<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 APRIL 30, 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 April 30, 2000 there were 13,008,018 shares of the Registrant's
   common stock outstanding.
================================================================================



<PAGE>   2

                               FATBRAIN.COM, INC.

                                   FORM 10-QSB

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

Item 1.    Condensed Consolidated Financial Statements

           Condensed Consolidated Balance Sheets at January 31, 2000 and April
           30, 2000........................................................................   3

           Condensed Consolidated Statements of Operations and Comprehensive
           Loss for the three months ended April 30, 1999 and April 30, 2000 ..............   4

           Condensed Consolidated Statements of Cash Flows for the three
           months ended April 30, 1999 and April 30, 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

Item 1.    Legal Proceedings...............................................................  22

Item 2.    Changes in Securities and Use of Proceeds.......................................  22

Item 3.    Defaults upon Senior Securities.................................................  22

Item 4.    Submission of Matters to a Vote of Security Holders.............................  22

Item 5.    Other Information...............................................................  22

Item 6.    Exhibits and Reports on Form 8-K................................................  22

SIGNATURES.................................................................................  23
</TABLE>



                                       2
<PAGE>   3

PART I.        FINANCIAL INFORMATION
ITEM 1.        CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

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

<TABLE>
<CAPTION>
                                                                    January 31,     April 30,
                                                                       2000           2000
                                                                       ----           ----
<S>                                                                 <C>             <C>
ASSETS
Current assets:
    Cash and cash equivalents                                        $ 15,367       $  8,082
    Short-term investments                                              5,475          2,515
    Accounts receivable                                                 3,027          4,054
    Inventories                                                         5,798          6,645
    Prepaid expenses and other                                          3,471          4,771
                                                                      -------        -------
      Total current assets                                             33,138         26,067

Property and equipment, net                                            11,224         12,988
Investments                                                             1,274             --
Goodwill, net                                                           2,545          2,493
Other assets                                                              284            407
                                                                      -------        -------
      Total assets                                                   $ 48,465       $ 41,955
                                                                     ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                 $  8,350       $ 11,761
    Accrued liabilities                                                 2,964          3,545
    Current portion of capital lease obligations                           22             19
    Current portion of deferred revenue                                    --            162
                                                                      -------        -------
      Total current liabilities                                        11,336         15,487
Borrowings on Line of Credit                                               --          2,080
Capital lease obligations                                                  12              9
Deferred revenue                                                           --            310
                                                                      -------        -------
      Total liabilities                                                11,348         17,886
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 13,008 shares issued and outstanding at
        January 31, 2000 and April 30, 2000, respectively                  13             13
    Additional paid-in capital                                         75,909         75,971
    Warrants                                                            5,261          5,185
    Accumulated loss on investments                                       (25)           (22)
    Accumulated deficit                                               (44,041)       (57,078)
                                                                      -------        -------
      Total stockholders' equity                                       37,117         24,069
                                                                      -------        -------
      Total liabilities and stockholders' equity                     $ 48,465       $ 41,955
                                                                     ========       ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>   4

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

<TABLE>
<CAPTION>
                                                                Quarter ended April 30,
                                                                -----------------------
                                                                  1999            2000
                                                                  ----            ----
<S>                                                             <C>            <C>
Revenues:
      Online                                                    $  4,491       $ 12,176
      Retail and other                                             1,652          1,865
                                                                --------       --------
         Total revenues                                            6,143         14,041
Cost of revenues:
      Online                                                       3,643          9,888
      Retail and other                                             1,071          1,219
                                                                --------       --------
         Total cost of revenues                                    4,714         11,107
                                                                --------       --------
Gross profit                                                       1,429          2,934
Operating expenses:
      Sales and marketing                                          4,670         10,495
      Development and engineering                                  1,120          2,387
      General and administrative                                   1,178          3,289
                                                                --------       --------
         Total operating expenses                                  6,968         16,171
                                                                --------       --------
Loss from operations                                              (5,539)       (13,237)
Interest, net                                                        329            200
                                                                --------       --------
Net loss                                                          (5,210)       (13,037)
Other comprehensive income (loss) - unrealized gain (loss)
   on investments                                                     (4)             3
                                                                --------       --------
Comprehensive loss                                              $ (5,214)      $(13,034)
                                                                ========       ========
Basic and diluted net loss per share                            $  (0.46)      $  (1.00)
                                                                ========       ========
Shares used in calculating basic and diluted
    net loss per share                                            11,225         12,983
                                                                ========       ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       4
<PAGE>   5

