COMPUTER LITERACY INC, SB-2/A, 1998-09-03

COMPUTER LITERACY INC
SB-2/A, 1998-09-03
RETAIL STORES, NEC

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998

REGISTRATION NO. 333-59361

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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COMPUTER LITERACY, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

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DELAWARE 5995 77-0389480
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
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1308 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 541-2020
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE
OF BUSINESS)
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CHRIS MACASKILL
CHIEF EXECUTIVE OFFICER
COMPUTER LITERACY, INC.
1308 ORLEANS DRIVE
SUNNYVALE, CALIFORNIA 94089
(408) 541-2020
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
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COPIES TO:

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ROBERT V. GUNDERSON, JR., ESQ. NORA L. GIBSON, ESQ.
RALPH L. ARNHEIM III, ESQ. MICHAEL A. ZUERCHER, ESQ.
SUSAN M. GIORDANO, ESQ. PETER S. BUCKLAND, ESQ.
FRANK GRANT, ESQ. BROBECK, PHLEGER & HARRISON LLP
GUNDERSON DETTMER STOUGH SPEAR STREET TOWER
VILLENEUVE FRANKLIN & HACHIGIAN, LLP ONE MARKET
155 CONSTITUTION DRIVE SAN FRANCISCO, CA 94105
MENLO PARK, CALIFORNIA 94025 (415) 442-0900
(650) 321-2400
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.

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The Information contained herein is subject to change, completion or amendment
without notice. A registration statement relating to these securities have been
filed with the Securities and Exchange Commission. These securities may not be
sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy, nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.

SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998

3,000,000 SHARES

LOGO
COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by Computer
Literacy, Inc. ("Computer Literacy" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between $7.00
and $9.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied for quotation of its Common Stock on the Nasdaq National Market under
the symbol "CMPL."

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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Price to Underwriting Proceeds to
Public Discount(1) Company(2)
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Per Share................................. $ $ $
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Total(3).................................. $ $ $
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.

(2) Before deducting offering expenses payable by the Company estimated at
$800,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 450,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."

The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them, and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing the shares will be made against payment therefor at the office of
NationsBanc Montgomery Securities LLC, on or about , 1998.
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NationsBanc Montgomery Securities LLC

Piper Jaffray Inc.

Needham & Company, Inc.

, 1998.
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ART WORK

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF THE
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

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PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those anticipated in such forward-looking
statements as a result of certain factors discussed in this Prospectus,
including those set forth in "Risk Factors." Investors should consider carefully
the factors discussed in "Risk Factors." The following summary is qualified in
its entirety by reference to the more detailed information and Financial
Statements, including the Notes thereto, appearing elsewhere in this Prospectus.
As used in this Prospectus, the "Company" and "Computer Literacy" refer to
Computer Literacy, Inc., a Delaware corporation, and its California predecessor.
Unless otherwise indicated, all information in this Prospectus (i) reflects the
4-for-1 reverse stock split of the outstanding shares of Common Stock and
Preferred Stock, authorized by the Board of Directors on August 25, 1998; (ii)
gives effect to the conversion of all outstanding shares of Preferred Stock into
shares of Common Stock effective upon the closing of the offering and (iii)
assumes no exercise of the Underwriters' over-allotment option.

THE COMPANY

Computer Literacy is the leading online retailer of information resources
singularly focused on the technical professional. With over 300,000 information
resource titles from more than 8,000 publishers, Computer Literacy offers its
customers online access to a broad and comprehensive selection of technical
books, technology based training solutions, product manuals, research reports
and other information resources. In addition to the Company's extensive product
offering, Computer Literacy's online store features authoritative and compelling
content, competitive pricing, an easy-to-use navigational interface and a
variety of value-added services. The Company also operates four physical retail
stores that complement its online business by generating increased online
traffic, building the Company's brand and creating cross-promotional
opportunities, thereby providing a profitable means of customer acquisition.

Organizations increasingly seek technology solutions for competitive
advantages and rely upon such solutions for mission-critical business processes.
As a result, the demand for technical professionals (i.e., network managers,
systems administrators, hardware engineers, graphics designers and professional
software programmers) has grown significantly. The need for such professionals
is expected to increase further as technology becomes more sophisticated and
organizations continue to adopt and integrate new technologies. In order to
remain knowledgeable with respect to the latest technical innovations and to
maximize the competitive advantages provided by these new technologies,
technical professionals must have access to an extensive selection of
immediately available information resources that are highly specific and contain
authoritative content. Such information resources, including technical books,
technology based training solutions, product manuals, research reports and other
information resources, traditionally have not been available from a single or
centralized source.

Computer Literacy has quickly become one of the most widely recognized
online retailers of information resources for the technical professional. By
offering customers an extensive product selection, as well as competitive
pricing and excellent customer service, the Company believes it has achieved a
leading position among retailers in its category. Computer Literacy further
believes that the demographics of technical professionals overlap one-to-one
with those of Internet users, providing an exceptional target market for the
Company's product offerings. To enhance brand recognition and increase online
traffic, the Company has established a number of strategic alliances with
publishers and other suppliers of information resources for technical
professionals. For example, the Company has established an alliance with CBT
Group PLC ("CBT") to sell CBT's full library of technology based training
materials, containing over 600 titles. In addition, the Company has established
co-branded online stores with a number of technology companies, including Apple
Computer ("Apple"), Cisco Systems, Inc. ("Cisco"), Hewlett-Packard Company
("Hewlett-Packard"), Microsoft Corporation ("Microsoft"), SAP America, Inc.
("SAP") and Sun Microsystems, Inc. ("Sun Microsystems"). The Company believes
that these customized corporate online stores, combined with its commitment to
customer service and readily available product offerings, create valuable
long-term relationships and repeat purchasing patterns.

Since launching its online store in February 1996, the Company has
experienced rapid online revenue growth. For the two-year period ended July 31,
1998, Computer Literacy generated total online revenue of over $7.4 million
(over $2.4 million of which was generated during the three months ended July 31,
1998), representing a compound average quarterly growth rate of approximately
175%. In addition, the number of online customers has grown from approximately
1,600 as of January 31, 1997 to over 44,000 as of July 31, 1998, and repeat
purchases have accounted for approximately 49% of the Company's online revenue
from inception to July 31, 1998.

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THE OFFERING

Common Stock offered.................. 3,000,000 shares

Common Stock to be outstanding after
the offering.......................... 10,642,788 shares(1)

Use of proceeds....................... For expanding direct sales, telesales
and marketing operations and systems
and infrastructure development
activities; working capital; and
general corporate purposes. See "Use
of Proceeds."

Proposed Nasdaq National Market
symbol................................ CMPL

SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS EXCEPT FOR SELECTED OPERATING DATA)

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<CAPTION>
YEAR ENDED
JANUARY 31, THREE MONTHS ENDED
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APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1998 1997 1997 1997 1998 1998 1998
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STATEMENT OF OPERATIONS DATA:
Revenues:
Online................................ $ 180 $ 3,021 $ 176 $ 444 $ 1,089 $ 1,312 $ 1,761 $ 2,464
Retail and other...................... - 7,927 71 2,192 3,124 2,540 2,633 2,351
----- -------- ----- ------ ------- ------- ------- -------
Total revenues.................... 180 10,948 247 2,636 4,213 3,852 4,394 4,815

Gross profit............................ 30 3,543 79 961 1,370 1,133 1,380 1,312
Loss from operations.................... (622) (3,183) (392) (617) (619) (1,555) (1,703) (2,033)
Net loss................................ $(567) $ (3,190) $(361) $ (625) $ (646) $(1,558) $(1,671) $(1,966)
SELECTED OPERATING DATA:
Total number of online customers(2)..... 1,614 19,979 3,445 6,741 12,796 19,979 29,115 44,302
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AS OF JULY 31, 1998
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and equivalents................................................................................ $ 5,132 $ 26,652
Working capital..................................................................................... 6,881 28,401
Total assets........................................................................................ 15,436 36,956
Total stockholders' equity.......................................................................... 11,901 33,421
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(1) Excludes (i) 1,110,351 shares of Common Stock issuable upon exercise of
options outstanding as of July 31, 1998 under the 1996 Stock Plan with a
weighted average exercise price of $1.46 per share, (ii) 45,595 shares of
Common Stock available for grant under the 1996 Stock Plan as of such date,
(iii) 3,000,000 additional shares of Common Stock reserved for issuance
under the Company's 1998 Omnibus Equity Incentive Plan, (iv) 300,000
additional shares of Common Stock reserved for issuance under the Company's
1998 Employee Stock Purchase Plan and (v) 15,624 additional shares of Common
Stock issuable upon exercise of an outstanding warrant with an exercise
price of $2.40 per share. See "Management -- Stock Plans," "Description of
Capital Stock" and Note 6 of Notes to the Computer Literacy, Inc.
Consolidated Financial Statements (the "Financial Statements").

(2) Reflects the cumulative total number of customers who have purchased
products from the Company's online store as measured by their unique e-mail
addresses as of the end of the period indicated.

(3) As adjusted to give effect to the sale of the 3,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $8.00
per share and after deducting estimated underwriting discount and estimated
offering expenses.

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The Company was incorporated in California in November 1994, and
reincorporated in the State of Delaware in July 1998. The Company's principal
executive offices are located at 1308 Orleans Drive, Sunnyvale, California 94089
and its telephone number is (408) 541-2020.

The Company's fiscal year ends on January 31. For purposes of the following
discussion the fiscal year ended January 31, 1996 is referred to as fiscal 1996,
the fiscal year ended January 31, 1997 is referred to as fiscal 1997, and the
fiscal year ended January 31, 1998 is referred to as fiscal 1998.

Computer Literacy, CL, CBooks and CBooks Express are trademarks of the
Company. This Prospectus also contains the trademarks of other companies which
are the property of their respective owners.

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RISK FACTORS

This offering and an investment in the Company's Common Stock involve a
high degree of risk. In addition to the other information contained in this
Prospectus, prospective investors should carefully consider the following risk
factors before investing in the Common Stock. All statements, trend analysis and
other information contained in this Prospectus relative to markets for the
Company's products and trends in total revenues, gross margin and anticipated
expense levels, as well as other statements including words such as
"anticipate," "believe," "plan," "estimate," "expect" and "intend" and other
similar expressions, constitute forward-looking statements. These
forward-looking statements are subject to business and economic risks, and the
Company's actual results of operations may differ materially from those
contained in the forward-looking statements. The cautionary statements made in
this Prospectus should be read as applicable to all forward-looking statements
wherever they appear in this Prospectus.

LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES

The Company was incorporated in November 1994 to develop an online retail
strategy and began selling information resources, initially consisting of
technical books, through its online store on the World Wide Web (the "Web") in
February 1996. The Company expanded its product offerings to include training
materials in January 1998, product manuals in May 1998 and research reports in
June 1998. Accordingly, the Company has a very limited operating history on
which to base an evaluation of its business and prospects. The Company's
prospects must be considered in light of the risks, expenses and uncertainties
frequently encountered by companies in the early stages of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. Such risks for the Company include, but are not limited to, an
evolving and unpredictable business model, the management of an expanding
business, fluctuations in sales, seasonality, entering into new business areas,
competition, personnel matters, limitations on the Company's ability to
establish and expand its brand, capacity constraints, systems failures,
announcements by current or potential competitors, changes in the needs of
technical professionals, and the other Risk Factors discussed herein and
elsewhere in this Prospectus. To address these risks, the Company must, among
other things, implement and successfully execute its business and marketing
strategy, maintain and increase its customer base, continue to develop and
upgrade its technology and transaction-processing systems, improve its online
store, provide superior customer service and order fulfillment, respond to
competitive developments, and attract, retain and motivate qualified personnel.
There can be no assurance that the Company will be successful in addressing such
risks, and the failure to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.

Since inception, the Company has incurred significant net operating losses
and expects to incur additional net operating losses for the foreseeable future.
There can be no assurance that the Company will achieve profitability or that,
if profitability is achieved, it will be sustained. As of July 31, 1998, the
Company had an accumulated deficit of $7.4 million. The Company believes that
its success will depend in large part on its ability to enhance its customers'
online shopping experience, expand corporate relationships, build brand
awareness, encourage customer loyalty, capitalize on the market for information
resources, establish and leverage supplier relationships and maintain its
technology focus and expertise. Accordingly, the Company intends to invest
heavily in marketing and promotion, its direct sales and telesales
organizations, and systems and infrastructure development. There can be no
assurance that such expenditures will result in increased revenues or customer
growth and, although in recent periods the Company has experienced significant
growth in revenues, its 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 the Company may experience. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

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

As a result of the Company's limited operating history and the emerging
nature of the markets in which it competes, the Company is unable to accurately
forecast its future revenues. Revenues and operating results generally depend on
the volume of, timing of and ability to fulfill orders received, which
historically has been and is likely to continue to be difficult to forecast. The
Company's current and future expense levels are based
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largely on its operating plans and estimates of future revenues and are to a
large extent fixed. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues in relation to the Company's planned
expenditures would have an immediate material adverse effect on the Company's
business, financial condition and results of operations. Further, as a strategic
response to changes in the competitive environment, the Company may from time to
time make certain pricing, product, service or marketing decisions that are
likely to have a material adverse effect on its business, financial condition
and results of operations. See "-- Competition."

The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that could affect the Company's quarterly
operating results include (i) the Company's ability to establish and expand
brand recognition, (ii) the Company's ability to retain existing customers,
attract new customers and continuously improve customer satisfaction, (iii)
announcements of, and market anticipation for, new technology offerings for
which information resources may be sought, (iv) the Company's ability to manage
inventory and fulfillment operations, (v) the Company's ability to sustain or
improve gross margins, (vi) the announcement or introduction of new online
stores, services and products by the Company or competitors, (vii) price
competition or higher wholesale prices in the industry, (viii) the level of
usage of and commerce on the Internet and online services generally, (ix)
increasing customer acceptance of the Internet for the purchase of information
resources such as those offered by the Company, (x) the Company's ability to
upgrade and develop its systems and infrastructure in a timely and effective
manner, (xi) the level of traffic on the Company's online store, (xii) the sales
mix of the Company's product offerings, (xiii) technical difficulties, system
downtime or Internet brownouts, (xiv) the amount and timing of operating costs
and capital expenditures relating to expansion of the Company's business,
operations and infrastructure, (xv) the introduction of books, technology based
training solutions, product manuals and research reports, (xvi) the level of
merchandise returns experienced by the Company, (xvii) governmental regulation
and (xviii) general economic conditions and economic conditions specific to the
Internet, electronic commerce and the technical resource industries.

In the past, the Company has experienced seasonality in its business and
the Company expects that it will continue to experience such seasonality in the
future. Internet usage and the amount of purchases from individual and corporate
consumers tend to decline during August, November and December, at times when
many technical professionals are either absent from the workplace, on vacation
or experience a holiday closure at their company. There can be no assurance that
the Company's results in any future quarter will not be negatively affected by
seasonal trends.

Due to the foregoing factors, the Company's quarterly revenue and operating
results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future performance.
It is likely that in one or more future quarters the Company's operating results
may fall below the expectations of securities analysts and investors. In such
event, the trading price of the Common Stock would likely be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

RISKS ASSOCIATED WITH ENTRY INTO NEW BUSINESS AREAS

For the six months ended July 31, 1998 approximately 90% of the Company's
total revenues were derived from sales of books. The Company recently expanded
its product offerings to include technology based training materials, product
manuals and research reports and future revenues from these new product
offerings are difficult to forecast. The Company may choose to further expand
its operations by promoting new or complementary products, expanding the breadth
and depth of products and services offered, leveraging third-party relationships
to extend its brand or establishing additional co-branded online stores. The
Company may also pursue the acquisition of new or complementary businesses,
products or technologies, although it has no present understandings, commitments
or agreements with respect to any material acquisitions or investments. There
can be no assurance that the Company would be able to expand its product
offerings and related operations in a cost-effective or timely manner or that
such efforts would increase online traffic and purchases

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from the Company's online or physical retail stores or increase its overall
market acceptance. Furthermore, any new business or online store launched by the
Company that is not favorably received by individuals, corporate customers or
their employees or constituents could damage the Company's reputation or the
Computer Literacy brand. Expansion of the Company's operations in this manner
would also require significant additional expenses and development, operations
and editorial resources and would strain the Company's management, financial and
operational resources. The lack of market acceptance of such efforts (including
the Company's recent expansion of product offerings to include technology based
training materials, manuals and research reports) or the Company's inability to
generate satisfactory revenues from such expanded services or products to offset
related increased costs could have a material adverse effect on the Company's
business, financial condition and results of operations.

