, 2001.

        In an unrelated matter, on July 12, 2000, the Company filed a
registration statement (File No. 333-41262) on Form S-3 with the Securities and
Exchange Commission (the "Commission") relating to the public offering, pursuant
to Rule 415 under the Securities Act of 1933, as amended, of up to an aggregate
of $20,000,000 in securities of the Company (the "Registration Statement"). On
August 7, 2000, the Commission declared the Registration Statement effective.
(The Registration Statement and definitive prospectus contained therein are
collectively referred to as the "Prospectus.")

        On August 22, 2000, the Company filed a supplement to the Prospectus,
dated August 22, 2000, relating to the issuance and sale of up to 582,860 shares
of the Company's common stock and the sale of a warrant to purchase up to
116,572 shares of the Company's common stock (the "Common Stock Supplement"),
with the Commission.


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

        The following discussion and analysis should be read in conjunction with
the Company's 2000 Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission. This document contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
the results discussed in such forward-looking statements. Factors that might
cause such differences include, but are not limited to, fluctuations in customer
demand, our ability to manage our growth, risks associated with competition, and
risks identified in our most recent Securities and Exchange Commission filings,
including, but not limited to, those discussed in this Form 10-QSB under the
heading ""Risk Factors That May Affect Future Results"

OVERVIEW

        Fatbrain.com is a leading Web-based information management service
provider that helps organizations easily and cost-effectively manage and
distribute publishable information in digital or hardcopy form to employees,
customers or partners.




                                       8
<PAGE>   9

        Similar to an online commerce experience, our Information Exchange
service offering provides a comprehensive, Web-based method to catalog, present
and distribute published materials. Users can find and procure what they need,
when they need it, whether it's a book or training document, a marketing
brochure or technical documentation. Taking the form of an online bookstore or
information resource center, the solution allows organizations to give employees
and/or external constituents easy, 24x7 access to published materials. These
items may be either the company's own content or that published by others (e.g.,
professional and technical books, third-party training materials or product
documentation). We give our corporate clients, as well as customers who go
directly to the www.fatbrain.com commerce site, access to more than 1,000,000
professional and technical titles. In addition, we operate two physical retail
stores that complement our online books and training business by generating
increased online traffic and creating cross-promotional opportunities.

        We were incorporated in November 1994 as Computer Literacy Corporation
and quickly developed a reputation for delivering an authoritative selection of
books, training materials and documentation for experts in technology,
engineering, business and finance, the sciences, and mathematics through our
online store. In mid-1998, we initiated our focus on providing larger
organizations Web-based information management solutions by offering customized,
co-branded bookstores and resource centers. These solutions include not only the
cataloguing of available materials and the online user experience, but also
warehousing, fulfillment, optional print services, secure digital distribution
and reporting services.

        Known as Fatbrain.com since March 1999, we currently serve nearly 350 of
the Fortune 1000 companies and similarly sized organizations with online custom
resource centers or bookstores. Many of these organizations have more than one
Fatbrain.com co-branded site, serving multiple internal or external
constituencies. Individual co-branded Fatbrain.com sites total more than 500,
and it's estimated that approximately 3.5 million customer employees have access
to the sites. Many millions more partners or customers of some of these
sponsoring companies can obtain published materials through the sites. The bulk
of our revenue comes from online sales through these corporate-sponsored sites
as well as sales of professional and technical books and training materials
directly from the www.fatbrain.com 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, 1999 and July 31, 2000, we purchased approximately 35% and 38%,
respectively, of our books from Ingram Book Company ("Ingram"), an indirect
reseller. In the six-month periods ended July 31, 1999 and July 31, 2000, we
purchased approximately 37% and 36%, 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-month
periods ended July 31, 1999 and July 31, 2000, we purchased approximately 17%
and 18%, respectively, of our books from Pearson Education Division. In the
six-month periods ended July 31, 1999 and July 31, 2000, we purchased
approximately 18% and 19%, 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, 2000 we had an
accumulated deficit of $66.8 million. We believe our success depends in large
part on our ability to capitalize on the need of larger organizations to
streamline the management and distribution of publishable materials, whether
their own or others'. We believe the greatest opportunity for Fatbrain.com is in
Web-based management and distribution of a corporation's own content and
providing value-added services such as usage reporting and secure digital
distribution. To that end, we intend to invest in our direct sales and strategic
alliance efforts as well as the technical and operational infrastructure
required to successfully support larger corporate clients with enterprise-wide
information management needs. 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 expenses as a percentage of total




                                       9
<PAGE>   10

revenues, are not necessarily meaningful and should not be relied upon as an
indication of future performance. See "Risk Factors - Other Factors Affecting
Operating Results, Liquidity and Capital Resources."