                               FATBRAIN.COM, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                    Quarter ended April 30,
                                                                                    -----------------------
                                                                                      1999           2000
                                                                                      ----           ----
<S>                                                                                 <C>            <C>
Cash from operating activities:
   Net loss                                                                         $ (5,210)      $(13,037)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization                                                      235            685
      Options and warrants granted to consultants and creditor                            --            (76)
      Amortization of premium on investments                                              91            (13)
   Changes in current assets and liabilities:
      Accounts receivable                                                               (100)        (1,027)
      Inventories                                                                     (2,288)          (847)
      Prepaid expenses and other assets                                                 (762)        (1,454)
      Accounts payable                                                                 2,309          3,411
      Accrued expenses                                                                   424            581
      Deferred revenue                                                                    --            472
                                                                                    --------       --------
      Net cash used in operations                                                     (5,301)       (11,305)
                                                                                    --------       --------

Cash from investing activities:
      Purchase of property and equipment                                              (1,459)        (2,366)
      Sale of investments                                                              4,289          4,250
                                                                                    --------       --------
      Net cash provided by investing activities                                        2,830          1,884
                                                                                    --------       --------

Cash from financing activities:
      Repayment of capital lease obligation                                               (4)            (6)
      Borrowings on line of credit                                                        --          2,080
      Exercise of stock options                                                           56             62
                                                                                    --------       --------
      Net cash provided by financing activities                                           52          2,136
                                                                                    --------       --------

Net decrease in cash and equivalents:                                                 (2,419)        (7,285)
      Cash and equivalents at beginning of period                                      9,341         15,367
                                                                                    --------       --------
      Cash and equivalents at end of period                                         $  6,922       $  8,082
                                                                                    ========       ========

Non-cash investing activity:
      Unrealized gain (loss) on investments                                               (4)             3
</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>   6

                               FATBRAIN.COM, INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

    Description of Business and Basis of Presentation

    Fatbrain.com, Inc., formerly Computer Literacy, Inc., (the "Company") was
incorporated in California in November 1994 and reincorporated in Delaware in
May 1998. The Company is an online 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. 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.
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 months ended April 30, 1999 and April 30, 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 months ended April 30, 2000 are not necessarily indicative of the
results to be expected for any subsequent quarter or for the year ending January
31, 2001.


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 months
ended April 30, 1999 has been reclassified from the prior quarter's presentation
to conform to the presentation for the three months ended April 30, 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, Fatbrain.com has three
operating segments: Internet commerce, retail stores, and eMatter. These
segments are differentiated based upon the method used to distribute product.
For the Internet commerce segment, products are ordered via the Company's Web
site and mailed directly to the customer through the Company's distribution
system. The retail stores maintain inventory within the store in a traditional
retail environment. eMatter is downloaded via the Company's Web site. The
Internet commerce and retail store segments had similar product offerings in the
three months ended April 30, 1999 and in the three months ended April 30, 2000.
Unallocated revenues are generated primarily from trade shows, book fairs and
the sale of advertising space.



                                       6
<PAGE>   7

SEGMENT CONTRIBUTION
<TABLE>
<CAPTION>
                                     QUARTER ENDED APRIL 30,
                                       1999           2000
                                     --------       --------
                                          (in thousands)
<S>                                  <C>            <C>
Revenues(1):
  Internet commerce                  $  4,206       $ 12,113
  Retail stores                         1,619          1,859
  eMatter                                  --             63
  Unallocated                             318              6
                                     --------       --------
     Consolidated net revenues          6,143         14,041

Gross profit(1):
  Internet commerce                       563          2,257
  Retail stores                           569            644
  eMatter                                  --             31
  Unallocated                             297              2
                                     --------       --------
      Consolidated margin               1,429          2,934

Contribution(2):
  Internet commerce                      (644)          (549)
  Retail stores                           167            265
  eMatter                                  --         (4,543)
  Unallocated                             276              1
                                     --------       --------
      Consolidated contribution      $   (201)      $ (4,826)
                                     ========       ========
</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>
Consolidated Contribution            $   (201)      $ (4,826)
Interest income, net                      329            200
Indirect expenses                      (5,338)        (8,411)
                                     --------       --------
Net loss                             $ (5,210)      $(13,037)
                                     ========       ========
</TABLE>

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

     Geographic information. International sales, measured as shipments to
addresses outside the United States were 12% of total revenues for the three
months ended April 30, 1999 and 10% of total revenues for the three months ended
April 30, 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 months ended April 30, 1999 and
April 30, 2000.