COMPETITION

The electronic commerce market is new, rapidly evolving and intensely
competitive. The market for information resources is more mature but also
intensely competitive. The Company expects competition to continue to intensify
in the future. The Company currently or potentially competes with a variety of
companies. These competitors include (i) a significant number of retail and
online bookstores, including Amazon.com, Barnes & Noble, Inc., Borders Group,
Inc. and other vendors of books, training products and product manuals, (ii)
various computer super-stores that carry related information resources at retail
locations, in catalogs and over the Internet, (iii) a number of indirect
competitors that specialize in electronic commerce or derive a substantial
portion of their revenue from electronic commerce and (iv) other companies with
substantial customer bases in the computer and other technical fields. There can
be no assurance that the Company can maintain a competitive position against
current or future competitors as they enter the markets in which the Company
competes, particularly those with greater financial, marketing, service,
support, technical and other resources than the Company. The failure by the
Company to maintain a competitive position within the market could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company believes that the principal competitive factors on which it
competes in its market are brand recognition, selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of editorial and other site content, reliability and speed of
fulfillment. Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, online retailers may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Certain of the Company's 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 the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service or marketing
decisions or acquisitions that could result in reduced margins or otherwise have
a material adverse effect on its business, financial condition and results of
operations. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. For example, applications
that select specific titles from a variety of Web sites may channel customers to
online booksellers that compete with the Company. Companies that control access
to transactions through a network or Web browsers could also promote the
Company's competitors or charge the Company a substantial fee for inclusion. In
addition, vendors of information resources such as technology based training
could provide direct access to training programs online. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and competitive pressures faced by the Company may have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Competition."

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MANAGEMENT OF EXPANDING BUSINESS; LIMITED SENIOR MANAGEMENT RESOURCES

The Company has rapidly expanded its operations, and anticipates that
further expansion will be required to address potential growth in its customer
base and market opportunities. Specifically the Company expects to significantly
increase its direct corporate and telesales organization and marketing
initiatives. This expansion has placed, and future expansion is expected to
place, a significant strain on the Company's management, operational and
financial resources. The Company's new employees include a number of key
managerial, technical and operations personnel who have not yet been fully
integrated into the Company, and the Company expects to add additional key
personnel in the near future. To manage the expected growth of its operations
and personnel, the Company will be required to improve existing and implement
new transaction-processing, operational and financial systems, procedures and
controls, and to expand, train and manage an increasing employee base. The
Company also will be required to expand its finance, administrative and
operations staff. Further, the Company's management will be required to maintain
and expand its relationships with various suppliers, freight companies, other
Web sites and other Web service providers, Internet and other online service
providers and other third parties necessary to the Company's business. There can
be no assurance that the Company's current and planned personnel, systems,
procedures and controls will be adequate to support the Company's future
operations, that management will be able to hire, train, retain, motivate and
manage required personnel or that Company management will be able to
successfully identify, manage and exploit existing and potential market
opportunities. If the Company is unable to manage growth effectively, its
business, financial condition and results of operations will be materially
adversely affected. See "-- Need For Additional Personnel," "-- Dependence on
Key Personnel," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business -- Technology and Product Development" and
"-- Employees."

RISKS ASSOCIATED WITH BRANDING

The Company believes that establishing, maintaining and enhancing the
Computer Literacy brand is critical to attracting online customers. To do so,
the Company expects to expand its marketing initiatives and build upon its brand
by providing a high-quality online experience supported by a high level of
customer service. To promote and maintain the Computer Literacy brand, the
Company expects to increase substantially its financial expenditures, including
marketing initiatives. If the Company is unable to provide high-quality online
services or customer support, or otherwise fails to promote and maintain its
brand, or if the Company incurs excessive expenses in an attempt to promote and
maintain its brand, the Company's business, operating results and financial
condition would be materially adversely affected. See "Business -- Competition"
and "-- Competition."

The Company is evaluating changing the Computer Literacy brand name. There
can be no assurance that such a name change, if effected, will enhance the
Company's efforts to attract new customers and retain existing customers, will
not result in confusion to current and potential customers, or will not disrupt
the Company's business, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
any name change effected after this offering, could result in confusion to
investors which could adversely affect the market price of the Common Stock.

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

A key element of the Company's strategy is to generate a high volume of
traffic on, and use of, its online store. Accordingly, the satisfactory
performance, reliability and availability of the Company's online store,
transaction-processing systems and network infrastructure are critical to the
Company's reputation and its ability to attract and retain customers and
maintain adequate service and customer support levels. The Company's revenues
depend on the number of visitors who shop on its online store and the volume of
orders it fulfills. Any system interruptions that result in the unavailability
of the Company's online store or reduced order fulfillment performance would
reduce the volume of goods sold and the attractiveness of the Company's product
and service offerings. The Company has experienced periodic system
interruptions, which it believes will continue to occur from time to time. Any
substantial increase in the volume of traffic on the Company's online store or
the number of orders placed by customers will require the Company to expand and
upgrade
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further its technology, transaction-processing systems and network
infrastructure. There can be no assurance that the Company will be able to
accurately project the rate or timing of increases, if any, in the use of its
online store or timely expand and upgrade its systems and infrastructure to
accommodate such increases.

The Company uses an internally developed system, which is supplemented by
commercially available licensed technology, for its online store, search engine
and substantially all aspects of transaction processing, including order
management, cash and credit card processing, purchasing, inventory management
and shipping. The Company intends to upgrade and expand its
transaction-processing systems and to integrate newly developed and/or purchased
modules with its existing systems in order to improve its accounting, control
and reporting methods and support increased transaction volume. The Company's
inability to add additional software and hardware or to develop and upgrade
further its existing technology, transaction-processing systems or network
infrastructure to accommodate increased traffic through its online store or
increased sales volume through its transaction-processing systems may cause
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. There can be no assurance that the
Company will be able in a timely manner to effectively upgrade and expand its
transaction-processing system or to integrate smoothly any newly developed or
purchased modules with its existing systems. Any inability to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Technology and Product Development."

NEED FOR ADDITIONAL PERSONNEL

The Company's future success depends on its ability to identify, attract,
hire, train, retain and motivate other 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
the Company's headquarters are located, and there can be no assurance that the
Company will be able to successfully attract, assimilate or retain qualified
personnel. The Company has encountered difficulties in attracting a sufficient
number of qualified software developers for its online store and
transaction-processing systems, and there can be no assurance that the Company
will be able to retain those developers which it currently employs or attract
additional developers. The failure to retain and attract the necessary
technical, managerial, editorial, merchandising, marketing and customer service
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Employees" and
"Management."

FULFILLMENT CENTER RELOCATION

The Company currently maintains a warehouse and distribution center in
Sunnyvale, California. The Company is considering outsourcing the warehousing
and fulfillment of orders to a service provider located in closer proximity to
certain publishers, wholesalers, distributors and delivery services. There can
be no assurance that outsourcing such services will result in operating
efficiencies or will not cause a significant disruption in the fulfillment of
orders, the distraction of management and other key personnel and the
expenditure of significant financial and other resources. Any such disruption,
distraction or expenditure could materially adversely affect the Company's
business, results of operations and financial condition. See
"Business -- Warehousing and Fulfillment."

SALES AND OTHER TAX COLLECTION

The Company does not currently collect sales or other similar taxes in
respect of shipments of goods into states other than California and Virginia.
However, one or more states or foreign countries may seek to impose sales tax
collection obligations on out-of-state or foreign companies such as the Company
which engage in electronic commerce. In addition, any new operations established
by the Company in states outside California and Virginia could subject shipments
into such states to state sales taxes. A successful assertion by one or more
states or any foreign country that the Company should collect sales or other
similar taxes on the sale of merchandise could have a material adverse effect on
the Company's business, financial condition and results of operations.
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RISK OF SYSTEM FAILURE; SINGLE SITE AND ORDER INTERFACE

The Company's success, in particular its ability to successfully receive
and fulfill online orders and provide high-quality customer service, largely
depends on the efficient and uninterrupted operation of its computer and
communications hardware systems. Substantially all of the Company's computer and
communications hardware is located at a single leased facility in Sunnyvale,
California. The Company's systems and operations are vulnerable to damage or
interruption from fire, flood, power loss, telecommunications failure,
break-ins, earthquake and similar events and the Company has experienced minor
and infrequent system interruptions in the past. The Company does not presently
have a formal disaster recovery plan and does not carry sufficient business
interruption insurance to compensate it for losses that may occur. Despite the
implementation of network security measures by the Company, its servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which 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 have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Technology and
Product Development" and "-- Facilities."

RELIANCE ON CERTAIN SUPPLIERS

For fiscal 1998 and the six months ended July 31, 1998, the Company
purchased approximately 30% and 36%, respectively, of its books from Ingram Book
Company ("Ingram"). The Company relies to a large extent on rapid fulfillment
from Ingram and other vendors. The Company generally has no commitments to or
arrangements with any of its vendors that guarantee the availability of
merchandise, the continuation of particular payment terms or the extension of
credit limits. There can be no assurance that the Company's current vendors will
continue to sell merchandise to the Company on current terms or that the Company
will be able to establish new or extend current vendor relationships to ensure
acquisition of merchandise in a timely and efficient manner and on acceptable
commercial terms. If the Company were unable to develop and maintain
relationships with vendors that would allow it to obtain sufficient quantities
of merchandise on acceptable commercial terms, its business, financial condition
and results of operations would be materially adversely affected.

DEPENDENCE ON KEY PERSONNEL

The Company's performance is substantially dependent on the continued
services and on the performance of its senior management and other key
personnel. The Company's performance also depends on the Company's ability to
retain and motivate its senior management and other key employees. The loss of
the services of any of its executive officers or other key employees could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."

The Company has entered into employment agreements with several members of
its senior management, including Mr. MacAskill, its President and Chief
Executive Officer; Mr. Orumchian, its Vice President of Engineering; Mr.
Alvarez, its Vice President of Finance and Chief Financial Officer; and Mr.
Cudd, its Vice President of Marketing. Each employment agreement sets forth each
officer's base salary and general employee benefits, including acceleration of a
portion of such employee's Common Stock option vesting. The Company maintains
$2.0 million of key person life insurance on Chris MacAskill, the Company's
President and Chief Executive Officer. See "Management -- Employment Agreements
and Change in Control Arrangements."

DEPENDENCE ON CONTINUED GROWTH OF ELECTRONIC COMMERCE

The Company's future revenues and profits, if any, are substantially
dependent upon the acceptance and use of the Internet and other online services
as an effective medium of commerce by its target customers. Rapid growth in the
use of and interest in the Internet, the Web and online services is a recent
phenomenon, and there can be no assurance that acceptance and use will continue
to develop at historical rates or that a sufficiently broad base of consumers
will adopt, and continue to use, the Internet and other online services as a

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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. The Company's
target customer has historically used traditional means of commerce to purchase
information resources. For the Company to be successful, these customers must
accept and utilize the Company's 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, there can be no assurance that the
infrastructure for the Internet will be able 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 the Company in particular.
If use of the Internet and other online services does not continue to increase
or increases more slowly than expected, if the infrastructure for the Internet
and other online services does not effectively support expansion that may occur,
or if the Internet and other online services do not become a viable commercial
marketplace, the Company's business, financial condition and results of
operations would be materially adversely affected.

RAPID TECHNOLOGICAL CHANGE

To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of its 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 that could render the
Company's existing online store and proprietary technology and systems obsolete.
The Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop new
services and technology that address the increasingly sophisticated and varied
needs of its prospective customers, and respond to technological advances and
emerging industry standards and practices on a cost-effective and timely basis.
The development of Web site and other proprietary technology entails significant
technical and business risks. There can be no assurance that the Company will
successfully use new technologies effectively or adapt its online store,
proprietary technology and transaction-processing systems to customer
requirements or emerging industry standards. If the Company is unable, for
technical, legal, financial or other reasons, to adapt in a timely manner in
response to changing market conditions or customer requirements, its business,
financial condition and results of operations would be materially adversely
affected. See "Business -- Technology and Product Development."

ELECTRONIC COMMERCE SECURITY RISKS

A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. The
Company relies on encryption and authentication technology licensed from third
parties to provide the security and authentication necessary to effect secure
transmission of confidential information, such as customer credit card numbers.
There can be no assurance that advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments will
not result in a compromise or breach of the algorithms used by the Company to
protect customer transaction data. If any such compromise of the Company's
security were to occur, it could have a material adverse effect on the Company's
reputation, business, financial condition and results of operations. A party who
is able to circumvent the Company's security measures could misappropriate
proprietary information or cause interruptions in the Company's operations. The
Company may be required to expend significant capital and other resources to
protect against such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of the Internet and other online
transactions and the privacy of users may

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<PAGE> 13

also inhibit the growth of the Internet and other online services generally, and
the Web in particular, especially as a means of conducting commercial
transactions. To the extent that activities of the Company or third-party
contractors involve the storage and transmission of proprietary information,
such as credit card numbers, security breaches could damage the Company's
reputation and expose the Company to a risk of loss or litigation and possible
liability. There can be no assurance that the Company's security measures will
prevent security breaches or that failure to prevent such security breaches will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Technology and Product
Development."

RISKS ASSOCIATED WITH INTERNATIONAL SALES

For fiscal 1998 and the six months ended July 31, 1998, international sales
accounted for approximately 21% and 22%, respectively, of the Company's online
revenue. The Company expects that its percentage of online revenue from
international markets will continue to represent a significant portion of its
online revenue. The Company's 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 the Company's ability to do business in certain jurisdictions. See
"-- Government Regulation and Legal Uncertainties." Although the Company
currently transacts business in U.S. dollars, to the extent that it determines
to transact business in foreign currencies, the Company will become subject to
the risks attendant to transacting in foreign currencies, including potential
adverse effects of exchange rate fluctuations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although the Company believes that
its products and internal systems are Year 2000 compliant, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Failure
of such third-party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition. Any failure
by the Company to make its products Year 2000 compliant could result in a
decrease in sales of the Company's products, an increase in the allocation of
resources to address Year 2000 problems of the Company's customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by the Company's
customers due to such Year 2000 problems. Furthermore, the purchasing patterns
of customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase products and services such as those offered by the Company, which could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company has conducted a preliminary review of its
internal computer systems to identify the systems that could be affected by the
Year 2000 issue and to develop a plan to resolve the issue. Based on this
preliminary review, the Company currently has no reason to believe that its
internal software systems are not Year 2000 compliant, however, the Company will
continue to evaluate its systems and in the event the Company concludes that its
systems are not Year 2000 compliant, it will develop a contingency plan to
address these issues.

TRADEMARKS AND PROPRIETARY RIGHTS; UNLICENSED ARRANGEMENTS AND MATERIALS

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

In addition, the Company displays reviews and articles on technical
subjects in its online store. Some reviews and articles may be copyrighted and
the Company may not have explicit permission from the author for use of such
intellectual property. There can be no assurance that the authors will not
assert infringement claims against the Company. If a claim is asserted alleging
that the Company has infringed the proprietary rights of a third party, the
Company may be required to seek licenses to continue to use such intellectual
property. The failure to obtain the necessary licenses or other rights at a
reasonable cost could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Intellectual
Property and Other Proprietary Rights."

GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES

The Company is not currently subject to direct regulation by any domestic
or foreign governmental agency, other than regulations applicable to businesses
generally, and laws or regulations directly applicable to access to electronic
commerce. However, due to the increasing popularity and use of the Internet, it
is possible that a number of laws and regulations may be adopted with respect to
the Internet covering issues such as 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, which could, in turn, decrease the demand for the Company's products
and services and increase the Company's cost of doing business, or otherwise
have an adverse effect on the Company's business, financial condition and
results of operations. Moreover, the applicability to the Internet of existing
laws in various jurisdictions governing issues such as property ownership, sales
tax, libel and personal privacy is uncertain and may take years to resolve. Any
such new legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to the Company's business, or
the application of existing laws and regulations to the Internet and other
online services could have a material adverse effect on the Company's business,
financial condition and results of operations.

As the Company's service is offered over the Internet in multiple states
and foreign countries, such jurisdictions may claim that the Company is required
to qualify to do business as a foreign corporation in each such state and
foreign country. The failure by the Company to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject the Company 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 the Company's online store or prosecute the Company for
violations of their laws. There can be no assurance that violations of local
laws will not be alleged or charged by state or foreign governments, that the
Company might not unintentionally violate such law or that such laws will not be
modified, or new laws enacted in the future.

In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
Because 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

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<PAGE> 15

interruptions in phone service, local exchange carriers have petitioned the FCC
to regulate Internet Service Providers ("ISPs") in a manner similar to long
distance telephone carriers and to impose access fees on the ISPs. If any effort
to increase regulation of ISPs is successful, the expense of communicating on
the Internet could increase substantially, potentially slowing the growth in the
use of the Internet. Any such new legislation or regulation or application or
interpretation of existing laws could have a material adverse effect on the
Company's business, financial condition and results of operations.