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>
                                         Three months ended July 31,     Six months ended July 31,
                                         ---------------------------     -------------------------
                                            1999            2000             1999            2000
                                           -----           -----            -----           -----
<S>                                      <C>               <C>           <C>               <C>
Revenues:
      Online                                78.6%           88.5%           76.1%           87.6%
      Retail and other                      21.4            11.5            23.9            12.4
                                           -----           -----           -----           -----
         Total revenues                    100.0           100.0           100.0           100.0
Cost of revenues(1):
      Online                                78.3            77.0            79.5            79.0
      Retail and other                      65.5            65.0            65.2            65.2
                                           -----           -----           -----           -----
         Total cost of revenues             75.6            75.6            76.1            77.3
                                           -----           -----           -----           -----
Gross profit                                24.4            24.4            23.9            22.7
Operating expenses:
      Sales and marketing                   71.5            48.2            73.6            60.9
      Development and engineering           17.6            14.1            17.9            15.5
      General and administrative            18.2            22.4            18.6            22.8
                                           -----           -----           -----           -----
         Total operating expenses          107.3            84.7           110.1            99.2
                                           -----           -----           -----           -----
    Loss from operations                   (82.9)          (60.3)          (86.2)          (76.5)
    Other expense                             --            (2.6)             --            (1.4)
    Interest income (expense), net           2.4            (0.2)            3.7             0.6
                                           -----           -----           -----           -----
    Net loss                               (80.5)%         (63.1)%         (82.5)%         (77.3)%
                                           =====           =====           =====           =====
</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, 1999 COMPARED TO THREE MONTHS ENDED JULY 31, 2000

        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 $5.8 million, or 78.6% of total revenues in the three
months ended July 31, 1999, to $13.6 million, or 88.5% of total revenues in the
three months ended July 31, 2000, primarily as a result of significant increases
in our customer base (from 138,725 to 363,128), repeat purchases from our
existing customers, and our expanded product offering such as our Information
Exchange suite.

        International sales represented approximately 14% and 17% of online
revenue for the three months ended July 31, 1999 and the three months ended July
31, 2000, respectively.

        Retail and Other Revenue. Retail and other revenue is comprised
primarily of revenue generated by our physical retail stores and, to a lesser
extent, by trade shows and book fairs. Retail and other revenue increased in
absolute dollars, but decreased as a percentage of total revenue from $1.6
million, or 21.4% of total revenues for the three months ended July 31, 1999, to
$1.8 million, or 11.5% of total revenues in the three months ended July 31,
2000, primarily as a result of an increased focus of our sales and marketing on
the online business. 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.




                                       10
<PAGE>   11

        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 $4.5 million, or
78.3% of online revenue for the three months ended July 31, 1999, to $10.5
million, or 77.0% of online revenue in the three months ended July 31, 2000. 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 increased from $1.0 million, or 65.5% of
retail and other revenue in the three months ended July 31, 1999, to $1.2
million, or 65.0% of retail and other revenue in the three months ended July 31,
2000. The increase in absolute dollars was attributable to increased retail
sales volume.