                                       7
<PAGE>   8

3. RECENT DEVELOPMENTS

        On June 6, 2000, the Company announced that it closed $36 million in
venture capital investments in its 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. The Company
will retain an approximately 23 percent ownership in MightyWords, while Barnes &
Noble.com will own an approximately 30 percent of the company.

        As part of the arrangement, the Company will receive approximately $8.5
million from MightyWords as reimbursement for expenses incurred on behalf of the
subsidiary over the past five months.


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 "Other Factors Affecting Operating Results, Liquidity and Capital
Resources."

Overview

        Fatbrain.com, Inc. is the leader in managing, marketing and distributing
information for businesses. Fatbrain.com's new Information Exchange product
suite combines Fatbrain.com's e-commerce expertise, secure digital publishing
technology known as eMatter, comprehensive professional bookstore, established
print-on-demand infrastructure, and world-class distribution and fulfillment
services to deliver a powerful and complete Web-based solution for outsourcing
mission-critical internal and external corporate documentation. With over
1,000,000 information resource titles from more than 25,000 publishers, we offer
our customers online access to a broad and comprehensive selection of technical
and professional books, technology based training solutions, corporate
documentation and other information resources. In addition to our extensive
product offering, our online store features authoritative and compelling
content, competitive pricing, an easy-to-use navigational interface and a
variety of value-added services. We also operate two physical retail stores that
complement our online business by generating increased online traffic and
creating cross-promotional opportunities.

        In March 2000, we launched MightyWords, a subsidiary created to take
advantage of the mass market opportunities presented by the eMatter digital
publishing initiative. We will continue to leverage the eMatter technology to
deliver document-publishing services for our corporate customers as part of the
Information Exchange product suite. In June 2000, we completed a round of equity
funding for MightyWords, which will now be operated as a separate company.

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

        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,



                                       8
<PAGE>   9

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 months ended
April 30, 1999 and April 30, 2000, we purchased approximately 40% and 34%,
respectively, of our books from Ingram Book Company, or Ingram, an indirect
reseller. Although the primary advantage associated with purchasing from Ingram
is just in time inventory management, we believe we will make a larger number of
our purchases directly from publishers as our sales volume increases, thereby
enabling us to take advantage of favorable volume discounts. For the three
months ended April 30, 1999 and April 30, 2000 we purchased approximately 20%,
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 April 30, 2000 we had an
accumulated deficit of $57.1 million. We believe that our success will depend in
large part on our ability to sell our Information Exchange suite of products to
our new and potential customer base, to enhance our customers' online shopping
experience, offer and market new products, expand corporate relationships, build
brand awareness, encourage customer loyalty, capitalize on the market for online
information management, establish and leverage supplier relationships, maintain
our technical focus and expand our expertise in the engineering, science,
mathematics, financial services, medical and biotechnology industries.
Accordingly, we intend to invest heavily in our direct sales and telesales
organizations, infrastructure development, and marketing and promotion. There
can be no assurance that such expenditures will result in increased revenues or
customer growth. Additionally, while in recent periods we have experienced
significant growth in revenues, our customer base and repeat customer revenue,
these growth rates are not sustainable, will decrease in the future and are not
indicative of actual growth rates that we may experience in future periods In
view of the rapidly evolving nature of our business and our limited operating
history, we believe that period-to-period comparisons of our operating results,
including our operating expenses as a percentage of total revenues, are not
necessarily meaningful and should not be relied upon as an indication of future
performance. See "Other Factors Affecting Operating Results, Liquidity and
Capital Resources."