CONTROL OF THE COMPANY BY CURRENT STOCKHOLDERS AND VENTURE CAPITAL FIRMS

Upon completion of this offering, the Company's executive officers,
directors and greater than 5% stockholders (and their affiliates) will, in the
aggregate, beneficially own approximately 59.9% of the Company's outstanding
Common Stock (57.6% if the Underwriters' over-allotment option is exercised in
full). Of the greater than 5% stockholders, four venture capital firms ("Venture
Stockholders,") will, in the aggregate, beneficially own approximately 46.6% of
the Company's outstanding Common Stock (44.6% if the Underwriter's
over-allotment option is exercised in full). As a result, such persons, acting
together, will have the ability to control all matters submitted to stockholders
of the Company for approval (including the election and removal of directors and
any merger, consolidation or sale of all or substantially all of the Company's
assets) and to control the management and affairs of the Company. Accordingly,
such concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company, impede a merger, consolidation,
takeover or other business combination involving the Company or discourage a
potential acquirer from making a tender offer or otherwise attempting to obtain
control of the Company, which in turn could have an adverse effect on the market
price of the Company's Common Stock. Upon completion of the offering
contemplated hereby there will be a public trading market for the Company's
Common Stock, and, subject to restrictions under applicable securities laws and
market stand-off agreements, the Venture Stockholders may seek to sell some, if
not all, of their Common Stock when liquidity is available. Sales of substantial
amounts of the Company's Common Stock in the public market after this offering
could adversely affect prevailing market prices for the Common Stock. See "Risk
Factors -- Shares Eligible for Future Sale," "Management," "Certain
Transactions" and "Principal Stockholders and Shares Eligible for Future Sale."

NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been no public market for the Common
Stock of the Company and there can be no assurance that an active trading market
will develop or be sustained upon completion of this offering. The initial
public offering price, which will be established by negotiations between the
Company and the representatives of the Underwriters based upon a number of
factors, may not be indicative of prices that will prevail in the trading
market. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.

The trading price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in price in response to factors such as
actual or anticipated variations in quarterly operating results, announcements
of technological innovations, new sales formats or new products or services by
the Company or its competitors, changes in financial estimates by securities
analysts, conditions or trends in the Internet and electronic commerce
industries, changes in the market valuations of other Internet, online service
or retail companies, announcements by the Company of significant acquisitions,
strategic partnerships, joint ventures or capital commitments, additions or
departures of key personnel, sales of Common Stock and other events or factors,
many of which are beyond the Company's control. In addition, the stock market in
general, and the Nasdaq National Market and the market for Internet-related and
technology companies in particular, has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and reflect price earnings ratios
substantially above historical levels. There can be no assurance that these
trading prices and price earnings ratios will be sustained. These broad market
and industry factors may materially adversely affect the market price of the
Common Stock, regardless of the Company's operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class-action litigation has often been instituted against such
company. Such litigation, if instituted, could result in substantial costs and a
diversion of management's attention

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and resources, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of the Company's Common Stock in the public
market after this offering could adversely affect prevailing market prices for
the Common Stock. The 3,000,000 shares of Common Stock offered hereby will be
freely tradable without restriction in the public market. Taking into account
restrictions imposed by the Securities Act of 1933, as amended (the "Securities
Act"), rules promulgated by the Securities and Exchange Commission (the
"Commission") thereunder and lock-up agreements between certain stockholders and
the Company or NationsBanc Montgomery Securities LLC, the number of additional
shares that will be available for sale in the public market, subject in some
cases to the volume and other restrictions of Rule 144 under the Securities Act,
will be as follows: (i) approximately 6,785,164 additional shares will be
eligible for sale beginning 181 days after the date of this Prospectus and (ii)
approximately 857,624 remaining shares will be eligible for sale pursuant to
Rule 144 upon the expiration of one-year holding periods expiring on May 22,
1999. NationsBanc Montgomery Securities LLC may, in its sole discretion and at
any time without notice, release all or any portion of the shares subject to
such lock-up agreements. Upon the closing of this offering, holders of 6,079,186
shares of Common Stock are entitled to certain rights with respect to the
registration of such shares under the Securities Act. In addition, the Company
intends to file a registration statement on Form S-8 under the Securities Act
approximately 180 days after the date of this Prospectus to register
approximately 3,345,595 shares of Common Stock reserved for issuance under the
1996 Stock Plan, the 1998 Omnibus Equity Incentive Plan and the 1998 Employee
Stock Purchase Plan. See "Description of Capital Stock -- Registration Rights"
and "Shares Eligible for Future Sale."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW

Upon the closing of this offering, the Company's Board of Directors will
have 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 adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of the Company
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Common Stock. The Company has no present
plans to issue shares of Preferred Stock. Further, certain provisions of the
Company's 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. See "Description of Capital Stock."

BROAD DISCRETION OF USE OF PROCEEDS

The Company expects to use the net proceeds to expand its direct sales,
telesales and marketing operations and systems and infrastructure development
activities with the balance to be used for working capital and general corporate
purposes. A portion of net proceeds may also be used to acquire or invest in
complementary businesses, products and technologies. From time to time, in the
ordinary course of business, the Company expects to evaluate potential
acquisitions of such businesses, products or technologies. However, the Company
has no present understandings, commitments or agreements with respect to any
material acquisition or investment. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. The
failure of management to apply such funds effectively could have a material
adverse effect on the Company's business, financial condition and results of
operations. Pending such uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment grade securities. See "Use
of Proceeds."

IMMEDIATE AND SUBSTANTIAL DILUTION

The initial public offering price is substantially higher than the book
value per outstanding share of Common Stock. Accordingly, purchasers in this
offering will suffer an immediate and substantial dilution in the net tangible
book value of the Common Stock from the initial public offering price of $5.14
per share based upon an assumed public offering price of $8.00 per share.
Additional dilution will occur upon exercise of outstanding options and a
warrant granted by the Company. See "Dilution."

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USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $21.5 million
(approximately $24.9 million if the Underwriters' over-allotment option is
exercised in full), at an assumed initial public offering price of $8.00 per
share and after deducting estimated underwriting discount and estimated offering
expenses payable by the Company. The primary purposes of this offering are to
obtain additional working capital, create a public market for the Company's
Common Stock and facilitate future access by the Company to public equity
markets.

The Company currently expects to use a significant portion of the net
proceeds from this offering for:

- expanding its direct sales, telesales and marketing operations and
systems;

- infrastructure development activities; and

- working capital and general corporate purposes.

The amounts actually expended by the Company for such purposes may vary
significantly and will depend on a number of factors, including the amount of
the Company's future revenues and cash generated by operations and the other
factors described under "Risk Factors." Accordingly, the Company's management
will retain broad discretion in the allocation of the net proceeds of this
offering. A portion of the net proceeds may also be used to acquire or invest in
complementary businesses. The Company has no current agreements or commitments
with respect to any such acquisition or investment, and the Company is not
currently engaged in any negotiations with respect to any such transaction.
Pending such uses, the net proceeds of this offering will be invested in
short-term, interest bearing, investment grade securities. See "Risk
Factors -- Broad Discretion of Use of Proceeds."

The Company estimates the net proceeds of this offering, together with
existing capital resources, will be sufficient to fund the Company's
requirements for at least twelve months from the date of this Prospectus.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its capital
stock and does not expect to do so in the foreseeable future. The Company's line
of credit arrangement prohibits the payment of dividends by the Company without
the lender's prior consent. The Company anticipates that all future earnings, if
any, generated from operations will be retained by the Company to develop and
expand its business.

16
<PAGE> 18

CAPITALIZATION

The following table sets forth the capitalization of the Company as of July
31, 1998 (i) on an actual basis and (ii) on an as adjusted basis to give effect
to the conversion of each outstanding share of Preferred Stock into one share of
Common Stock upon the closing of this offering, and the sale of the 3,000,000
shares of Common Stock offered hereby, at an assumed initial public offering
price of $8.00 per share and after deducting estimated underwriting discount and
estimated offering expenses payable by the Company.

<TABLE>
<CAPTION>
AS OF JULY 31, 1998
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred Stock, $0.001 par value, 6,275,000 shares
authorized, 6,079,186 shares issued and outstanding,
actual; $0.001 par value, 5,000,000 shares authorized,
no shares issued and outstanding, as adjusted.......... $ 6 $ --
Common Stock, $0.001 par value, 10,000,000 shares
authorized, 1,563,602 shares issued and outstanding,
actual; $0.001 par value, 50,000,000 shares authorized,
10,642,788 shares issued and outstanding, as
adjusted(1)............................................ 2 11
Additional paid-in capital................................ 19,376 40,893
Warrants(2)............................................... 12 12
Accumulated deficit....................................... (7,495) (7,495)
------- --------
Total stockholders' equity............................. 11,901 33,421
------- --------
Total capitalization.............................. $11,901 $ 33,421
======= ========
</TABLE>

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

(2) Represents an expense relating to the issuance of a warrant to a lender of
the Company. See Note 5 of Notes to Financial Statements.

17
<PAGE> 19

DILUTION

The pro forma net tangible book value of the Company as of July 31, 1998
was approximately $8.9 million or $1.16 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total tangible assets of
the Company less its total liabilities, divided by the total number of shares of
Common Stock outstanding as of July 31, 1998, after giving effect to the
conversion of the outstanding shares of Preferred Stock into Common Stock. After
giving effect to the sale of 3,000,000 shares of Common Stock offered hereby (at
an assumed initial public offering price of $8.00 per share and after deducting
estimated underwriting discount and estimated offering expenses payable by the
Company), the pro forma net tangible book value of the Company as of July 31,
1998 would have been $30.4 million or $2.86 per share. This represents an
immediate increase in net tangible book value of $1.70 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$5.14 per share to purchasers of Common Stock in the offering. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 8.00
Pro forma net tangible book value per share as of July 31,
1998................................................... $ 1.16
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.70
--------
Pro forma net tangible book value per share after the
offering.................................................. 2.86
--------
Dilution per share to new investors......................... $ 5.14
========
</TABLE>

The following table summarizes, on a pro forma basis as of July 31, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing stockholders and by new investors purchasing shares in this offering
(at an assumed initial public offering price of $8.00 per share and before
deducting estimated underwriting discount and estimated offering expenses
payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 7,642,788 71.8% $19,478,892 44.8% $ 2.55
New investors............. 3,000,000 28.2 24,000,000 55.2 $ 8.00
----------- ------- ----------- -----------
Total........... 10,642,788 100.0% $43,478,892 100.0%
=========== ======= =========== ===========
</TABLE>

The foregoing discussion and table excludes (i) 1,110,351 shares of Common
Stock issuable upon exercise of options outstanding as of July 31, 1998 under
the 1996 Stock Plan with a weighted average exercise price of $1.46 per share,
(ii) 45,595 shares of Common Stock available for grant under the 1996 Stock Plan
as of such date, (iii) 3,000,000 additional shares of Common Stock reserved for
issuance under the Company's 1998 Omnibus Equity Incentive Plan, (iv) 300,000
additional shares of Common Stock reserved for issuance under the Company's 1998
Employee Stock Purchase Plan and (v) 15,624 additional shares of Common Stock
issuable upon exercise of an outstanding warrant with an exercise price of $2.40
per share. See "Management -- Stock Plans," "Description of Capital Stock" and
Note 5 of Notes to Financial Statements.

18
<PAGE> 20

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The following selected financial data is qualified by reference to and
should be read in conjunction with the Financial Statements and related Notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The selected
statement of operations data for the years ended January 31, 1997 and 1998 and
the balance sheet data as of January 31, 1998 are derived from the Financial
Statements of the Company which have been audited by Deloitte & Touche LLP,
independent auditors, and included herein. The balance sheet data as of January
31, 1997 is derived from the audited financial statements of the Company and are
not included herein. The selected statement of operations data for the year
ended January 31, 1996 and the balance sheet data as of January 31, 1996 are
derived from unaudited consolidated financial statements not included herein.
The selected statement of operations data for the six months ended July 31, 1997
and 1998 and the selected balance sheet data as of July 31, 1998 are derived
from unaudited financial statements of the Company included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring adjustments necessary for a fair presentation of
the Company's financial position and results of operations for these periods.
The financial data for the six months ended July 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending January 31,
1999 or any other future period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JANUARY 31, JULY 31,
----------------------------- ------------------
1996 1997 1998 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Online........................................... $ -- $ 180 $ 3,021 $ 620 $ 4,225
Retail and other................................. -- -- 7,927 2,263 4,984
------- ------- ------- ------- -------
Total revenues............................ -- 180 10,948 2,883 9,209
Cost of revenues:
Online........................................... -- 150 2,189 418 3,291
Retail and other................................. -- -- 5,216 1,425 3,226
------- ------- ------- ------- -------
Total cost of revenues.................... -- 150 7,405 1,843 6,517
------- ------- ------- ------- -------
Gross profit....................................... -- 30 3,543 1,040 2,692
Operating expenses:
Sales and marketing.............................. 3 130 4,192 1,240 4,056
Development and engineering...................... 65 110 860 213 1,148
General and administrative....................... 26 412 1,674 596 1,224
------- ------- ------- ------- -------
Total operating expenses.................. 94 652 6,726 2,049 6,428
------- ------- ------- ------- -------
Loss from operations............................... (94) (622) (3,183) (1,009) (3,736)
Interest, net...................................... -- 55 (7) 23 99
------- ------- ------- ------- -------
Net loss........................................... $ (94) $ (567) $(3,190) $ (986) $(3,637)
======= ======= ======= ======= =======
Basic and diluted net loss per share(1)............ $ (0.10) $ (0.38) $ (2.11) $ (0.66) $ (2.37)
======= ======= ======= ======= =======
Shares used in computing net loss per share(1)..... 960 1,504 1,509 1,504 1,533
</TABLE>

<TABLE>
<CAPTION>
AS OF JANUARY 31,
-------------------------------- AS OF JULY 31,
1996 1997 1998 1998
----------- ------ ------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.............................. $ 29 $3,228 $ 4,974 $ 5,132
Working capital................................... 29 3,242 5,630 6,881
Total assets...................................... 101 3,583 13,598 15,436
Total liabilities................................. 49 182 3,673 3,535
Total stockholders' equity........................ 52 3,401 9,925 11,901
</TABLE>

- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of shares
used in computing basic and diluted net loss per share.

19
<PAGE> 21

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

The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with "Selected Financial
Data" and the Company's Financial Statements and the related Notes thereto
included elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ significantly from those discussed in the forward-looking statements
as a result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this Prospectus.

OVERVIEW

Incorporated in November 1994, the Company (formerly CBooks Express, Inc.)
began selling technical books through its online store in February 1996,
technology based training solutions in January 1998, product manuals in May 1998
and research reports in June 1998. From inception through January 1996, the
Company's operating activities consisted primarily of developing the
infrastructure necessary to conduct online sales of information resources,
establishing vendor relationships, recruiting personnel, and purchasing and
leasing operating assets, including warehousing, fulfillment and customer
service capabilities. The Company's four physical retail stores were acquired in
May 1997 in connection with its $5.1 million acquisition of Computer Literacy
Bookshops, Inc. ("CLBI"), which was accounted for as a purchase. Accordingly,
the Company's results of operations include those of CLBI for all periods
subsequent to the acquisition date.

Computer Literacy generates revenues from sales of books, technology based
training materials, product manuals and research reports through its online
store, certain co-branded corporate online stores and in its four retail
locations. The Company recognizes revenue from its online store upon shipment
and, from its physical retail stores, 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, varied
levels of cooperative advertising dollars received from certain publishers of
books and changes in the size and timing of discounts and other promotional
activities. In addition, as sales of higher gross margin products, such as
technology based training materials, manuals and research reports increase as a
percentage of total revenues, gross margins may increase accordingly. For fiscal
1998 and for the six months ended July 31, 1998, the Company purchased
approximately 30% and 36%, respectively, of its books from Ingram, an indirect
reseller. Although the primary advantage associated with purchasing from Ingram
is just in time inventory management, the Company believes it will make a larger
number of its purchases directly from publishers as its sales volume increases,
thereby enabling the Company to take advantage of favorable volume discounts.

20
<PAGE> 22

intends to invest heavily in marketing and promotion, its direct sales and
telesales organizations, and systems and infrastructure development. There can
be no assurance that such expenditures will result in increased revenues or
customer growth and, although in recent periods the Company has experienced
significant growth in revenues, its 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 the Company may experience. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company believes that period-to-period comparisons of its operating
results, including the Company's 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 "Risk Factors -- Limited Operating
History; Accumulated Deficit; Anticipated Losses."

RESULTS OF OPERATIONS

The following table presents the Company's results of operations as a
percentage of total revenues for the periods indicated. This table does not
include data for fiscal 1996 as such data is not considered to be meaningful.

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
---------------- ----------------
1997 1998 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Online........................................ 100.0% 27.6% 21.5% 45.9%
Retail and other.............................. -- 72.4 78.5 54.1
------ ------ ------ ------
Total revenues........................ 100.0 100.0 100.0 100.0
Cost of revenues(1):
Online........................................ 83.3 72.5 67.4 77.9
Retail and other.............................. -- 65.8 63.0 64.7
------ ------ ------ ------
Total cost of revenues................ 83.3 67.6 63.9 70.8
------ ------ ------ ------
Gross margin.................................... 16.7 32.4 36.1 29.2
Operating expenses:
Sales and marketing........................... 72.2 38.3 43.0 44.0
Development and engineering................... 61.1 7.8 7.4 12.5
General and administrative.................... 228.9 15.3 20.7 13.3
------ ------ ------ ------
Total operating expenses.............. 362.2 61.4 71.1 69.8
------ ------ ------ ------
Loss from operations............................ (345.6) (29.1) (35.0) (40.6)
Interest, net................................... 30.6 (0.1) 0.8 1.1
------ ------ ------ ------
Net loss........................................ (315.0)% (29.1)% (34.2)% (39.5)%
====== ====== ====== ======
</TABLE>

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

21
<PAGE> 23

SIX MONTHS ENDED JULY 31, 1997 COMPARED TO SIX MONTHS ENDED JULY 31, 1998

Online Revenue. Online revenue is comprised of revenue from online sales of
information resources and associated outbound shipping charges, net of returns.
Online revenue increased from $620,000, or 21.5% of total revenues, to $4.2
million, or 45.9% of total revenues, for the six months ended July 31, 1997 and
the six months ended July 31, 1998, respectively, as a result of significant
increases in the customer base (from 6,741 to 44,302) and repeat purchases from
the Company's existing customers. The Company expects online revenue to increase
both in absolute dollars and as a percentage of total revenues as the Company
continues to invest significantly in its online store, related operating
infrastructure, corporate and telesales organization, and marketing programs.
There can be no assurance, however, that online revenue will increase as a
result of these investments and any such failure would materially adversely
affect the Company's business, operating results and financial condition. See
"Risk Factors -- Limited Operating History; Accumulated Deficit; Anticipated
Losses" and "-- Unpredictability of Future Revenues; Potential Fluctuations in
Quarterly Operating Results; Seasonality."