        Gross Profit. Gross profit as a percentage of total revenues remained
the same at 24.4% in the three months ended July 31, 1999 and 2000. 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 $5.3 million, or 71.5% of total revenues in
the three months ended July 31, 1999, to $7.4 million, or 48.2% of total
revenues in the three months ended July 31, 2000. The increase in absolute
dollars was primarily attributable to the expansion of our online store and its
direct sales force, plus an increase in advertising, branding, public relations
and other promotional expenditures associated with MightyWords (our former
wholly owned subsidiary) prior to the financing. 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 branding,
marketing and telesales campaigns to generate increased online traffic and
acquire customers. Accordingly, we expect sales and marketing expenses to
increase in absolute dollars for the foreseeable future, but continue to
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 $1.3 million, or 17.6% of
total revenues in the three months ended July 31, 1999, to $2.2 million, or
14.1% of total revenues in the three months ended July 31, 2000. The increase in
absolute dollars was primarily attributable to increased staffing and associated
costs related to enhancing the features, content and functionality of our online
store and transaction-processing systems, as well as increased investments in
systems and telecommunications infrastructure. To date, all development and
engineering costs have been expensed as incurred. We believe that continued
investment in systems and infrastructure development is critical to attaining
our strategic objectives.

        General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$1.3, or 18.2% of total revenues in the three months ended July 31, 1999, to
$3.4 million or 22.4% of total revenues in the three months ended July 31, 2000.
This increase was primarily due to increased salaries and related expenses
associated with the hiring of additional personnel and increases in professional
fees, as well as increased rental expenses associated with the expansion in our
current headquarters. 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 continue to decrease as a percentage of total revenues as total
revenues increase.

        Other expense. Other expense of $397,000 for the three months ended
July 31, 2000 represents the Company's 24 percent interest in the net loss of
MightyWords from June 5, 2000 through July 31, 2000.




                                       11
<PAGE>   12

        Interest, Net. Net interest decreased from $177,000 interest income in
the three months ended July 31, 1999, to $35,000 interest expense in the three
months ended July 31, 2000 due to the reduction in cash and investments as well
as interest and finance fees charged on our line of credit.

SIX MONTHS ENDED JULY 31, 1999 COMPARED TO SIX MONTHS ENDED JULY 31, 2000

        Online Revenue. Online revenue increased from $10.3 million, or 76.1% of
total revenues in the six months ended July 31, 1999, to $25.8 million, or 87.6%
of total revenues in the six months ended July 31, 2000, primarily as a result
of significant increases in our customer base (from 137,725 to 363,128), repeat
purchases from our existing customers, and our expanded product offering such as
our Information Exchange suite.

        International sales represented approximately 16% and 15% of online
revenue for the six months ended July 31, 1999 and the six months ended July 31,
2000, respectively.

        Retail and Other Revenue. Retail and other revenue increased in absolute
dollars, but decreased as a percentage of total revenue from $3.2 million, or
23.9% of total revenues for the six months ended July 31, 1999, to $3.6 million,
or 12.4% of total revenues in the six months ended July 31, 2000, primarily as a
result of an increased focus of our sales and marketing on the online business.

        Cost of Online Revenue. Cost of online revenue increased from $8.2
million, or 79.5% of online revenue for the six months ended July 31, 1999, to
$20.3 million, or 79.0% of online revenue in the six months ended July 31, 2000.
The increase in absolute dollars was attributable to increased online sales
volume.

        Cost of Retail and Other Revenue. Cost of retail and other revenue
increased from $2.1 million, or 65.2% of retail and other revenue in the six
months ended July 31, 1999, to $2.4 million, or 65.2% of retail and other
revenue in the six months ended July 31, 2000. The increase in absolute dollars
was attributable to increased retail sales volume.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 23.9% in the six months ended July 31, 1999 to 22.7% in the six months
ended July 31, 2000 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 $9.9 million, or 73.6% of total revenues in the six months ended July 31,
1999, to $17.9 million, or 60.9% of total revenues in the six months ended July
31, 2000. The increase in absolute dollars was primarily attributable to the
expansion of our online store and its direct sales force, plus an increase in
advertising, branding, public relations and other promotional expenditures
associated with MightyWords (our former wholly owned subsidiary) prior to the
financing. 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 $2.4 million, or 17.9% of total revenues in the six
months ended July 31, 1999, to $4.5 million, or 15.5% of total revenues in the
six months ended July 31, 2000. The increase in absolute dollars was primarily
attributable to increased staffing and associated costs related to enhancing the
features, content and functionality of our online store and transaction-
processing systems, as well as increased investments in systems and
telecommunications infrastructure.