                                       9
<PAGE>   10

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                      Quarter ended April 30,
                                      -----------------------
                                         1999         2000
                                         ----         ----
<S>                                      <C>          <C>
Revenues:
     Online                              73.1%        86.7%
     Retail and other                    26.9         13.3
                                        -----        -----
        Total revenues                  100.0        100.0
Cost of revenues(1):
     Online                              81.1         81.2
     Retail and other                    64.8         65.4
                                        -----        -----
        Total cost of revenues           76.7         79.1
                                        -----        -----
Gross profit                             23.3         20.9
Operating expenses:
     Sales and marketing                 76.1         74.7
     Development and engineering         18.2         17.0
     General and administrative          19.2         23.4
                                        -----        -----
        Total operating expenses        113.5        115.1
                                        -----        -----
   Loss from operations                 (90.2)       (94.2)
   Interest, net                          5.4          1.4
                                        -----        -----
   Net loss                             (84.8)%      (92.8)%
                                        =====        =====
</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 APRIL 30, 1999 COMPARED TO THREE MONTHS ENDED APRIL 30, 2000

        Online Revenue. Online revenue comprises 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 $4.5 million, or 73.1% of total revenues in the three
months ended April 30, 1999, to $12.2 million, or 86.7% of total revenues in the
three months ended April 30, 2000 primarily as a result of significant increases
in our customer base (from approximately 103,000 to 303,000), and repeat
purchases from our existing customers.

        International sales represented approximately 17% and 12% of online
revenue for the three months ended April 30, 1999 and the three months ended
April 30, 2000, respectively.

        Retail and Other Revenue. Retail and other revenue comprises primarily
revenue generated by our physical retail stores and, to a lesser extent, by
trade shows and book fairs. Retail and other revenue increased from $1.7
million, or 26.9% of total revenues for the three months ended April 30, 1999,
to $1.9 million, or 13.3% of total revenues in the three months ended April 30,
2000. The decrease in the percent of sales is primarily 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 the percent
of total revenue from retail and other revenue.

        Cost of Online Revenue. Cost of online revenue comprises primarily the
cost of merchandise sold through our online store and associated inbound and
outbound shipping costs. Cost of online revenue increased from $3.6 million, or
81.1% of online revenue for the three months ended April 30, 1999, to $9.9
million, or 81.2% of online



                                       10
<PAGE>   11

revenue in the three months ended April 30, 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
comprises the cost of merchandise sold through our retail stores and at trade
shows and book fairs and includes associated inbound shipping costs. Cost of
retail and other revenue increased from $1.1 million, or 64.8% of retail and
other revenue in the three months ended April 30, 1999, to $1.2 million, or
65.4% of retail and other revenue in the three months ended April 30, 2000,
primarily as a result of the increase in retail and other sales.

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 23.3% in the three months ended April 30, 1999 to 20.9% in the three months
ended April 30, 2000. The percentage decrease was primarily a result of the
increase in online sales as a percent of total revenues, as well as our online
competitive pricing policy and discounted shipping offerings. We have offered,
and expect to continue to offer in the foreseeable future, discounts on various
product offerings and on outbound shipping to encourage new customers and online
traffic. Such pricing pressure is likely to reduce gross margins in the future,
but may be partially offset by the change in mix of products sold towards higher
margin technology based training materials and corporate documentation.

        Sales and Marketing Expenses. Sales and marketing expenses consist of
advertising, promotional and public relations expenditures, payroll and related
expenses for personnel engaged in corporate sales, marketing and fulfillment, as
well as direct expenses associated with our retail stores. Sales and marketing
expenses increased from $4.7 million, or 76.1% of total revenues in the three
months ended April 30, 1999, to $10.5 million, or 74.7% of total revenues in the
three months ended April 30, 2000. The increase in absolute dollars was
primarily attributable to the March 16, 2000 launch of the MightyWords Web site,
our subsidiary company. Additionally, we continue to expand our online store and
its direct sales force, advertising, branding, public relations and other
promotional expenditures to support the Fatbrain.com, MightyWords, and eMatter
brands. The increase was also due to the increased personnel and related
expenses required to implement our marketing strategy and fulfill customer
demand. We intend to continue to enhance our corporate sales force to generate
increased online traffic and acquire customers and to pursue branding, marketing
and telesales campaigns.

        Development and Engineering Expenses. Development and engineering
expenses primarily consist of costs associated with systems and
telecommunications infrastructure, as well as editorial operations. Development
and engineering expenses increased from $1.1 million, or 18.2% of total revenues
in the three months ended April 30, 1999, to $2.4 million, or 17% of total
revenues in the three months ended April 30, 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 web site and
transaction-processing systems, as well as increased investments in systems and
telecommunications infrastructure. Additionally, we incurred significant costs
associated with the development and introduction of eMatter and the launch of
the MightyWords Web site due to both increased staffing and systems
infrastructure costs. To date, all development and engineering costs have been
expensed as incurred. We believe that continued investment in systems and
infrastructure development is critical to attaining our strategic objectives.