International sales represented approximately 26.9% and 22.3% of online
revenue for the six months ended July 31, 1997 and the six months ended July 31,
1998, respectively. The Company believes that the international market for its
products is large and expanding, and that the Internet offers a unique
opportunity for it to expand its international presence quickly and
cost-effectively. The Company expects international sales to increase as the
Company begins to direct corporate sales, telesales and marketing resources
towards international markets.

Retail and Other Revenue. Retail and other revenue is comprised primarily
of revenue generated by the Company's physical retail stores and, to a lesser
extent, by trade shows and book fairs. Retail and other revenue increased from
$2.3 million, or 78.5% of total revenues, to $5.0 million, or 54.1% of total
revenues, for the six months ended July 31, 1997 and the six months ended July
31, 1998, respectively, primarily as a result of the acquisition of CLBI in May
1997. The Company expects retail and other revenue to remain relatively flat in
absolute dollars and decrease as a percentage of total revenues in the
foreseeable future as the Company continues to invest in its online store,
related operating infrastructure, corporate and telesales organization and
marketing programs. In addition, the Company periodically evaluates the location
and productivity of its retail stores and may close, consolidate or relocate
stores as conditions warrant. Any closure, consolidation or relocation of a
retail store is likely to decrease retail and other revenue.

Cost of Online Revenue. Cost of online revenue is comprised primarily of
the cost of merchandise sold through the Company's online store and associated
inbound and outbound shipping costs. Cost of online revenue increased from
$418,000, or 67.4% of online revenue, to $3.3 million, or 77.9% of online
revenue, for the six months ended July 31, 1997 and the six months ended July
31, 1998, respectively. 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 the Company's 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 $1.4 million, or
63.0% of retail and other revenue, to $3.2 million, or 64.7% of retail and other
revenue, in the six months ended July 31, 1997 and the six months ended July 31,
1998, respectively, primarily as a result of sales from the retail stores
acquired.

Gross Margin. Gross margin as a percentage of total revenues decreased from
36.1% to 29.2% for the six months ended July 31, 1997 and the six months ended
July 31, 1998, respectively. The percentage decrease was a result of the
implementation by the Company of an online competitive pricing policy and was
partially offset by the inclusion of higher margin retail sales as a result of
the acquisition of CLBI in May 1997. The Company has offered, and expects 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.

22
<PAGE> 24

Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of direct expenses associated with the Company's retail stores and
also include advertising, promotional and public relations expenditures, payroll
and related expenses for personnel engaged in corporate sales, marketing and
fulfillment. Sales and marketing expense increased from $1.2 million, or 43.0%
of total revenues, to $4.1 million, or 44.0% of total revenues, for the six
months ended July 31, 1997 and the six months ended July 31, 1998, respectively.
The increase in absolute dollars was primarily attributable to sales and
marketing expenses related to operating the Company's four retail stores
following the acquisition of CLBI in May 1997, the expansion of the Company's
online store and its direct sales force, the increase in advertising, public
relations and other promotional expenditures, and the increased personnel and
related expenses required to implement the Company's marketing strategy and
fulfill customer demand. The Company intends to pursue aggressive branding,
marketing and telesales campaigns to generate increased online traffic and
acquire customers. Accordingly, the Company expects sales and marketing expenses
to increase in absolute dollars for the foreseeable future, but decrease as a
percentage of total revenues as total revenues increase.

Development and Engineering Expenses. Development and engineering expenses
primarily consist of costs associated with systems and telecommunications
infrastructure, editorial operations and content acquisition. Development and
engineering expenses increased from $213,000, or 7.4% of total revenues, to $1.1
million, or 12.5% of total revenues, for the six months ended July 31, 1997 and
the six months ended July 31, 1998, respectively. The increase in absolute
dollars was primarily attributable to increased staffing and associated costs
related to enhancing the features, content and functionality of the Company's
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. The Company
believes that continued investment in systems and infrastructure development is
critical to attaining its strategic objectives and, as a result, expects
development and engineering expenses to increase significantly in absolute
dollars for the foreseeable future, but decrease as a percentage of total
revenues as total revenues increase.

General and Administrative Expenses. General and administrative expenses
consist of payroll and related costs associated with executive, accounting and
administrative personnel, recruiting, professional service fees and other
general corporate expenses. General and administrative expenses increased from
$596,000, or 20.7% of total revenues, to $1.2 million, or 13.3% of total
revenues, for the six months ended July 31, 1997 and the six months ended July
31, 1998, respectively. This increase in absolute dollars was primarily due to
increased salaries and related expenses associated with the hiring of additional
personnel and increases in professional fees. The decrease in general and
administrative expenses as a percentage of total revenues was primarily the
result of an increased revenue base. The Company expects general and
administrative expenses to increase in absolute dollars as the Company expands
its staff and incurs additional costs related to the expansion of its business
and the costs resulting from being a public company, but decrease as a
percentage of total revenues as total revenues increase.

Interest, Net. Interest, net is comprised primarily of interest income from
the investment of cash proceeds from financing activities, less interest expense
on short-term borrowings. Net interest income was $23,000 as compared with
$99,000 for the six months ended July 31, 1997 and the six months ended July 31,
1998, respectively.

FISCAL 1997 COMPARED TO FISCAL 1998

Online Revenue. Online revenue increased from $180,000 in fiscal 1997 to
$3.0 million in fiscal 1998. This increase was primarily attributable to
increased awareness of the Company's online product offerings and the resulting
increase in new customers (from 1,614 to 19,979), and repeat purchases. The
decrease in online revenue as a percentage of total revenues from 100% in fiscal
1997 to 27.6% in fiscal 1998 was primarily attributable to the Company's
acquisition of CLBI in May 1997. Online revenue derived from international sales
accounted for approximately 33.4% and 21.4% of online revenue in fiscal 1997 and
fiscal 1998, respectively.

23
<PAGE> 25

Retail and Other Revenue. Although the Company had no significant retail
and other revenue in fiscal 1997, it generated $7.9 million in retail and other
revenue during fiscal 1998 representing 72.4% of total revenues. Substantially
all of fiscal 1998 retail and other revenue was attributable to the inclusion of
CLBI results of operations after the acquisition of CLBI in May 1997.

Cost of Online Revenue. Cost of online revenue increased from $150,000, or
83.3% of online revenue, in fiscal 1997, to $2.2 million, or 72.5% of online
revenue, in fiscal 1998, primarily as a result of increased online sales.

Cost of Retail and Other Revenue. In fiscal 1997, there was no cost of
retail and other revenue. Cost of retail and other revenue was $5.2 million, or
65.8% of retail and other revenue, in fiscal 1998.

Gross Margin. Gross margin as a percentage of total revenues increased from
16.7% in fiscal 1997 to 32.4% in fiscal 1998 as the Company began to achieve
economies of scale from the operation of its online store and inclusion of
higher margin retail and other revenue resulting from the acquisition of CLBI in
May 1997.

Sales and Marketing Expenses. Sales and marketing expenses increased from
$130,000, or 72.2% of total revenues, in fiscal 1997 to $4.2 million, or 38.3%
of total revenues, in fiscal 1998. The increase in absolute dollars was
primarily attributable to sales and marketing expenses related to operating the
Company's four retail stores following the acquisition of CLBI in May 1997, the
expansion of the Company's online store and its direct sales force, the increase
in advertising, public relations and other promotional expenditures, and the
increased personnel and related expenses required to implement the Company's
marketing strategy and fulfill customer demand. The decrease as a percentage of
total revenues was primarily attributable to an increased revenue base.

Development and Engineering Expenses. Development and engineering expenses
increased from $110,000, or 61.1% of total revenues, in fiscal 1997 to $860,000,
or 7.8% of total revenues, in fiscal 1998. This increase in absolute dollars was
primarily attributable to increased staffing and costs related to enhancing the
features, content and functionality of the Company's online store and
transaction-processing systems, as well as increased investments in systems and
telecommunications infrastructure. Such expenses decreased significantly as a
percentage of total revenues in fiscal 1998 due to the substantial increase in
fiscal 1998 total revenues.

General and Administrative Expenses. General and administrative expenses
increased from $412,000 in fiscal 1997 to $1.7 million, or 15.3% of total
revenues, in fiscal 1998. This increase in absolute dollars was primarily
attributable to increased salaries and related expenses associated with the
hiring of additional personnel, increases in professional fees and travel. Such
expenses decreased as a percentage of total revenues in fiscal 1998 due to the
increase in fiscal 1998 total revenues.

Interest, Net. Net interest income in fiscal 1997 was $55,000 compared to
net interest expense of $7,000 in fiscal 1998. Net interest income in fiscal
1997 resulted from the investment of cash proceeds from financing activities.
Interest expense during fiscal 1998 was primarily attributable to borrowings on
the Company's bank line of credit.

Provision for Income Taxes. The Company recorded no provision for income
taxes in fiscal 1997 and fiscal 1998, as it incurred losses during such periods.
As of September 30, 1997, the Company's year end for tax reporting purposes, the
Company had net operating loss carryforwards of approximately $3.0 million for
federal and state income tax purposes. If not utilized, the net operating loss
carryforwards will expire through 2004 and 2013 for state and federal income tax
purposes, respectively. Under the Tax Reform Act of 1986 and the California
Conformity Act of 1987, the amount of and the benefit from net operating losses
that can be carried forward may be impaired in certain circumstances, including,
for example, a cumulative ownership change of more than 50% over a three-year
period.

24
<PAGE> 26

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited selected quarterly results
of operations data for the six quarters ended July 31, 1998 as well as such data
expressed as a percentage of total revenue. In the opinion of management, this
information has been prepared substantially on the same basis as the audited
Financial Statements appearing elsewhere in this Prospectus, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results
when read in conjunction with the Financial Statements of the Company and
related Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of results for any future
period.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Online............................. $ 176 $ 444 $1,089 $ 1,312 $ 1,761 $ 2,464
Retail and other................... 71 2,192 3,124 2,540 2,633 2,351
----- ------ ------ ------- ------- -------
Total revenues.............. 247 2,636 4,213 3,852 4,394 4,815
Cost of revenues:
Online............................. 115 303 802 969 1,326 1,965
Retail and other................... 53 1,372 2,041 1,750 1,688 1,538
----- ------ ------ ------- ------- -------
Total cost of revenues...... 168 1,675 2,843 2,719 3,014 3,503
----- ------ ------ ------- ------- -------
Gross profit......................... 79 961 1,370 1,133 1,380 1,312
Operating expenses:
Sales and marketing................ 272 968 1,126 1,826 1,986 2,070
Development and engineering........ 76 137 311 336 554 594
General and administrative......... 123 473 552 526 543 681
----- ------ ------ ------- ------- -------
Total operating expenses.... 471 1,578 1,989 2,688 3,083 3,345
----- ------ ------ ------- ------- -------
Loss from operations................. (392) (617) (619) (1,555) (1,703) (2,033)
Interest, net........................ 31 (8) (27) (3) 32 67
----- ------ ------ ------- ------- -------
Net loss............................. $(361) $ (625) $ (646) $(1,558) $(1,671) $(1,966)
===== ====== ====== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1997 1997 1997 1998 1998 1998
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL REVENUES:
Revenues:
Online............................... 71.3% 16.8% 25.8% 34.1% 40.1% 51.2%
Retail and other..................... 28.7 83.2 74.2 65.9 59.9 48.8
------ ----- ----- ----- ----- -----
Total revenues................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues(1):
Online............................... 65.3 68.2 73.6 73.9 75.3 79.7
Retail and other..................... 74.6 62.6 65.3 68.9 64.1 65.4
------ ----- ----- ----- ----- -----
Total cost of revenues........ 68.0 63.5 67.5 70.6 68.6 72.8
------ ----- ----- ----- ----- -----
Gross profit........................... 32.0 36.5 32.5 29.4 31.4 27.2
Operating expenses:
Sales and marketing.................. 110.1 36.7 26.7 47.4 45.2 43.0
Development and engineering.......... 30.8 5.2 7.4 8.7 12.6 12.3
General and administrative........... 49.8 17.9 13.1 13.7 12.4 14.1
------ ----- ----- ----- ----- -----
Total operating expenses...... 190.7 59.9 47.2 69.8 70.2 69.4
------ ----- ----- ----- ----- -----
Loss from operations................... (158.7) (23.4) (14.7) (40.4) (38.8) (42.2)
Interest, net.......................... 12.6 (0.3) (0.6) (0.1) 0.7 1.4
------ ----- ----- ----- ----- -----
Net loss............................... (146.2)% (23.7)% (15.3)% (40.4)% (38.0)% (40.8)%
====== ===== ===== ===== ===== =====
</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.

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<PAGE> 27

The Company expects to experience significant fluctuations in its future
quarterly operating results due to a variety of factors, many of which are
outside the Company's control. Factors that could affect the Company's quarterly
operating results include: (i) the Company's ability to establish and expand
brand recognition, (ii) the Company's ability to retain existing customers,
attract new customers and continuously improve customer satisfaction, (iii)
announcements of, and market anticipation for, new technology offerings for
which information resources may be sought, (iv) the Company's ability to manage
inventory and fulfillment operations, (v) the Company's ability to sustain or
improve gross margins, (vi) the announcement or introduction of new online
stores, services and products by the Company or competitors, (vii) price
competition or higher wholesale prices in the industry, (viii) the level of
usage of and commerce on the Internet and online services generally, (ix)
increasing customer acceptance of the Internet for the purchase of information
resources such as those offered by the Company, (x) the Company's ability to
upgrade and develop its systems and infrastructure in a timely and effective
manner, (xi) the level of traffic on the Company's online store, (xii) the sales
mix of the Company's product offerings, (xiii) technical difficulties, system
downtime or Internet brownouts, (xiv) the amount and timing of operating costs
and capital expenditures relating to expansion of the Company's business,
operations and infrastructure, (xv) the introduction of books, technology based
training solutions, product manuals and research reports, (xvi) the level of
merchandise returns experienced by the Company, (xvii) governmental regulation
and (xviii) general economic conditions and economic conditions specific to the
Internet, electronic commerce and the technical resource industries.

In the past, the Company has experienced seasonality in its business and
the Company expects that it will continue to experience such seasonality in the
future. Internet usage and the amount of purchases from individual and corporate
consumers tend to decline during August, November and December, times when many
technical professionals are either absent from the workplace, on vacation or
experience a holiday closure at their company. There can be no assurance that
the Company's results in any future quarter will not be negatively affected by
seasonal trends.

Due to the foregoing factors, the Company's quarterly revenue and operating
results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future performance.
It is likely that in one or more future quarters the Company's operating results
may fall below the expectations of securities analysts and investors. In such
event, the trading price of the Common Stock would likely be materially
adversely affected. See "Risk Factors -- Unpredictability of Future Revenues;
Potential Fluctuations in Quarterly Operating Results; Seasonality."

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily through
private sales of Preferred Stock which totaled approximately $19.3 million (net
of issuance costs) through July 1998.

Net cash used in operating activities was $574,000 in fiscal 1997 and $2.7
million in fiscal 1998. Cash used in operating activities in fiscal 1997 was
primarily attributable to a net loss of $567,000 and increases in inventories,
prepaid expenses and other assets, partially offset by an increase in accounts
payable and accrued expenses, as well as depreciation and amortization. For
fiscal 1998, cash used in operating activities primarily resulted from a net
loss of $3.2 million plus increases of $1.1 million in inventories, $173,000 in
prepaid expenses and other assets, offset by net increases of $1.6 million in
accounts payable and accrued expenses and $297,000 in depreciation and
amortization.

Net cash used in operating activities was $343,000 and $4.8 million in the
six months ended July 31, 1997 and the six months ended July 31, 1998,
respectively. Cash used in operating activities in the six months ended July 31,
1997 was primarily attributable to a net loss of $986,000, an increase in
prepaid expenses and other assets of $118,000 and a decrease in accrued expenses
of $132,000 partially offset by an increase in accounts payable of $845,000. For
the six months ended July 31, 1998, cash used in operating activities primarily
resulted from a net loss of $3.6 million, an increase in accounts receivable,
inventories and prepaid and other

26
<PAGE> 28

assets of $358,000, $296,000 and $613,000, respectively, and net decreases in
accounts payable and accrued expenses of $129,000, partially offset by
depreciation and amortization.