        General and Administrative Expenses. General and administrative expenses
increased from $2.5 million, or 18.6% of total revenues in the six months ended
July 31, 1999, to $6.7 million or 22.8% of total revenues in the six months
ended July 31, 2000. This increase was primarily due to increased salaries and
related expenses associated with the hiring of additional personnel and
increases in professional fees, as well as increased rental expenses associated
with expansions in our current headquarters.

        Other expense. Other expense of $397,000 for the six months ended July
31, 2000 represents the Company's 24 percent interest in the net loss of
MightyWords from June 5, 2000 to July 31, 2000.




                                       12
<PAGE>   13

        Interest, Net. Net interest income decreased from $506,000 in the six
months ended July 31, 1999, to $165,000 in the six months ended July 31, 2000
due to the reduction in cash and investments.

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) and private sale of Common Stock and Warrants in November 1999
which totaled approximately $29.9 million (net of issuance costs).

        Net cash used in operating activities was $6.0 million in the three
months ended July 31, 1999 and $12.7 million in the three months ended July 31,
2000. Cash used in operating activities in the three months ended July 31, 1999
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 liabilities, 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. For the three months ended
July 31, 2000, cash used for operating activities primarily resulted from a net
loss of $9.7 million plus increases of $3.1 million and $1.4 million,
respectively, in accounts receivable and receivable from affiliate plus a
decrease in accounts payable of $1.8 million offset by a $1.4 million decrease
in prepaid expenses and other assets and a $630,000 decrease in inventory, as
well as depreciation and amortization. The significant increase in accounts
receivable was primarily due to an increase in sales, as well as our recent
accounting system conversion in April 2000. The system conversion resulted in
delays in collections, which was addressed in July and collections have improved
subsequently.

        Net cash used in operating activities was $11.3 million in the six
months ended July 31, 1999 and $24.0 million in the six months ended July 31,
2000. 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.
Cash used for operating activities for the six months ended July 31, 2000,
primarily resulted from a net loss of $22.7 million plus increases of $4.1
million and $1.4 million, respectively, in accounts receivable and receivable
from affiliate offset by a $1.7 million increase in accounts payable and a
$576,000 increase in accrued liabilities, as well as depreciation and
amortization.

        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 from the sale of
investments, offset by $2.5 million used to purchase property and equipment. Net
cash provided by investing activities was $1.2 million in the three months ended
July 31, 2000 and was due to $2.5 million from the sale of investments, offset
by $1.3 million used to purchase 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 from the sale of investments, offset by $4.0
million used to purchase property and equipment. Net cash provided by investing
activities was $3.1 million in the six months ended July 31, 2000 and was due to
$6.8 million from the sale of investments offset by $3.7 million used to
purchase property and equipment.

        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 $8.3 million in the three months ended July 31, 2000
and was mainly attributable to $8.6 million received from MightyWords at the
time of its financing. Cash provided by financing activities was $306,000 in the
six months ended July 31, 1999 and was due primarily to purchases under our
employee stock purchase plan, as well as stock options exercises. Cash provided
by financing activities was $10.4 million in the six months ended July 31, 2000
and was mainly attributable to $8.6 million received from MightyWords at the
time of its financings, as well as, $1.4 million in proceeds from our line of
credit plus purchases under our employee stock purchase plan, and stock option
exercises. We have a $3.0 million line of credit, which expires on April 26,
2001.




                                       13
<PAGE>   14

        As of July 31, 2000 we had $4.9 million of cash and equivalents. As of
that date, our principal commitments consisted of obligations outstanding under
an agreement with SmartForce (formerly CBT Systems, Ltd.) and operating and
capital leases. Although we have no material long-term commitments for capital
expenditures, we anticipate an increase in our capital expenditures and lease
commitments consistent with anticipated growth in operations, infrastructure and
personnel.

RECENT DEVELOPMENTS

        On June 5, 2000, we closed a $36 million financing in venture capital
investments in our subsidiary, MightyWords(TM). MightyWords is now operated as
an independent, privately held company. The investments include $20 million from
Barnes & Noble.com, $10 million from Vulcan Ventures Inc. and an additional $6
million from other investors, including Millennium Technology Ventures, Highland
Capital Partners and APV Technology Partners. We will retain an approximately 24
percent ownership in MightyWords, while Barnes & Noble.com will own an
approximately 30 percent of the company.