        General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$1.2 million, or 19.2% of total revenues in the three months ended April 30,
1999, to $3.3 million or 23.4% of total revenues in the three months ended April
30, 2000. This increase in absolute dollars was primarily due to increased
salaries and related expenses associated with the hiring of additional personnel
and increases in facilities related costs associated with our move to a new
larger facility in July 1999.

        Interest, Net. Net interest income decreased from $329,000 in the three
months ended April 30, 1999, to $200,000 in the three months ended April 30,
2000 due to less cash available for investment.


LIQUIDITY AND CAPITAL RESOURCES

        Since inception, we have financed our operations through private sales
of Preferred Stock which totaled approximately $19.3 million net of issuance
costs, public sale of Common Stock in November 1998 which totaled



                                       11
<PAGE>   12

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 $5.3 million in the three
months ended April 30, 1999 and $11.3 million in the three months ended April
30, 2000. Cash used in operating activities in the three months ended April 30,
1999 was primarily attributable to a net loss of $5.2 million and increases of
$100,000, $2.3 million and $762,000, respectively, in accounts receivable,
inventories and prepaid expenses and other assets, which was partially offset by
an increase of $2.3 million and $424,000 respectively, in accounts payable and
accrued expenses as well as $326,000 in depreciation and amortization. For the
three months ended April 30, 2000, cash used in operating activities primarily
resulted from a net loss of $13.0 million plus increases of $1.0 million,
$847,000 and $1.5 million, respectively, in accounts receivable, inventories and
prepaid expenses and other assets, partially offset by an increase of $3.4
million, $581,000 and $472,000, respectively in accounts payable, accrued
expenses and deferred revenue, as well as $596,000 in depreciation,
amortization, options and warrants.

        Net cash provided by investing activities was $2.8 million in the three
months ended April 30, 1999, and was attributable to the sale of investments of
$4.3 million, which was partially offset by $1.5 million used to purchase
property and equipment. Net cash provided by investing activities was $1.9
million in the three months ended April 30, 2000 and was attributable to $4.3
million in sales of investments, which partially offset by $2.4 million used to
purchase property and equipment.

        Cash provided by financing activities was $52,000 in the three months
ended April 30, 1999, primarily attributable to the exercise of stock options,
partially offset by the repayment of our capital lease obligations. Cash
provided by financing activities was $2.1 million in the three months ended
April 30, 2000 and was due primarily to $2.1 million in borrowings under our
line of credit, as well as $62,000 in stock option exercises offset by repayment
of our capital lease obligations.

        As of April 30, 2000 we had $8.1 million of cash and cash equivalents
and $2.5 million of investments. As of that date, our principal commitments
consisted of obligations outstanding under a purchase agreement with SmartForce
(formerly CBT Systems, Ltd.) and operating and capital leases. Although we have
no material long-term commitments for capital expenditures, we anticipate a
substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.


RECENT DEVELOPMENTS

        On June 6, 2000, we announced that we closed $36 million 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 23 percent ownership in MightyWords, while Barnes & Noble.com
will own an approximately 30 percent of the company.

        As part of the arrangement, we will receive approximately $8.5 million
from MightyWords as reimbursement for expenses incurred on behalf of the
subsidiary over the past five months. With the additional cash, we will be able
to further invest in our focus on corporate information exchange product suites.


OTHERS 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



                                       12
<PAGE>   13

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. As a result, we have a very limited
operating history from which to evaluate our business and prospects.

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

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

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

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

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

We Have Incurred Losses and We Expect Future Losses

         Since inception, we have incurred significant net operating losses and
expect to incur additional net operating losses for the foreseeable future. We
may not achieve profitability and if achieved, profitability may not be
sustained. As of April 30, 2000, we had an accumulated deficit of $57.1 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;
~    Enhance our customers' online shopping experience;
~    Expand corporate relationships and establish and utilize supplier
     relationships;
~    Build brand awareness;
~    Capitalize on the market for information resources;
~    Maintain our technology focus and expertise; and
~    Expand our expertise in the engineering, science, mathematics, financial
     services, medical and biotechnology industries.