Net cash used in investing activities was $140,000 and $5.3 million in
fiscal 1997 and fiscal 1998, respectively. Investing activities in fiscal 1998
are related primarily to the acquisition of CLBI in May 1997 for $4.3 million
(net of cash acquired) and purchases of property and equipment of $941,000. Net
cash used in investing activities was $4.5 million and $645,000 for the six
months ended July 31, 1997 and the six months ended July 31, 1998, respectively.
Investing activities in the six months ended July 31, 1997 are related to the
acquisition of CLBI in May 1997 for $4.3 million (net of cash acquired) and
purchases of property and equipment of $176,000. Investing activities in the six
months ended July 31, 1998 are primarily attributable to purchases of property
and equipment.

Cash provided by financing activities was $3.9 million and $9.7 million in
fiscal 1997 and fiscal 1998, respectively, consisted primarily of proceeds from
the issuance of Preferred Stock. Cash provided by financing activities of $3.5
million in the six months ended July 31, 1997 consisted of $2.5 million in
proceeds from the issuance of preferred stock and $1.0 million in borrowings on
a line of credit. Cash provided by financing activities of $5.6 million in the
six months ended July 31, 1998 consisted primarily of proceeds from the issuance
of preferred stock. The Company has a $3.0 million line of credit which expires
on November 30, 1998. As of July 31, 1998, the Company has no borrowings
outstanding under its line of credit.

As of July 31, 1998, the Company had $5.1 million of cash and equivalents.
As of that date, the Company's principal commitments consisted of obligations
outstanding under an agreement with CBT Systems, Ltd. and operating and capital
leases. Although the Company has no material long-term commitments for capital
expenditures, it anticipates a substantial increase in its capital expenditures
and lease commitments consistent with anticipated growth in operations,
infrastructure and personnel.

The Company believes that the net proceeds from this offering, combined
with its current cash and equivalents and its available bank line of credit,
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least twelve months from the date of this
Prospectus. The Company's future liquidity and capital requirements will depend
upon numerous factors discussed under the section entitled "Risk Factors." The
Company's forecast of the period of time through which its financial resources
will be adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary. The factors
described in "Risk Factors" will impact the Company's future capital
requirements and the adequacy of its available funds. If cash generated from
operations is insufficient to satisfy the Company's liquidity requirements, the
Company may seek to sell additional equity or debt securities or to increase its
bank line of credit. The sale of additional equity or convertible debt
securities could result in additional dilution to the Company's stockholders.
There can be no assurance that financing will be available in amounts or on
terms acceptable to the Company, if at all.

The Company has entered into employment agreements with Mr. MacAskill, its
President and Chief Executive Officer; Mr. Orumchian, its Vice President of
Engineering; Mr. Alvarez, its Vice President of Finance and Chief Financial
Officer; and Mr. Cudd, its Vice President of Marketing. Each employment
agreement sets forth each officer's base salary and general employee benefits,
including acceleration of a portion of such employees Common Stock option
vesting. The employment agreements with Messrs. MacAskill and Orumchian also
provide that in the event that either is terminated without cause or due to
disability, he will receive a severance payment equal to six months of salary,
payable in equal monthly installments over a six-month period. See
"Management -- Employment Agreements and Change in Control Agreements."

The Company has purchase obligations to CBT Systems, Ltd. under the
agreement with such company dated March 7, 1998, as amended from time to time.
See Note 10 of Notes to Financial Statements.

The Company leases office and warehouse space, retail store space and
equipment under noncancellable operating leases. See Note 8 of Notes to
Financial Statements.

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<PAGE> 29

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruptions of operations including,
among other things, a temporary inability to process transactions, send invoices
or engage in similar normal business activities. As a result, many companies'
software and computer systems may need to be upgraded or replaced in order to
comply with such "Year 2000" requirements. Although the Company believes that
its products and internal systems are Year 2000 compliant, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Failure
of such third-party equipment or software to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition. Furthermore,
the purchasing patterns of customers or potential customers may be affected by
Year 2000 issues as companies expend significant resources to correct their
current systems for Year 2000 compliance. Any failure by the Company to make its
products Year 2000 compliant could result in a decrease in sales of the
Company's products, an increase in the allocation of resources to address Year
2000 problems of the Company's customers without additional revenue commensurate
with such dedication of resources, or an increase in litigation costs relating
to losses suffered by the Company's customers due to such Year 2000 problems.
These expenditures may result in reduced funds available to purchase products
and services such as those offered by the Company, which could have a material
adverse effect on the Company's business, operating results and financial
condition. The Company has conducted a preliminary review of its internal
computer systems to identify the systems that could be affected by the Year 2000
issue and to develop a plan to resolve the issue. Based on this preliminary
review, the Company currently has no reason to believe that its internal
software systems are not Year 2000 compliant, however, the Company will continue
to evaluate its systems and in the event the Company concludes that its systems
are not Year 2000 compliant, it will develop a contingency plan to address these
issues. See "Risk Factors -- Year 2000 Compliance."

RECENT ACCOUNTING PRONOUNCEMENT

In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997. In the initial
year of application, comparative information for earlier years must be restated.
The Company has not determined the manner in which it will present the
information required by Statement 131.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedging accounting when
certain conditions are met. This statement is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999. Although the Company has not
fully assessed the implications of this new statement, the Company does not
believe adoption of this statement will have a material impact on the Company's
financial statements.

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<PAGE> 30

BUSINESS

OVERVIEW

Computer Literacy has quickly become one of the most widely recognized
online retailers of information resources for the technical professional. To
enhance brand recognition and increase online traffic, the Company has
established a number of strategic alliances with publishers and other suppliers
of information resources for technical professionals. For example, the Company
has established an alliance with CBT to sell CBT's full library of technology
based training materials, containing over 600 titles. In addition, the Company
has established co-branded online stores with a number of technology companies,
including Apple, Cisco, Hewlett-Packard, Microsoft, SAP and Sun Microsystems.
The Company believes that these customized corporate online stores, combined
with its commitment to customer service and readily available product offerings,
create valuable long-term relationships and repeat purchasing patterns.

Since launching its online store in February 1996, the Company has
experienced rapid online revenue growth. On May 31, 1997, the Company completed
the acquisition of all of the outstanding capital stock of Computer Literacy
Bookshops, Inc., a retailer of computer books, with four stores located in
California and Virginia for a purchase price of approximately $5.1 million. For
the two-year period ended July 31, 1998, Computer Literacy generated total
online revenues of over $7.4 million (over $2.4 million of which was generated
during the three months ended July 31, 1998), representing a compound average
quarterly growth rate of approximately 175%. In addition, the number of online
customers has grown from approximately 1,600 as of January 31, 1997 to over
44,000 as of July 31, 1998, and repeat purchases have accounted for
approximately 49% of the Company's online revenue from inception to July 31,
1998. See "Risk Factors -- Limited Operating History; Accumulated Deficit;
Anticipated Losses."

INDUSTRY BACKGROUND

The Growth of the Internet and Electronic Commerce

The Internet is an increasingly significant global medium for
communications, content and commerce. According to International Data
Corporation ("IDC"), there were an estimated 69 million domestic and
international Web users at the end of 1997, and it is anticipated that there
will be approximately 320 million Web users by the end of 2002. Growth in
Internet usage has been fueled by a number of factors, including: (i) a large
and increasing installed base of personal computers at home and in the
workplace, (ii) advances in the performance of personal computers and modems,
(iii) improvements in network systems and infrastructure, (iv) more readily
available access to the Internet, (v) increased awareness of the Internet among
businesses and consumers, (vi) growing availability of information and services
on the Web and (vii) reduced security risks in conducting transactions online.

The increasing functionality, availability and overall usage of the
Internet enables online retailers to access customers in a manner unprecedented
by traditional retailers or mail-order catalogs. The reduced cost of selling and
marketing on the Web, the ability to serve a large and global group of customers
electronically from a central location and the potential for personalized
low-cost customer interaction provide significant economic benefits for online
retailers. Unlike traditional retailers, online retailers do not have the costs
of managing and maintaining a significant retail store infrastructure or the
printing and mailing costs of catalog marketing. Because of these advantages,
online retailers have the potential to build large, global customer

29
<PAGE> 31

bases quickly and to achieve economies of scale over the long term. IDC
estimates that the amount of commerce conducted over the Web will grow from over
$12 billion at the end of 1997 to more than $425 billion by the end of 2002.

Technical Professionals and Their Information Resource Requirements

Organizations increasingly seek technology solutions for competitive
advantages and rely upon such solutions for mission-critical business processes.
As a result, the demand for technical professionals has grown significantly.
According to Dataquest, there were 6.1 million professional programmers
worldwide as of 1995, and based on information derived from the U.S. Bureau of
Labor Statistics, the Company believes that there were over 2 million other
technical professionals in the U.S. as of 1996. In addition, according to the
U.S. Bureau of Labor Statistics, computer scientists, computer engineers, and
systems analysts are expected to be the three fastest growing occupations in the
U.S. through the year 2006. In order to remain knowledgeable with respect to the
latest technical innovations and to maximize the competitive advantages provided
by these new technologies, technical professionals must have access to
immediately available information resources that are highly specific and contain
authoritative content. These information resources, including technical books,
technology based training solutions, product manuals and research reports,
traditionally have been available only from disparate sources.

Technical Books. The market for technical books is large and relatively
fragmented. Based on industry data the Company believes that the wholesale
market for technical books was approximately $1 billion in 1996. Traditionally,
technical books have been sold through small, local and independent technical
bookstores and, to a lesser extent, through computer or book superstores. These
traditional retail channels typically require customers to travel to physical
retail locations and are further limited by their product selection,
inconvenient hours of operation and degree of authoritative content.

Technology Based Training Solutions. To address training requirements for
an increasing number of products and technologies, technical professionals and
their managers are increasingly seeking current technical training covering a
broad range of topics and skill levels that can be delivered on multiple
formats. According to IDC, revenue from all technology based training solutions
in the United States is expected to grow from $1.5 billion in 1997 to $7.7
billion in 2002. Courseware from vendors, including interactive CD-ROMs, network
resident programs and video tapes, allows employees to tailor training to their
work schedules, to begin training at a level that is suitable to their needs, to
integrate training with on-the-job practice, to train in only those topics that
are relevant to their needs and to access training materials on an ongoing basis
as reference tools. Much of the technology based training is interactive,
allowing users to practice and test skills as they learn. To date, the market
for technology based training solutions has been highly fragmented with many
publishers primarily selling directly to end users. As a result, technology
based training solutions are typically difficult to locate and undeliverable
within tight time constraints.

Product Manuals, Research Reports and Other Technical Information. In
addition to technical books and technology based training, the Company believes
there is a sizeable and growing market for product manuals, research reports and
other information resources that technical professionals rely on for maintaining
existing technology or evaluating new technology. Although the market for
product manuals is driven by the increasing sales of hardware and software,
vendors are seeking alternatives to the production of such materials, including
outsourcing, printing and distribution in an effort to focus employee resources
on the core competencies of the organization. Very few product manuals and
research reports are distributed through third party resellers and, when
available from such sources, may be undeliverable within tight time constraints
or in sufficient quantity.

Technical professionals must stay abreast of technology developments and
respond quickly to changes or updates to such technology. Delays or unanswered
questions often result in missed deadlines, lost customer communications,
inaccessibility to mission-critical information and lost business opportunities.
Technical professionals therefore demand an extensive selection of information
resources, authoritative and compelling content to assist purchasing decisions,
customer convenience and value-added service, none of which have traditionally
been available from a single or centralized source.

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<PAGE> 32

THE COMPUTER LITERACY SOLUTION

Since opening its online store in February 1996, Computer Literacy has
become one of the most widely recognized online retailers of information
resources for technical professionals. By offering customers a selection of more
than 300,000 titles, as well as competitive pricing and a strong commitment to
customer service, the Company believes it has achieved a leading position among
retailers in its category. Computer Literacy further believes that the
demographics of technical professionals overlap one-to-one with those of
Internet users, providing an exceptional target market for the Company's product
offerings. The Company's solution consists of the following key attributes:

Extensive Product Selection. Computer Literacy offers the most extensive
selection of information resources for the technical professional, including
technical books, technology based training solutions, product manuals and
research reports from more than 8,000 publishers. The Company believes that its
online platform is particularly suited to offer a comprehensive selection of
information resources that would be impractical for physical retail stores to
provide. This extensive selection enables technical professionals to obtain the
information resources they need in a timely and efficient manner.

Corporate Programs. Computer Literacy has corporate sales personnel whose
focus is to fulfill the information resource needs of organizations and their
employees and constituents. The Company sells primarily to purchasing agents and
corporate librarians as well as to individual employees within these
organizations and to their customers or constituents. The Company has also
established customized co-branded online stores focused on specific product
offerings for certain corporate customers, including Apple, Cisco,
Hewlett-Packard, Microsoft, SAP and Sun Microsystems. These co-branded online
stores minimize time and travel expenditures, simplify payment and reimbursement
processes and improve access to relevant information resources.

Highly Authoritative and Compelling Content. Computer Literacy offers
technical professionals authoritative and compelling content to facilitate
informed purchasing decisions. Computer Literacy's knowledgeable editorial staff
delivers relevant, informative and insightful commentary through synopses,
reviews and recommendations. In addition, reviews and recommendations by
authors, other technical professionals, publishers and recognized industry
experts provide diverse and stimulating points of view. The availability of this
content at the Company's online store allows technical professionals to quickly
identify the resources that specifically address their needs.

Customer Convenience. Purchasing from Computer Literacy's online store is
easy, quick and convenient. Computer Literacy's online store is available 24
hours a day, seven days a week, and customer service may be accessed via e-mail
or through the Company's toll-free helpline. Because the Computer Literacy
online store has a global reach, it can deliver a broad selection of technical
resources to customers in rural, international or other locations who would not
otherwise have access to such resources. Computer Literacy accepts credit cards,
checks, money orders and, for approved corporate customers, extends trade credit
through purchase orders. To maximize the availability of information resources,
Computer Literacy strives to ship 90% of all orders received weekdays by 4:00
p.m. Pacific Time on the same day.

Value-added Services. Computer Literacy has designed its online store to
incorporate certain value-added services that enhance the customer experience
and promote repeat purchasing. Computer Literacy's online store offers several
notification services allowing customers to subscribe to preference lists that
notify them with e-mails of weekly specials, new books and upcoming events. For
books not yet in print, customers can order in advance of the release date
ensuring access to the most current information as soon as it becomes available.
Orders are confirmed by e-mail notifications and customers are able to check the
status of their orders online. In addition to notification services, the Company
obtains certain preference and behavioral information, enabling it to offer
other value-added customized services to its customers. The Company has also
established several special interest group reading rooms covering specific
technical topics. These reading rooms provide customized, in-depth technical
resources, recommendations and content to facilitate purchasing decisions.

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<PAGE> 33

Substantial Benefits to Publishers. Computer Literacy offers a sales and
marketing channel not previously available for certain publishers and suppliers.
The Company believes that by focusing on technical professionals, it is able to
increase sales of specialized and unique titles not typically available in
physical stores or on other Web sites, while helping publishers target customers
for particular product offerings. With its centralized distribution and online
store, Computer Literacy is able to order more accurately based upon aggregated
customer demand, which the Company believes results in reduced return rates to
publishers and more efficient inventory management.

STRATEGY

Computer Literacy's objective is to maintain and extend its leadership
position as an online retailer of information resources singularly focused on
the technical professional. Key elements of the Company's strategy to achieve
this objective include:

Enhance the Customer Experience. Computer Literacy seeks to provide its
customers with a superior online shopping experience by offering an extensive
selection, authoritative and compelling content, convenience, value-added
service, a strong commitment to customer service, competitive pricing and an
easy-to-use interface. The Company believes that enhancements to its online
product offering will enable it to capture an increasing share of the worldwide
market for information resources. The Company expects to continue investing in
its technology and product development to maintain a state-of-the-art, simple to
use and content-rich online store, while broadening and expanding its product
offerings.

Expand Corporate Relationships. Computer Literacy believes that there is a
significant opportunity to increase its sales by expanding its corporate sales
force and adding telesales capacity to focus on small and midsized businesses,
educational institutions and government agencies. Such corporate relationships
provide a cost-effective means of acquiring a large number of loyal customers
quickly and efficiently. In addition, by building customized co-branded online
stores for many of these corporate customers, the Company is able to secure and
leverage its position with the customer as the preferred provider of information
resources for technical professionals.

Build Brand Awareness. Computer Literacy believes it is the first online
retailer to singularly focus on providing information resources to the technical
professional. To leverage its first-mover advantage, the Company seeks to expand
awareness of its brand with targeted online marketing campaigns, a direct sales
force and other marketing initiatives, thereby reducing customer acquisition
costs. The Company's strategy is to promote, advertise and increase brand equity
through excellent customer service, effective marketing and promotion, and with
strategic alliances and partnerships.