        As part of the arrangement, the Company received approximately $10.1
million from MightyWords as reimbursement for expenses incurred and additional
cash spent on behalf of the subsidiary prior to the financing. The Company
recorded the reimbursement as additional paid in capital in accordance with
Staff Accounting Bulletin No. 51. The Company signed an operating agreement
with MightyWords on June 5, 2000, whereas MightyWords is responsible for
monthly reimbursements to the Company for all cash related expenses, and the
Company is responsible to MightyWords' vendors for payment of all of their
expenses. The operating agreement ends on January 31, 2001.

        In an unrelated matter, on July 12, 2000, the Company filed a
registration statement (File No. 333-41262) on Form S-3 with the Securities and
Exchange Commission (the "Commission") relating to the public offering, pursuant
to Rule 415 under the Securities Act of 1933, as amended, of up to an aggregate
of $20,000,000 in securities of the Company (the "Registration Statement"). On
August 7, 2000, the Commission declared the Registration Statement effective.
(The Registration Statement and definitive prospectus contained therein are
collectively referred to as the "Prospectus.")

        On August 22, 2000, the Company filed a supplement to the Prospectus,
dated August 22, 2000, relating to the issuance and sale of up to 582,860 shares
of the Company's common stock and the sale of a warrant to purchase up to
116,572 shares of the Company's common stock (the "Common Stock Supplement"),
with the Commission.

OTHER FACTORS AFFECTING OPERATING RESULTS, LIQUIDITY AND CAPITAL RESOURCES

        We were incorporated in November 1994 to develop an online retail
strategy, and we began selling information resources, initially consisting of
technical books, through our online store on the World Wide Web, or the Web, in
February 1996. We expanded our product offerings to include training materials
in January 1998, corporate documentation in May 1998 and professional resources
for the engineering, science, mathematics and financial services industries in
March 1999. We introduced eMatter, a secure digital publishing technology that
allows authors and publishers to publish and sell works online, in October 1999.
More recently, we have introduced our Information Exchange product suite, as
well as information resources for the medical and biotechnology industries. In
March 2000, the Company launched MightyWords, a subsidiary created to take
advantage of the mass market opportunities presented by the eMatter digital
publishing initiative and on June 5, 2000, the Company completed a round of
equity funding for MightyWords, which is now operated as a separate company. As
a result, we have a very limited operating history from which to evaluate our
business and prospects.

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

-       An evolving and unpredictable business model;
-       Management of an expanding business;
-       Fluctuations in sales and seasonality;
-       Entry into new business areas;
-       Competition;
-       Need for additional personnel and dependence on key personnel;
-       Limitations on our ability to establish and expand our brand; and
-       Capacity constraints and system failures.

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

-       Implement and successfully execute our business and marketing strategy;
-       Maintain and increase our customer base;
-       Continue to develop and upgrade our technology and
        transaction-processing systems;
-       Improve our online store;
-       Provide superior customer service and order fulfillment;
-       Respond to competitive developments; and
-       Attract, retain and motivate qualified personnel.




                                       14
<PAGE>   15

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

We Have Incurred Losses and We Expect Future Losses

        Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future. We
may not achieve profitability and if achieved, profitability may not be
sustained. As of July 31, 2000, we had an accumulated deficit of $66.8 million.
We believe that our success will depend in large part on our ability to:

-       Integrate our Information Exchange suite of products into our business;
-       Expand corporate relationships and establish and utilize supplier
        relationships;
-       Capitalize on the market for information resources;
-       Build brand awareness;
-       Maintain our technology focus and expertise;
-       Expand our expertise in the engineering, science, mathematics, financial
        services, medical and biotechnology industries; and
-       Enhance our customers' online shopping experience.