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

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



                                       13
<PAGE>   14

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

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

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

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

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

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

        For the three months ended April 30, 2000 approximately 90% of our
online revenues were derived from sales of books. We recently expanded our
product offerings to include our Information Exchange suite of products and
resource materials for professionals in the medical and biotechnology
industries, and future revenues from these new product offerings are difficult
to forecast. The lack of market acceptance for these efforts or our inability to
generate satisfactory revenues from such expanded services or products to offset
related increased costs could seriously harm our business, financial condition,
operating results and cash flows.

In addition, we may choose to further expand our operations by promoting new or
complementary products and expanding the breadth and depth of products and
services offered. We may decide to utilize third-party relationships to extend
our brand or establish additional co-branded online stores. We may pursue the
acquisition of new or complementary businesses, products or technologies.
However, we have no present commitments or agreements for any material
acquisitions or investments. We may not be able to expand our product offerings
and



                                       14
<PAGE>   15

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

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

~    Brand recognition;
~    Selection, personalized services and overall customer service;
~    Convenience and accessibility;
~    Price;
~    Quality of search tools;
~    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



                                       15
<PAGE>   16

addition, vendors of information resources such as technology based training
materials could provide direct access to training programs online.

We Must Manage Our Growth and Expansion

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

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

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

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


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

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



                                       16
<PAGE>   17

further upgrade our existing technology, transaction-processing systems or
network infrastructure to accommodate increased traffic through our online store
or increased sales volume. Any inability to do so may result in:

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

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

We Must Attract Additional Personnel

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

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

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

System Failures Could Harm Our Business

        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.



                                       17
<PAGE>   18

We Rely on Selected Suppliers

        For the three months ended April 30, 2000, we purchased approximately
34% of our products from Ingram Book Company and 20% 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 months ended April 30, 2000, international sales accounted
for approximately 12% of our online revenue. We expect that our percentage of
online revenue from international markets will continue to represent a
significant portion of our total revenue. Our international business activities
are subject to a variety of potential risks, including the adoption of laws,
political and economic conditions and actions by third parties that would
restrict or eliminate our ability to do business in some jurisdictions. Although
we currently transact business in U.S. dollars, to the extent that we determine
to transact business in foreign currencies, we will become subject to the risks
attendant to transacting in foreign currencies, including potential adverse
effects of exchange rate fluctuations.

Protection of Our Intellectual Property Is Limited

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

We May Be Found to Infringe Proprietary Rights of Others

Other parties may assert infringement claims against us. These claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources. We are not currently aware of any legal proceedings
pending or threatened against us. In addition, we display reviews and articles
on technical subjects in our online store. Some reviews and articles may be
copyrighted and we may not have explicit permission from the



                                       18
<PAGE>   19

author for use of such intellectual property. The authors may assert
infringement claims against us. If a claim is asserted alleging that we have
infringed the proprietary rights of a third party, we may be required to seek
licenses to continue to use this intellectual property. The failure to obtain
the necessary licenses or other rights at a reasonable cost could seriously harm
our business, financial condition, operating results and cash flows.

RISKS RELATED TO OUR INDUSTRY

We Depend on the Continued Growth of Electronic Commerce

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

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

We Must Respond to Rapid Technological Change and Evolving Industry Standards

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

~    Rapid technological change;
~    Changes in user and customer requirements and preferences;
~    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.



                                       19
<PAGE>   20

Security Breaches of Third-Party Technology Could Affect Our Business

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

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

We May Face Increased Governmental Regulation and Legal Uncertainties

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

~    User privacy;
~    Pricing;
~    Content;
~    Copyrights;
~    Distribution; and
~    Characteristics and quality of products and services.

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



                                       20
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effort to increase regulation of Internet Service Providers is successful, the
expense of communicating on the Internet could increase substantially,
potentially slowing the growth in the use of the Internet. Any new legislation
or regulation or application or interpretation of existing laws could seriously
harm our business, financial condition, operating results and cash flows.

Possible Volatility of Our Stock Price

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

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

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


We Have Implemented Anti-Takeover Provisions

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



                                       21
<PAGE>   22

PART II.       OTHER INFORMATION

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

                      No Reports on Form 8-K were filed during the three months
                      ended April 30, 2000.



                                       22
<PAGE>   23

                                   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.

June 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 Financial Officer)



                                       23
<PAGE>   24

                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number                 Description
--------------                 -----------
<S>                     <C>
   27.01                Financial Data Schedule
</TABLE>