Encourage Customer Loyalty. Computer Literacy believes that its customized
corporate online stores, its commitment to customer service and readily
available product offerings create valuable long-term relationships and repeat
purchasing behavior. The Company intends to further pursue customized online
retail opportunities and devote significant resources to encourage overall
customer loyalty.

Capitalize on Expanding Market. Computer Literacy intends to capitalize on
the growing market for information resources by leveraging its online platform
and brand, and by providing an extensive selection of products and services
previously unavailable through a single or centralized source. In addition, the
Company will consider developing incremental revenue opportunities by promoting
its products through affiliated sites and expanding into related product areas.
The Company believes that the international market for its product offering is
large and expanding and that the Internet offers a unique opportunity for it to
expand its international presence quickly and cost-effectively. Further, the
Company's customer demographics and substantial site traffic creates a
meaningful opportunity for potential ancillary revenues such as banner
advertising, links to related sites and cross promotions.

Establish and Leverage Supplier Relationships. Computer Literacy intends to
capitalize upon the advantages associated with its online platform to create and
sustain strong relationships with publishers and other suppliers. The Company
also intends to leverage its market leadership position to expand cooperative
marketing campaigns with publishers, pursue direct supply relationships and
improve volume discounts.

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Computer Literacy plans to hire additional personnel primarily dedicated to
establishing and maintaining supplier relationships in order to improve
availability, delivery, pricing terms and, in certain circumstances,
exclusivity.

Maintain Technology Focus and Expertise. Because speed, scalability and
ease of use are essential to effectively operating online stores, Computer
Literacy's internal engineering group will continue to devote substantial
resources to develop, acquire and implement technological enhancements to its
Web site and transaction-processing systems. Among other technology objectives,
the Company intends to provide increasingly value-added services and make the
user interface as intuitive, engaging and effective as possible, while
continuously improving the efficiency of its transaction-processing and
fulfillment activities.

COMPUTER LITERACY'S ONLINE STORE

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

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

Searching. A primary feature of the Computer Literacy online store is its
interactive, searchable catalog of more than 300,000 titles. The Company
provides a selection of search tools enabling users to quickly find technical
resources based on title, subject, author, publisher or ISBN. Within a
particular search, a customer can choose to sort the selections in various
orders of importance. The Company believes that its focus on technical materials
allows for an efficient search mechanism by delivering search results of
relevant technical materials. After a selection has been located, Computer
Literacy informs customers of related products which provides unique up-selling
and marketing opportunities.

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

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

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

Customized Online Stores. The Company's co-branded online stores are
accessible through the Company's home page or from the intranet sites of
corporate customers, and provide the Company with opportunities to be the
preferred provider of information resources to organizations and their employees
and constituents.

The following table depicts the Company's best selling titles in terms of
dollar volume from February 1, 1998 through July 31, 1998:

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

<TABLE>
<CAPTION>
PRODUCT TYPE
(APPROXIMATE NO. OF TITLES AVAILABLE) PRICE RANGE BEST SELLING TITLES
- ------------------------------------------
<S> <C> <C>
Technical Books (300,000) $7.25 - - Samba: Integrating UNIX and Windows
$790.00 - MCSE Core Requirements, Second Edition
- The Cisco CCIE Exam Guide
- Cisco IOS Configuration
- Computer Networks, Third Edition
- ------------------------------------------
Technology Based Training Solutions $21.95 - - Complete Cisco Curriculum
(1,600) $3,700.00 - Complete Microsoft MCSE Curriculum
- Microsoft TechNet
- ------------------------------------------
Product Manuals and Research Reports (72) $23.50 - - Microsoft Visual C+ Run-Time Library Reference
$250.00 - About the AS/400 and Internet
- Getting Started with the SAP R/3 System
</TABLE>

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

In addition to its online stores, Computer Literacy maintains four retail
stores, located in San Jose, Sunnyvale and Cupertino, California and Vienna,
Virginia. For the period beginning on the date of the CLBI acquisition through
January 31, 1998, revenues attributable to these physical stores were $7.1
million. These stores supplement the Company's operating results and provide a
profitable means of customer acquisition and branding. Additionally, the
existence of the stores enables the Company to engage in unique
cross-promotional efforts and offer in-store events such as guest lectures. The
Company periodically evaluates the location and productivity of its stores, and
may close, consolidate or relocate stores as conditions warrant. See "Risk
Factors -- Unpredictability of Future Revenues; Potential Fluctuations in
Quarterly Operating Results; Seasonality."

CUSTOMERS

The Company's customers consist of both individual technical professionals,
who primarily purchase for business purposes, and corporate customers. Through
its relationships with corporate customers, the Company sells to purchasing
agents, corporate librarians and training departments as well as to individual
employees within these organizations. The Company has also leveraged these
corporate customer relationships into sales to constituents of the corporate
customers. The number of customer accounts has grown from approximately 1,600 as
of January 31, 1997 to over 44,000 as of July 31, 1998 and repeat purchases have
accounted for approximately 49% of online revenue from inception to July 31,
1998. No single customer accounted for more than 10% of total revenues in the
fiscal years ended January 31, 1997 or January 31, 1998 or the six months ended
July 31, 1998. The following table sets forth a representative list of the
Company's corporate accounts

34
<PAGE> 36

who have purchased at least $20,000 of the Company's technical books, technology
based training solutions, product manuals and research reports for the six month
period ended July 31, 1998:

<TABLE>
<S> <C> <C>
Cisco Systems, Inc. Microsoft Corporation Software Quality Engineering
Hewlett-Packard Company Motorola, Inc. Sun Microsystems, Inc.
Intel Corporation Prism Solutions, Inc. University of California, Santa
Lawrence Livermore National Rockwell International Corp. Cruz
Laboratory Extension
</TABLE>

Set forth below are two case studies of a representative corporate customer
relationships.

Microsoft Corporation. Computer Literacy's relationship with Microsoft
began in January 1997 when the Microsoft Corporate Library ("MS Library") began
using Computer Literacy as one of its sources to acquire materials for its
collection. In this manner, the library staff acts as central purchasing agents
to acquire resources on behalf of the entire corporate staff, who turn to the MS
Library as an internal one-stop resource for their own information needs.
Recognizing the importance of this strategic account, the Company assigned a
member of its sales team to actively manage the account, deliver personal
service, and further develop the relationship. The assigned account manager is
in weekly contact to personally resolve issues, expedite important orders, and
suggest products and services. The Company believes that the MS Library chooses
to buy from Computer Literacy because it delivers higher levels of service by
lending personal attention, accepting orders via its corporate credit card, and
offering faster shipping, all at competitive prices. In January 1998, Computer
Literacy extended its relationship with Microsoft to reach external
constituents, specifically with members of the Microsoft development community,
by collaborating with the Microsoft Site Builder Network ("SBN"). Microsoft
chose Computer Literacy as its partner to develop a co-branded store for SBN
members and visitors. This selection was based on Computer Literacy's focus on
the technology professional, its unique ability to provide value-added content,
and its commitment to partnering as demonstrated by previous relationships and
resource commitments to partnership projects. Once the selection was made,
Computer Literacy developed the SBN store site which features books of
particular interest to SBN's audience of Web developers. Together, Microsoft and
Computer Literacy promote the SBN store via vehicles such as e-mailings to over
500,000 registered SBN members, Web site links and other mechanisms.

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

SALES AND MARKETING

The Company's sales and marketing strategy is focused on both individual
consumers and organizations, which represent distinct yet complementary customer
segments. This approach is designed to cost-effectively strengthen the Company's
brand name, increase customer traffic to the Computer Literacy online store,
build customer loyalty and develop revenue opportunities through the Company's
distribution channels.

Corporate Sales. The Company has sales personnel primarily focused on
fulfilling the information resource requirements of corporate organizations and
their employees and constituents. The Company's direct sales force is
headquartered in Sunnyvale, California and each member is assigned to specific
strategic accounts. Each member of the direct sales organization, including
telesales personnel, is compensated with base salary and commissions. The
Company intends to expand its corporate sales force and add telesales capacity
to focus on small and midsized businesses, educational institutions and
governmental agencies. See

35
<PAGE> 37

"Risk Factors -- Need for Additional Personnel," "-- Dependence on Key
Personnel" and "-- Management of Expanding Business; Limited Senior Management
Resources."

Marketing and Consumer Sales. Computer Literacy utilizes a variety of
programs and promotional activities to increase traffic and purchases on its Web
site and in retail locations. The Company maintains a proprietary customer
database of e-mail addresses that allows for cost-effective personal
notification and other targeted marketing. Computer Literacy continues to build
customer loyalty by delivering customized services, promotions and products to
its customers. The Company targets the individual customer through a mix of
promotional activities and strategic advertising. Over 2,000 Web sites have
links to the Company's online store. These links are located primarily on Web
sites concerning computers or other technical topics, which are considered
complementary to the Company's online store. The Company also places a limited
number of advertisements on strategic Web sites.

The Company advertises in a number of trade journals, newspapers and
magazines targeted to the information technology professionals and information
systems consultants. The Company may also pursue advertisements in other media,
such as radio and television. In addition, the Company has served as the
official bookseller of certain trade shows and conventions, such as the
Microsoft's TechEd and Software Development West. See "Risk Factors -- Risks
Associated with Branding."

International Sales. For fiscal 1998 and the six months ended July 31,
1998, approximately 21% and 22%, respectively, of online revenue was derived
from international sales. The Company believes that the Internet offers a unique
opportunity for it to rapidly expand its international presence on a
cost-effective basis and it intends to pursue this opportunity aggressively.

CUSTOMER SERVICE AND SUPPORT

The Company is committed to providing superior customer service and
support. The Company's customer service and support personnel are trained to
assist customers in purchasing decisions, recommend complementary products and
handle general customer inquiries. The Company answers service and support
questions through e-mail 24 hours a day, seven days a week, and through its
toll-free phone line from 6:00 a.m. to 8:00 p.m., Pacific time on weekdays and
9:00 a.m. to 5:00 p.m., Pacific Time on weekends. The Company has automated
certain portions of its customer service and support operations and intends to
enhance and provide further automation of such service and operations.

WAREHOUSING AND FULFILLMENT

For fiscal 1998 and the six months ended July 31, 1998 the Company
purchased approximately 30% and 36%, respectively, of its books from Ingram. The
Company relies to a large extent on rapid fulfillment from Ingram and other
vendors. The Company generally has no commitments to or arrangements with any of
its vendors that guarantee the availability of merchandise, the continuation of
particular payment terms or the extension of credit limits. There can be no
assurance that the Company's current vendors will continue to sell merchandise
to the Company on current terms or that the Company will be able to establish
new or extend current vendor relationships to ensure acquisition of merchandise
in a timely and efficient manner and on acceptable commercial terms. If the
Company were unable to develop and maintain relationships with vendors that
would allow it to obtain sufficient quantities of merchandise on acceptable
commercial terms, its business, financial condition and results of operations
would be materially adversely affected. See "Risk Factors -- Reliance on Certain
Suppliers."

TECHNOLOGY AND PRODUCT DEVELOPMENT

Using a combination of its internally developed proprietary technology and
commercially available licensed technology, the Company has implemented an
integrated system of site management, search engine, customer support, inventory
management, network monitoring, quality assurance, transaction processing and
fulfillment services. The Company's technology architecture is based on a
distributed model that is extremely scalable, flexible and modular. See "Risk
Factors -- Trademarks and Proprietary Rights; Unlicensed Arrangements and
Materials."

The Company's current strategy is to focus its development efforts on
creating and enhancing the proprietary software unique to its business,
especially as it relates to interaction with customers. Computer Literacy
licenses commercially available technology in areas where the Company cannot
create unique value. See "Risk Factors -- Dependence on Continued Growth of
Electronic Commerce; and "-- Rapid Technological Change."

The Company's integrated system consists of a dynamic Web site and
transaction processing components. The Company's dynamic Web site allows
customers to search, browse and view product information, monitor product status
and availability, compare different product options, and make purchase decisions
specific to their particular needs. The Company has implemented a transaction
processing system that supports corporate ordering, multiple account profiles
for individual and corporate users, custom integration and co-branding with
partner sites, the application of selective discounting and promotion codes, and
referral tracking and reporting. The system can accommodate large numbers of
products, across different product categories and millions of individual items,
offer users multiple shipping and delivery options, and provides secure credit
card transactions. The Company has implemented a customer service system that
manages order adjustments, credits, returns, refunds, cancellations, and
customer account information. The Company's back-end system is fully integrated
and includes inventory management, accounts payable, accounts receivable,
general ledger, and retail point of sale.

Computer Literacy's engineering staff consisted of 17 individuals as of
July 31, 1998. The Company's engineering strategy includes enhancing the
functionality of its existing features, developing new features, and integrating
off-the-shelf components into its environment. Computer Literacy is currently
investing significant resources in its system development and expects to
continue to do so in the future. The Company believes its future success depends
on its ability to continue developing and enhancing this system.

As of July 31, 1998, the Company's online store operations staff consisted
of four systems administrators and one database administrator who are
responsible for managing, monitoring, and operating the Company's online store
and related systems. The uninterrupted operation of the Company's online store
and related system is essential to its business, and the site operations staff
is responsible for ensuring its reliability. The Company uses three Internet
service providers. The Company anticipates upgrading capacity to allow for
faster telecommunication services in the future. See "Risk Factors -- Management
of Expanding Business; Limited Senior Management Resources," "-- Risk of
Capacity Constraints; Reliance on Internally Developed Systems; System
Development Risks;" and "-- Risk of System Failure; Single Site and Order
Interface."

COMPETITION

position within the market could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company believes that the principal competitive factors on which it
competes in its market are brand recognition, selection, personalized services,
convenience, price, accessibility, customer service, quality of search tools,
quality of editorial and other site content and reliability and speed of
fulfillment. Many of the Company's current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than the Company.
In addition, online retailers may be acquired by, receive investments from or
enter into other commercial relationships with larger, well-established and
well-financed companies as use of the Internet and other online services
increases. Certain of the Company's 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 the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service or marketing
decisions or acquisitions that could result in reduced margins or otherwise have
a material adverse effect on its business, financial condition and results of
operations. New technologies and the expansion of existing technologies may
increase the competitive pressures on the Company. For example, applications
that select specific titles from a variety of Web sites may channel customers to
online booksellers that compete with the Company. Companies that control access
to transactions through a network or Web browsers could also promote the
Company's competitors or charge the Company a substantial fee for inclusion. In
addition, vendors of information resources such as technology based training
could provide direct access to training programs online. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors, and competitive pressures faced by the Company may have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Competition."

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

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

In addition, the Company displays reviews and articles on technical
subjects in its online store. Some reviews and articles may be copyrighted and
the Company may not have explicit permission from the author for use of such
intellectual property. There can be no assurance that the authors will not
assert infringement claims against the Company. If a claim is asserted alleging
that the Company has infringed the proprietary rights of a third party, the
Company may be required to seek licenses to continue to use such intellectual
property. The failure to obtain the necessary licenses or other rights at a
reasonable cost could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Trademarks
and Proprietary Rights; Unlicensed Arrangements and Materials."

38
<PAGE> 40

EMPLOYEES

As of July 31, 1998, the Company employed 149 full-time employees. In
addition, the Company employed 16 part-time employees, primarily for its
physical retail stores. The Company also employs independent contractors and
other temporary employees in its editorial, operations and finance and
administration departments. None of the Company's employees are represented by a
labor union, and the Company considers its employee relations to be good.
Competition for qualified personnel in the Company's industry is intense,
particularly among software development and other technical staff. The Company
believes that its future success will depend in part on its continued ability to
attract, hire and retain a sufficient number of highly skilled personnel. See
"Risk Factors -- Dependence on Key Personnel;" and "-- Need for Additional
Personnel."

FACILITIES

The Company's principal administrative, engineering, marketing, customer
service, warehousing and merchandising facility totals approximately 13,635
square feet and is located in Sunnyvale, California under a master lease that
expires on July 31, 1999. In addition, the Company leases four physical stores
located in San Jose, Sunnyvale and Cupertino, California, and Vienna, Virginia.
The Company does not own any real property. The Company expects that its current
facilities will be sufficient for the foreseeable future. The Company
periodically evaluates the location and productivity of its stores, and may
close, consolidate or relocate stores as conditions warrant.

39
<PAGE> 41

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of August 1, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chris MacAskill........................... 44 Chief Executive Officer, President and
Chairman of the Board
Kim Orumchian............................. 33 Vice President of Engineering,
Secretary and Director
Donald P. Alvarez......................... 33 Vice President of Finance and Chief
Financial Officer
Dennis F. Capovilla....................... 38 Vice President of Sales and Business
Development
Robert M. Cudd............................ 44 Vice President of Marketing
Peter G. Bodine(1)........................ 36 Director
Ralph C. Derrickson....................... 39 Director
Alan S. Fisher(2)......................... 37 Director
Tod H. Francis(1)......................... 38 Director
David C. Schwab........................... 40 Director
Peter C. Wendell(2)....................... 48 Director
</TABLE>

- ---------------
(1) Member of the Audit Committee

(2) Member of the Compensation Committee

Chris MacAskill has been Chief Executive Officer, President and a director
of the Company since co-founding the Company in June 1995. From June 1991 to
June 1993, Mr. MacAskill served as Director of Developer Relations at NeXT Inc.,
a software development company. From June 1993 to June 1995, Mr. MacAskill
served as Director of Developer Relations at General Magic, a software
development company. From September 1983 to May 1991, Mr. MacAskill served as
Vice President of Engineering at Western Atlas International, a geophysics
company. In September 1981, Mr. MacAskill founded PSI, a petroleum engineering
company, which was acquired by Western Atlas International in October 1983. Mr.
MacAskill received his B.S. in Geophysics from the University of Utah and
received his M.S. in Geophysics from Stanford University.