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

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

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

-       Our ability to sustain or improve gross margin levels;
-       The introduction of new product lines, including eMatter and our
        Information Exchange suite;
-       Our ability to retain existing customers, attract new customers and
        continuously improve customer satisfaction;
-       Our ability to manage inventory and fulfillment operations;
-       Price competition or higher wholesale prices in the industry;
-       The announcement or introduction of new online stores, services and
        products by us or our competitors;
-       Our ability to establish and expand brand awareness;
-       The level of usage of and commerce on the Internet and online services
        generally;
-       Our ability to upgrade and develop our systems and infrastructure in a
        timely and effective manner;
-       Technical difficulties, system downtime or Internet brownouts;
-       The amount and timing of operating costs and capital expenditures
        relating to expansion of our business, operations and infrastructure;
        and
-       Governmental regulation.

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




                                       15
<PAGE>   16

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

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

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

        For the three and six months ended July 31, 2000 approximately 89% of
our online revenues were derived from sales of books. We recently expanded our
product offerings to include our Information Exchange suite of products and
resource materials for professionals in the medical and biotechnology
industries, and future revenues from these new product offerings are difficult
to forecast. The lack of market acceptance for these efforts or our inability to
generate satisfactory revenues from such expanded services or products to offset
related increased costs could seriously harm our business, financial condition,
operating results and cash flows.

        In addition, we may choose to further expand our operations by promoting
new or complementary products and expanding the breadth and depth of products
and services offered. We may decide to utilize third-party relationships to
extend our brand or establish additional co-branded online stores. We may not be
able to expand our product offerings and related operations in a cost-effective
or timely manner. These efforts may fail to increase online traffic and
purchases from our online or physical retail stores or to increase our overall
market acceptance. Furthermore, any new business or online store launched by us
that is not favorably received by individuals, corporate customers or their
employees or constituents could damage our reputation or the Fatbrain.com brand.
Expansion of our operations in this manner would also require significant
additional expenses and development, operations and editorial resources. These
efforts may strain our management, financial and operational resources.

        We recently introduced eMatter, a secure digital publishing technology
which allows authors and publishers to publish and sell works online. Future
revenues from this new product are difficult to forecast. Further, the
development and expansion of eMatter requires additional expenses and the
diversion of resources. The lack of market acceptance for eMatter, or our
inability to generate satisfactory revenues from eMatter to offset related
increased costs could seriously harm our business, financial condition,
operating results and cash flows.

Our Markets Are Highly Competitive

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

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

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

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

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

-       Brand recognition;





                                       16
<PAGE>   17

-       Selection, personalized services and overall customer service;
-       Convenience and accessibility;
-       Price;
-       Quality of search tools;
-       Quality of editorial and other site content; and
-       Reliability and speed of fulfillment.

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

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

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

We Must Manage Our Growth and Expansion

        We have rapidly expanded our operations and we anticipate that further
expansion may be required to address potential growth in our customer base and
market opportunities. Specifically, we expect to 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 management will be required
to maintain and expand our relationships with:

-       Various suppliers and freight companies;
-       Other Web sites and other Web service providers;
-       Internet and other online service providers; and
-       Other third parties necessary to our business.

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

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

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





                                       17
<PAGE>   18

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

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

-       Our online store;
-       Our search engine;
-       Our secure digital publishing channel for eMatter; and
-       Substantially all aspects of our transaction processing systems,
        including order management, cash and credit card processing, purchasing,
        inventory management and shipping.

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

-       Unanticipated system disruptions;
-       Slower response times;
-       Degradation in levels of customer service;
-       Impaired quality and speed of order fulfillment; and
-       Delays in reporting accurate financial information.

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

We Must Attract Additional Personnel

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

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

        We do not currently collect sales or other similar taxes for shipments
of goods into states other than California and Kentucky. However, one or more
states or foreign countries may seek to impose sales tax collection obligations
on out-of-state or foreign companies, which engage in electronic commerce. In
addition, any new operations we establish in states outside California and
Kentucky could subject shipments into these states to state





                                       18
<PAGE>   19

sales taxes. A successful assertion by one or more states or any foreign country
that we should collect sales or other similar taxes on the sale of merchandise
could seriously harm our business, financial condition, operating results and
cash flows.