Kim Orumchian has been Vice President of Engineering, Secretary and a
director of the Company since co-founding the Company in June 1995. From May
1994 to June 1996, Mr. Orumchian served as a third party Product Manager for
General Magic, a software development company. From September 1990 to April
1994, Mr. Orumchian served as Manager of Developer Relations for NeXT Inc., a
software development company. Mr. Orumchian received his B.A. in Physics from
Reed College and received his B.S. in Applied Physics from Columbia University
School of Engineering.

Donald P. Alvarez joined the Company as Vice President of Finance and Chief
Financial Officer in September 1997. From January 1994 to August 1997, Mr.
Alvarez served as Controller for West Marine Inc., a retailer of recreational
boating supplies and apparel. From January 1987 to December 1993, Mr. Alvarez
served as an audit manager for Deloitte & Touche LLP, an international public
accounting firm. Mr. Alvarez received his B.S. in Business Administration from
California State University, Hayward.

Dennis F. Capovilla joined the Company as Vice President of Sales and
Business Development in June 1997. From August 1995 to July 1997, Mr. Capovilla
served as Director of the Imaging Division and Worldwide Printer Supplies for
Apple Computer, a computer company. From December 1992 to December 1994, Mr.
Capovilla directed Apple Computer's worldwide marketing efforts for the Imaging
Division. From January 1989 to December 1992, Mr. Capovilla served as a channel
marketing manager for Versatec Inc., an affiliate of Xerox Engineering Systems,
a technology company, where he directed North American distributor

40
<PAGE> 42

and VAR channel activities. Mr. Capovilla received his B.S. in Marketing from
Santa Clara University and did graduate work in business at the Leavey School of
Business at Santa Clara University.

Robert M. Cudd joined the Company as Vice President of Marketing in March
1998. From September 1996 to March 1998, Mr. Cudd served as Vice President of
Marketing for West Marine Inc., a retailer of recreational boating supplies and
apparel. From March 1994 to May 1996, Mr. Cudd served as the Director of
Marketing for the Computer City Division of Tandy Corporation, a computer
company. From November 1989 to January 1994 he served as Vice President of
Marketing at Computerland, a retail company. Mr. Cudd received his B.S. in
Business from Ferris State University.

Peter G. Bodine has been a director of the Company since May 1998. Since
December 1992, Mr. Bodine has served as a partner of APV Technology Partners
("APV"), a venture capital investment firm, and as an Executive Vice President
of Asia Pacific Ventures, a consulting firm affiliated with APV. Before joining
APV in 1992, Mr. Bodine was co-founder of International Business Catalysts, a
consulting firm focused on international trade and investment counsel. Mr.
Bodine received his B.S. in Finance from Brigham Young University and his M.B.A.
from the University of Utah.

Ralph C. Derrickson has been a director of the Company since June 1998.
Since December 1996 Mr. Derrickson has been employed by Vulcan Northwest, an
investment firm, where he focuses on new media, Internet, and technology-enabled
consumer product investments. From June 1993 to December 1996, Mr. Derrickson
served as Vice President of Product Development for Starwave, a multi-media
company, where he oversaw the development of online and multimedia products.
From December 1989 to February 1992, Mr. Derrickson served as Director of
Systems for NeXT, Inc., a software development company. Mr. Derrickson also
serves as a director of Metricom Inc. Mr. Derrickson received his Bachelor of
Technology in Systems Software Science from the Rochester Institute of
Technology.

Alan S. Fisher has been a director of the Company since July 1998. Mr.
Fisher has been Vice President of Development and Operations, Chief Technical
Officer and a director of ONSALE, Inc. ("ONSALE"), an online retailer, since
co-founding ONSALE in July 1994. He also served as Chief Financial Officer of
ONSALE from July 1994 to July 1996. Mr. Fisher is also President and Chairman of
Software Partners, Inc., a developer and publisher of software products, which
he co-founded in August 1988. From April 1984 to August 1988, Mr. Fisher served
as Technical Marketing Manager and Product Development Manager for Teknowledge,
Inc., a developer of artificial intelligence software products. Mr. Fisher
serves as a director of Infodata Systems, Inc., an internet document publishing
software company. Mr. Fisher received his B.S. in Electrical Engineering from
the University of Missouri and received his M.S. in Electrical Engineering from
Stanford University.

Tod H. Francis has been a director of the Company since September 1996. Mr.
Francis has been general partner of Trinity Ventures since March 1996. Prior to
being named a general partner, Mr. Francis worked at Trinity Ventures as an
associate from March 1993 to March 1995 and as a principal from March 1995 to
March 1996. Prior to joining Trinity Ventures, Mr. Francis was a partner at RAM
Group, a marketing management firm and worked at Johnson & Johnson, in brand
management. Mr. Francis received his B.A. in Economics and his M.B.A from
Northwestern University.

David C. Schwab has been a director of the Company since September 1996.
Mr. Schwab has been a general partner of Sierra Ventures since June 1996. Prior
to joining Sierra Ventures, Mr. Schwab co-founded Scopus Technology, Inc., a
client-server software systems company, and served in various capacities from
August 1991 to June 1996, most recently as Vice President of Sales. Mr. Schwab
also serves as a director of Micromuse, Inc. Mr. Schwab received his B.A. in
Systems Engineering from University of California San Diego, his M.S. and ENG.
in Aerospace Engineering from Stanford University, and his M.B.A from Harvard
Business School.

Peter C. Wendell has been a director of the Company since September 1996.
Mr. Wendell has been a General Partner of Sierra Ventures since 1982, the year
in which he founded that firm. Prior to that time he served in various executive
capacities with IBM Corp. Since 1991 he has also held a faculty appointment at
Stanford University's Graduate School of Business where he teaches
"Entrepreneurship and Venture Capital." Mr. Wendell holds an A.B. degree from
Princeton University and an M.B.A. from Harvard Business School.

41
<PAGE> 43

All directors hold office until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Officers are
elected by and serve at the direction of the Board of Directors. There are no
family relationships among the directors or officers of the Company.

BOARD COMMITTEES

The Board has established an Audit Committee to meet with and consider
suggestions from members of management and the Company's internal audit staff,
as well as the Company's independent accountants, concerning the financial
operations of the Company. The Audit Committee also has the responsibility to
review audited financial statements of the Company and consider and recommend
the employment of, and approve the fee arrangements with, independent
accountants for both audit functions and for advisory and other consulting
services. The Audit Committee is currently comprised of Mssrs. Bodine and
Francis. The Board has also established a Compensation Committee to review and
approve the compensation and benefits for the Company's key executive officers,
administer the Company's stock purchase, equity incentive and stock option plans
and make recommendations to the Board regarding such matters. The Compensation
Committee is currently comprised of Messrs. Wendell and Fisher.

COMPENSATION OF DIRECTORS

Directors receive no cash remuneration for serving on the Board of
Directors or any Board Committee. Non-employee Board members are eligible for
option grants pursuant to the provisions of the Automatic Option Grant Program
under the Company's 1998 Omnibus Equity Incentive Plan. Under the Automatic
Option Grant Program, each individual who first becomes a non-employee Board
member after the date of the Company's initial public offering will be granted
an option to purchase 7,500 shares of the Company's Common Stock on the date
such individual joins the Board ("Initial Grant"). In addition, at each Annual
Meeting of Stockholders, each individual who will continue to serve as a member
of the Board after such meeting will receive an additional option to purchase
1,500 shares of Common Stock ("Annual Grant"). However, a director will not
receive an Annual Grant in the same calendar year that he received an Initial
Grant. The exercise price for each option granted under the Automatic Option
Grant Program will be equal to the fair market value per share of the Common
Stock on the automatic grant date. Each Initial Grant will become vested and
exercisable with respect to 25% of the option shares on the first anniversary of
the date of grant and with respect to an additional 1/48th of the option shares
upon the completion of each month of service thereafter. Each Annual Grant will
become fully vested and exercisable on the first anniversary of the date of
grant. See "-- Stock Plans." In addition, directors are reimbursed for all
reasonable expenses incurred by them in attending Board and Committee meetings.

Directors who are also employees of the Company are eligible to receive
options and be issued shares of Common Stock directly under the 1998 Omnibus
Equity Incentive Plan and are also eligible to participate in the Company's 1998
Employee Stock Purchase Plan.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee consists of Messrs. Wendell and Fisher. None of
these individuals was at any time since the formation of the Company, an
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.

42
<PAGE> 44

EXECUTIVE COMPENSATION

The following summary compensation table sets forth information concerning
cash and non-cash compensation earned during the fiscal year ended January 31,
1998 by the Company's Chief Executive Officer and each of the Company's other
four highest paid executive officers whose total compensation for services in
all capacities to the Company exceeded or would have exceeded $100,000 during
such year had such officers provided services for the Company for the entire
fiscal year (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE FOR FISCAL YEAR 1998

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
----------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)(1)
--------------------------- ---------- --------- ---------------- ------------ -------------------
<S> <C> <C> <C> <C> <C>
Chris MacAskill.............. $81,539 -- -- -- $308
Chief Executive Officer and
President
Kim Orumchian................ 81,539 -- -- -- 308
Vice President of
Engineering and
Secretary
Donald P. Alvarez............ 50,000(2) -- -- 75,000 --
Vice President of Finance
and Chief Financial
Officer
Riki M. Tokuno(3)............ 34,904(4) $25,000 $57,987(5) 75,000 --
Chief Operating Officer
Dennis F. Capovilla.......... 76,962(6) -- 52,500(7) --
Vice President of Sales and
Business Development
</TABLE>

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

(1) Represents matching contributions to each Named Executive Officer's 401(k)
plan account.

(2) Mr. Alvarez commenced employment on September 2, 1997.

(3) Mr. Tokuno resigned from employment to pursue other interests effective as
of July 17, 1998.

(4) Mr. Tokuno commenced employment on November 10, 1997.

(5) Represents moving and related expenses.

(6) Mr. Capovilla commenced employment on July 7, 1997.

(7) Mr. Capovilla received an option grant for 22,500 shares of the Company's
Common Stock on February 27, 1998.

STOCK OPTIONS GRANTED IN FISCAL 1998

The following table provides information concerning grants of options to
purchase the Company's Common Stock made during the fiscal year ended January
31, 1998 to the Named Executive Officers. No stock appreciation rights were
granted to these individuals during such year.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
--------------------------------------------------------------------- RATES OF STOCK PRICE
NUMBER OF APPRECIATION FOR
SECURITIES % OF TOTAL OPTIONS OPTION
UNDERLYING GRANTED TO TERM (1)
OPTIONS EMPLOYEES IN EXERCISE PRICE PER EXPIRATION ---------------------
NAME GRANTED(#)(2) FISCAL 1998(3) SHARE ($)(4) DATE 5%($) 10%($)
---- ------------- ------------------ ------------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Chris MacAskill...... -- -- -- -- -- --
Kim Orumchian........ -- -- -- -- -- --
Donald P. Alvarez.... 75,000 9.4% $0.24 9/1/07 $11,320 $28,687
Riki M. Tokuno....... 75,000 9.4 1.20 11/9/07 56,601 143,437
Dennis F.
Capovilla.......... 52,500(5) 6.6 0.24 8/25/07 7,924 20,081
</TABLE>

43
<PAGE> 45

- ---------------
(1) The assumed 5% and 10% rates of stock price appreciation are provided in
accordance with rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the future Common Stock
price. Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock, overall market conditions and the
option holders' continued employment through the vesting period. This table
does not take into account any appreciation in the price of the Common Stock
from the date of grant to the date of this Prospectus. Unless the market
price of the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the Named Executive Officers.

(2) Each of the options listed in the table was granted under the Company's 1996
Stock Plan and is immediately exercisable. The shares purchasable thereunder
are subject to repurchase by the Company at the original exercise price paid
per share upon the optionee's cessation of service prior to vesting in such
shares. Except for Mr. Tokuno's option, the repurchase right lapses as to
25% of the option shares upon the completion of 12 months of service and as
to the balance in equal monthly installments upon the completion of each of
the next 36 months of service. For Mr. Tokuno's option, the repurchase right
lapses as to 7,500 option shares on the option grant date, as to an
additional 25% of the option shares upon the completion of 12 months of
service and as to the balance in equal monthly installments upon the
completion of each of the next 36 months of service thereafter. Mr. Tokuno
resigned from employment to pursue other interests effective as of July 17,
1998. The option shares will fully vest upon an acquisition of the Company
by merger or asset sale, unless the Company's repurchase right with respect
to the unvested option shares is assigned to the acquiring entity. The plan
administrator has the discretionary authority to reprice the options through
the cancellation of those options and the grant of replacement options with
an exercise price based on the fair market value of the option shares on the
regrant date. Each option has a maximum term of 10 years, subject to earlier
termination in the event of the optionee's cessation of employment with the
Company.

(3) The Company granted options to purchase an aggregate of 794,934 shares of
Common Stock during the fiscal year ended January 31, 1998.

(4) All options were granted at an exercise price equal to the fair market value
of the Company's Common Stock as determined by the Board of Directors of the
Company on the date of grant. The exercise price may be paid in cash, check,
promissory note, shares of the Company's Common Stock valued at fair market
value on the exercise date or a cashless exercise procedure involving a
same-day sale of the purchased shares.

(5) Mr. Capovilla received an option grant for 22,500 shares of the Company's
Common Stock on February 27, 1998.

44
<PAGE> 46

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL 1998 YEAR-END OPTION
VALUES

No options were exercised by the Named Executive Officers during the fiscal
year ended January 31, 1998. The following table provides the specified
information concerning unexercised options held as of January 31, 1998 by the
Named Executive Officers. No stock appreciation rights were granted or exercised
by the Named Executive Officers during the fiscal year ended January 31, 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
JANUARY 31, 1998 AT JANUARY 31, 1998
(#)(1) ($)(2)
----------------------- ---------------------
NAME VESTED UNVESTED VESTED UNVESTED
---- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Chris MacAskill.......................... 29,105 58,210 $58,792 $117,584
Kim Orumchian............................ 10,894 21,788 22,006 44,012
Donald P. Alvarez........................ 0 75,000 0 147,000
Riki M. Tokuno(3)........................ 7,500 67,500 7,500 67,500
Dennis F. Capovilla...................... 0 52,500 0 102,900
</TABLE>

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

(1) Each of the options listed in the table is immediately exercisable. The
shares purchasable thereunder are subject to repurchase by the Company at
the original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. Except for Mr. Tokuno's option, the
repurchase right lapses as to 25% of the option shares upon the completion
of 12 months of service and as to the balance in equal monthly installments
upon the completion of each of the next 36 months of service. For Mr.
Tokuno's option, the repurchase right lapses as to 7,500 option shares on
the option grant date, as to 25% of the option shares upon the completion of
12 months of service and as to the balance in equal monthly installments
upon the completion of each of the next 36 months of service.

(2) Calculated by subtracting the exercise price from the fair market value of
the underlying securities, as determined by the Board of Directors as of
January 31, 1998, of $2.20 per share.

(3) Mr. Tokuno resigned from employment to pursue other interests effective as
of July 17, 1998.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

Messrs. MacAskill and Orumchian have each entered into employment
agreements with the Company. The employment agreements set forth the base salary
and general employee benefits offered to Messrs. MacAskill and Orumchian. The
annual base salary for each of Mssrs. MacAskill and Orumchian is currently
$110,000. The employment agreements also provide that in the event Mr. MacAskill
or Mr. Orumchian is terminated without cause or due to disability, the
terminated employee will receive a severance payment equal to six months of
salary, payable in equal monthly installments over a six-month period. Each
severance payment is payable in full for the initial three-month period
following the termination and may be offset by any compensation received by the
terminated employee from another employer during the remaining three-month
period. Severance payments will cease in the event of death. In addition, the
employment agreements amended each of Mr. MacAskill's and Mr. Orumchian's stock
purchase agreement with the Company, dated June 12, 1995, such that in the event
of a change in control, an additional number of shares subject to each stock
purchase agreement will become vested, and such additional shares will be equal
to the greater of (i) 50% of the shares then remaining vested or (ii) the number
of shares that would have become vested during the 12-month period following the
change in control.

Mr. Alvarez has entered into an employment agreement with the Company. The
employment agreement sets forth the base salary, bonus potential, stock option
grant and general employee benefits offered to Mr. Alvarez. Mr. Alvarez's annual
base salary will be $125,000. Mr. Alvarez is guaranteed a bonus of $15,000 in
his first year of employment with the Company. Mr. Alvarez was granted an option
to purchase 75,000 shares of the Company's Common Stock.