System Failures Could Harm Our Business

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

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

-       Fire;
-       Flood;
-       Power loss or telecommunications failure;
-       Break-ins; and
-       Earthquake and similar events.

We Rely on Selected Suppliers

        For the three months and six months ended July 31, 2000, we purchased
approximately 38% and 36% of our products from Ingram Book Company and 18% and
19% of our products from Pearson Education Division. We rely to a large extent
on rapid fulfillment from Ingram, Pearson and other vendors. We generally have
no commitments or arrangements with any of our vendors that guarantee the
availability of merchandise, the continuation of particular payment terms or the
extension of credit limits. Our current vendors may not continue to sell
merchandise to us on current terms. In addition, we may be unable to establish
new or extend current vendor relationships to ensure acquisition of merchandise
in a timely and efficient manner and on acceptable commercial terms. If we were
unable to develop and maintain relationships with vendors that would allow us to
obtain sufficient quantities of merchandise on acceptable commercial terms, our
business, financial condition, operating results and cash flows could be
seriously harmed.

We Depend on Key Personnel

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

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

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

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

Risks Associated with International Sales

        For the three and six months ended July 31, 2000, international sales
accounted for approximately 17% and 15% of our online revenue. We expect that
our percentage of online revenue from international markets will continue




                                       19
<PAGE>   20

to represent a significant portion of our total revenue. Our international
business activities are subject to a variety of potential risks, including the
adoption of laws, political and economic conditions and actions by third parties
that would restrict or eliminate our ability to do business in some
jurisdictions. Although we currently transact business in U.S. dollars, to the
extent that we determine to transact business in foreign currencies, we will
become subject to the risks attendant to transacting in foreign currencies,
including potential adverse effects of exchange rate fluctuations.

Protection of Our Intellectual Property Is Limited

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

We May Be Found to Infringe Proprietary Rights of Others

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

RISKS RELATED TO OUR INDUSTRY

We Depend on the Continued Growth of Electronic Commerce

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

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




                                       20
<PAGE>   21

We Must Respond to Rapid Technological Change and Evolving Industry Standards

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

-       Rapid technological change;
-       Changes in user and customer requirements and preferences;
-       Frequent new product and service introductions embodying new
        technologies; and
-       The emergence of new industry standards and practices.

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

-       License leading technologies useful in our business;
-       Enhance our existing services;
-       Develop new services and technology that address the increasingly
        sophisticated and varied needs of our current and prospective customers;
        and
-       Respond to technological advances and emerging industry standards and
        practices on a cost-effective and timely basis.

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

Security Breaches of Third-Party Technology Could Affect Our Business

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

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

We May Face Increased Governmental Regulation and Legal Uncertainties

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

-       User privacy;
-       Pricing;




                                       21
<PAGE>   22

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

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

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

Possible Volatility of Our Stock Price

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

-       Actual or anticipated variations in quarterly operating results;
-       Announcements of technological innovations or new products or services
        by us or our competitors;
-       Changes in financial estimates by securities analysts;
-       Conditions or trends in the Internet and electronic commerce industries;
-       Announcements of significant acquisitions, strategic partnerships, joint
        ventures or capital commitments; and
-       Additions or departures of key personnel.

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




                                       22
<PAGE>   23

We Have Implemented Anti-Takeover Provisions

        Our Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of common stock
will be subject to, and may be seriously harmed by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a third party
from acquiring us without further action by our stockholders. We have no present
plans to issue shares of preferred stock. Further, selected provisions of our
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.

               Not applicable.

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:

                   27.01 - Financial Data Schedule

               (b) Reports on Form 8-K

                   The Company filed a report with the SEC on Form 8-K on June
                   9, 2000 to announce the financing of their subsidiary.
</TABLE>





                                       24
<PAGE>   25

                                   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 14, 2000                          FATBRAIN.COM, INC.
                                            (Registrant)



                                            By: /s/ Janet Hall
                                               ---------------------------------
                                                Janet Hall
                                                Vice President of Finance
                                                and interim Chief Financial
                                                Officer (Duly Authorized
                                                Officer and Principal)




                                       25
<PAGE>   26
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit           Description
-------           -----------
<S>               <C>
27.01             Financial Data Schedule

</TABLE>