Mr. Cudd has entered into an employment agreement with the Company. The
employment agreement sets forth the base salary, bonus potential, stock option
grant and general employee benefits offered to

45
<PAGE> 47

Mr. Cudd. Mr. Cudd's annual base salary will be $135,000. Mr. Cudd received a
signing bonus of $10,000 and is guaranteed a bonus of $25,000 in his first year
of employment with the Company. Mr. Cudd was granted an option to purchase
65,000 shares of the Company's Common Stock.

In the event of a change in control, the vesting of the options granted to
Messrs. Alvarez, Capovilla and Cudd will accelerate and an additional number of
option shares will become vested that is equal to the greater of: (i) 50% of any
unvested option shares; or (ii) a number of shares equal to the number each
officer would become vested in had he provided 12 months of additional service
following the change in control.

Mr. Tokuno has entered into an employment agreement with the Company. The
employment agreement sets forth the base salary, bonus potential and general
employee benefits offered to Mr. Tokuno. Mr. Tokuno's annual base salary will be
$165,000. In addition, the employment agreement provides for the Company's
payment of various relocation expenses, including expenses related to moving and
storage, costs associated with the sale of Mr. Tokuno's home and the purchase of
a new home and a tax gross-up payment for the Company's payment of these
relocation expenses. Mr. Tokuno resigned from employment to pursue other
interests effective as of July 17, 1998.

The Board of Directors has the authority under the 1998 Omnibus Equity
Incentive Plan to accelerate the exercisability of outstanding options, or to
accelerate the vesting of the shares of Common Stock subject to outstanding
options, held by all optionees, including the Chief Executive Officer and the
other Named Officers, in the event of a change in control.

STOCK PLANS

1998 Omnibus Equity Incentive Plan

The Company's 1998 Omnibus Equity Incentive Plan (the "Plan") was adopted
by the Board on July 13, 1998, subject to stockholder approval. The Company has
reserved (a) 3,000,000 shares plus (b) the aggregate number of shares remaining
available for issuance under the 1996 Stock Plan (as of July 31, 1998 1,155,946
shares, of which 1,110,351 shares are subject to outstanding options) for
issuance under the Plan. As of July 31, 1998, no options had been granted under
the Plan and 3,045,595 shares are available for option grant. As of February 1
of each year, commencing with the year 2000, the number of shares reserved for
issuance under the Plan will be increased automatically by the lesser of 2% of
the total number of the then outstanding shares of Common Stock or 1,000,000
shares.

Under the Plan, employees, non-employee members of the Board ("Outside
Directors") and consultants may be awarded options to purchase shares of Common
Stock, stock appreciation rights ("SARs"), restricted shares and stock units
(the "Awards").

If restricted shares or shares of Common Stock issued upon the exercise of
options are forfeited, these shares will become available for future issuance
under the Plan. If stock units, options or SARs are forfeited or terminate for
any other reason prior to exercise, the corresponding shares will again become
available for issuance under the Plan. However, if stock units are settled or
SARs are exercised, then the number of shares of Common Stock actually issued in
the settlement will reduce the number of shares reserved for issuance under the
Plan and any balance will again become available for issuance under the Plan.

The Plan will be administered by the Company's Compensation Committee (the
"Committee"). The Committee has the complete discretion to determine which
eligible individuals are to receive any award, determine the type, number,
vesting requirements and other features and conditions of such award, interpret
the Plan and make all other decisions relating to the operation of the Plan. The
Committee has the authority to modify, extend or assume outstanding options and
SARs or may accept the cancellation of outstanding options and SARs in return
for the grant of new options or SARs for the same or a different number of
shares and at the same or a different exercise price.

Options may be incentive stock options designed to satisfy section 422 of
the Internal Revenue Code or nonstatutory stock options not designed to meet
such requirements. Only employees may be granted incentive stock options, and
employees and non-employees may receive the remaining types of available Awards.
The

46
<PAGE> 48

term of an incentive stock option cannot exceed 10 years (except that the term
of an incentive stock option granted to a holder of more than 10% of the
Company's stock cannot exceed 5 years). No optionee may receive in a single
fiscal year options to purchase more than 100,000 shares of Common Stock.
However, a new employee may receive, in the fiscal year in which he or she
commences employment, options to purchase up to 300,000 shares of Common Stock.

The exercise price for incentive stock options granted under the Plan will
in no event be less than 100% of the fair market value of the Common Stock on
the grant date (except that incentive stock options granted to a holder of more
than 10% of the Company's stock will have an exercise price of no less than 110%
of fair market value on the grant date), and the exercise price for
non-statutory stock options will be no less than 85% of the fair market value of
the Common Stock on the grant date. The exercise price for options granted under
the Plan may be paid in cash or in outstanding shares of Common Stock. Options
may also be exercised by using a cashless exercise method, a pledge of shares to
a broker or promissory note. The payment for the award of newly issued
restricted shares will be made in cash, by promissory note or the rendering of
past or future services.

Each Outside Director who first becomes a member of the Board after the
date of this offering will receive a one-time option grant for 7,500 shares of
Common Stock upon taking office. Upon the conclusion of each regular annual
meeting of the Company's stockholders held in the year 1999 and thereafter, each
Outside Director who will continue to serve as a Board member will receive an
option covering 1,500 shares of Common Stock. However, an Outside Director will
not receive the annual 1,500-share option grant in the same calendar year that
he received the initial 7,500-share option grant. The initial 7,500-share option
grant will become exercisable for 25% of the shares upon completion of 12 months
of service and the balance will become exercisable in equal monthly installments
over the next 36 months of service. The annual 1,500-share option grant will
become exercisable in full on the first anniversary of the date of grant. All
automatic option grants to Outside Directors will be non-statutory stock options
with an exercise price equal to 100% of the fair market value of Common Stock on
the date of grant. In the event of an Outside Director's termination as a result
of death, total and permanent disability or retirement at or after age 65, the
options will become fully vested. The Board may decide to implement a program
that allows an Outside Director to elect to receive his or her annual retainer
payments and meeting fees, if any, from the Company in the form of cash,
options, restricted shares, stock units or a combination thereof. The number and
terms of such options, restricted shares or stock units to be granted to Outside
Directors in lieu of annual retainers and meeting fees that would otherwise be
paid in cash will be calculated in a manner determined by the Board. The
Committee may also provide that the non-statutory stock options that otherwise
would be granted to an Outside Director will instead be granted to an affiliate
of such Outside Director, provided that the service-related vesting and
termination provisions pertaining to non-statutory stock options will be applied
with regard to the service of the Outside Director.

SARs may be awarded in combination with options and may provide that the
SARs will not be exercisable unless the related options are forfeited. No
individual may, in a single calendar year, be granted SARs that pertain to more
than 100,000 shares of Common Stock. However, SARs granted to a new employee in
the fiscal year in which his or her service as an employee with the Company
commences may not pertain to more than 300,000 shares of Common Stock.

The Committee may award restricted shares under the Plan. The payment for
the award of restricted shares will be made in cash, cash equivalents,
promissory note or the rendering of past or future services. To the extent that
an award consists of newly issued restricted shares, the recipient must furnish
consideration with a value not less than the par value of those restricted
shares, in the form as the Committee may determine. An award of restricted
shares may be subject to vesting.

The Committee may grant stock units. No cash consideration by the
recipients will be required. A stock unit award may carry with it a right to
dividend equivalents which entitles the holder to be credited with an amount
equal to all cash dividends paid on one share of Common Stock while the stock
unit is outstanding. Stock units may be settled in cash, shares of Common stock
or a combination of both.

47
<PAGE> 49

The Committee may determine that, upon an optionee's or participant's
death, disability or retirement or a change in control, an award of an option,
SAR, stock units or restricted shares will become fully exercisable as to all
shares subject to such award. A change in control includes a merger or
consolidation of the Company, sale of assets, certain changes in the composition
of the Board and acquisition of 50% or more of the combined voting power of the
Company's outstanding stock. In the event of a merger or other reorganization,
outstanding options, SARs, restricted shares and stock units will be subject to
the agreement of merger or reorganization, which may provide for the assumption
of outstanding awards by the surviving corporation or its parent, for their
continuation by the Company (if the Company is a surviving corporation), for
accelerated vesting and accelerated expiration or for settlement in cash.

The Board may amend or terminate the Plan at any time, and the Plan will
continue unless otherwise terminated by the Board. Amendments may be subject to
stockholder approval to the extent required by applicable laws.

1998 Employee Stock Purchase Plan

The Board adopted the Company's 1998 Employee Stock Purchase Plan (the
"Purchase Plan") on July 13, 1998, subject to the approval of the Company's
stockholders. A total of 300,000 shares of Common Stock will be reserved for
issuance under the Purchase Plan. On February 1 of each year, beginning with the
year 2000, the total number of shares of Common Stock reserved for issuance will
automatically increase by the number of shares necessary to cause the number of
shares available for issuance to be restored to 300,000.

The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, will be implemented by 24-month offering periods, each
offering period containing four six-month accumulation periods, with purchases
occurring at the end of each six-month accumulation period. A new offering
period begins every six months. The first accumulation and offering periods are
expected to begin on the effective date of this offering and will end on May 31,
1999 and November 30, 2000, respectively.

The Purchase Plan will be administered by the Committee. Employees will be
eligible to participate if their customary employment with the Company is for
more than 20 hours per week and for more than 5 months per year. The Purchase
Plan permits each eligible employee to purchase Common Stock through payroll
deductions, which may not exceed 15% of an employee's compensation, nor more
than 500 shares on any purchase date. In addition, the value of the Common Stock
(determined at the beginning of the offering period) that may be purchased by
any participant in a calendar year is limited to $25,000.

The price of the Common Stock purchased under the Purchase Plan will be 85%
of the lower of the fair market value of the Common Stock on the date
immediately prior to the first date of the period or the date at the end of the
applicable accumulation period. For the initial offering period, the price of
the Common Stock purchased under the Purchase Plan will be 85% of the lower of
the initial public offering price or the fair market value on the date at the
end of the applicable accumulation period. An offering period continues to apply
to a participant for the full 24 months, unless the market price of the Common
Stock is lower when a subsequent offering period begins. In that event, the
subsequent offering period automatically becomes the applicable period for
purposes of determining the purchase price.

Employees may end their participation in the Purchase Plan at any time
during the accumulation period, and participation ends automatically upon
termination of employment with the Company. In the event of a merger or
consolidation, each offering period and accumulation period will terminate and
each outstanding purchase right will be exercised. The Board may amend or
terminate the Purchase Plan at any time. However, the Board may not, without
stockholder approval, materially increase the number of shares of Common Stock
available for issuance.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company's Second Amended and Restated Certificate of Incorporation which,
which will become effective upon the closing of this offering, includes a
provision that directors of the Company shall not be personally liable for
monetary damages to the Company or its stockholders for a breach of fiduciary
duty as a director, except for liability as a result of (i) a breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) an act related to
48
<PAGE> 50

the unlawful stock repurchase or payment of a dividend under Section 174 of the
Delaware Law; and (iv) transactions from which the director derived an improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission.

Upon the closing of this offering, the Company's Second Amended and
Restated Certificate of Incorporation will authorize the Company to indemnify
its officers, directors and other agents, by bylaws, agreements or otherwise, to
the fullest extent permitted under the Delaware Law. Prior to the closing of
this offering, the Company will enter into separate indemnification agreements
with its directors and officers which are, in some cases, broader than the
specific indemnification provisions contained in the Delaware Law. The
indemnification agreements will require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may arise
by reason of their status or service as directors or officers (other than
liabilities arising from willful misconduct of a culpable nature), to advance
their expenses incurred as a result of any proceeding to which they are a party
to or participant in and as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.

As permitted by the Delaware law, the Company's Amended and Restated
Bylaws, which will become effective upon the closing of this offering, provide
for mandatory indemnification of its directors and permissible indemnification
of officers and employees to the maximum extent allowed by the Delaware Law.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.

49
<PAGE> 51

CERTAIN TRANSACTIONS

Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company or any of
its subsidiaries was or is to be a party in which the amount involved exceeded
or will exceed $60,000 and in which any director, executive officer, holder of
more than 5% of the Common Stock of the Company or any member of the immediate
family of any of the foregoing persons had or will have a direct or indirect
material interest other than (i) compensation agreements and other arrangements,
which are described where required in "Management," and (ii) the transactions
described below.

In June 1995, the Company sold 828,897 shares of Common Stock to Chris
MacAskill, the Chief Executive Officer, President and a director of the Company,
for an aggregate purchase price of $11,051.96. As payment of the purchase price,
Mr. MacAskill transferred the title to certain equipment to the Company and
canceled the obligation of the Company to reimburse him for certain expenses. In
June 1995, the Company also sold 675,000 shares of Common Stock to Kim
Orumchian, the Vice President of Engineering, Secretary and a director of the
Company, for an aggregate purchase price of $9,000. As payment of the purchase
price, Mr. Orumchian transferred the title to certain equipment to the Company
and canceled the obligation of the Company to reimburse him for certain
expenses.

The Company has issued, in private placement transactions (collectively,
the "Private Placement Transactions"), shares of Preferred Stock as follows: an
aggregate of 2,453,701 shares of Series B Preferred Stock at $1.67 per share
(including the conversion of shares of Series A Preferred Stock into an
aggregate of 154,950 shares of Series B Preferred Stock) in September and
December 1996; an aggregate of 1,041,667 shares of Series C Preferred Stock at
$2.40 per share in May 1997; an aggregate of 1,726,194 shares of Series D
Preferred Stock at $4.20 per share in January 1998; and an aggregate of 857,624
shares of Series E Preferred Stock at $6.44 per share in May 1998. Each share of
Preferred Stock is convertible into one share of Common Stock and all such
shares of Preferred Stock shall be converted into shares of Common Stock upon
the closing of this offering.

The following table summarizes the shares of Preferred Stock purchased by
Named Executive Officers, directors and 5% stockholders of the Company and
persons and entities associated with them in the Private Placement Transactions.

<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D SERIES E
INVESTOR(1) PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
APV Technology Partners, L.P. (Peter
Bodine) (2)........................... 150,000 64,206 59,524 69,877
Needham Capital Partners II, L.P. (3)... -- -- 535,715 69,876
Sierra Ventures V, L.P. (Peter Wendell
and David Schwab)..................... 1,500,000 642,078 476,191 69,876
Trinity Ventures V, LP (Tod
Francis)(4)........................... 600,000 256,831 238,096 23,292
Vulcan Ventures Incorporated (Ralph
Derrickson)........................... -- -- -- 543,478
Chris MacAskill......................... 5,144 2,201 -- 219
</TABLE>

- ---------------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal Stockholders."

(2) Includes shares held by APV Technology Partners, L.P., APV Technology
Partners II, L.P. and APV Technology Partners U.S., L.P.

(3) Includes shares held by Needham Capital Partners II, L.P., Needham Capital
SBIC, L.P. and Needham Capital Partners II (Bermuda), L.P.

(4) Includes shares held by Trinity Ventures, V, LP and Trinity Ventures,
Side-By-Side Fund V, LP.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans between the
Company and its officers, directors, principal stockholders and their affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will continue to be on terms no less favorable to the Company
than could be obtained from unaffiliated third parties.

50
<PAGE> 52

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of July 31, 1998, and as adjusted to
reflect the sale of the Shares offered hereby, (i) by each person or entity who
is known by the Company to own beneficially more than 5% of the Company's Common
Stock, (ii) by each of the Named Executive Officers and by each of the Company's
directors and (iii) by all executive officers and directors of the Company as a
group.

<TABLE>
<CAPTION>
PERCENT OF TOTAL (1)(2)
-----------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNERS BENEFICIALLY OWNED OFFERING OFFERING
------------------------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Sierra Ventures V, L.P. (3)............................ 2,688,145 35.17% 25.26%
3000 Sand Hill Road, Building 4, Suite 210
Menlo Park, CA 94025
Entities affiliated with Trinity Ventures V, L.P. 1,118,219 14.63% 10.51%
(4)..................................................
3000 Sand Hill Road, Building 1, Suite 240
Menlo Park, CA 94025
Entities affiliated with Needham Capital Partners II, 605,591 7.92% 5.69%
L.P. (5).............................................
445 Park Avenue, 3rd Floor
New York, NY 10022
Vulcan Ventures Incorporated(6)........................ 543,478 7.11% 5.11%
110 100th Avenue N.E., Suite 550
Bellevue, WA 98004
Chris MacAskill (7).................................... 923,776 11.95% 8.61%
Kim Orumchian (8)...................................... 707,682 9.22% 6.63%
Donald P. Alvarez (9).................................. 75,000 * *
Riki M. Tokuno (10).................................... 75,000 * *
Dennis F. Capovilla (11)............................... 75,000 * *
Peter G. Bodine (12)................................... 343,607 4.50% 3.23%
Ralph C. Derrickson (6)................................ 543,478 7.11% 5.11%
Alan S. Fisher (13).................................... 7,500 * *
Tod H. Francis (4)..................................... 1,118,219 14.63% 10.51%
David C. Schwab (3).................................... 2,688,145 35.17% 25.26%
Peter C. Wendell (3)................................... 2,688,145 35.17% 25.26%
All directors and executive officers as a group (12 6,622,407 82.16% 59.88%
people)(14)..........................................
</TABLE>

- ---------------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.

(1) Percentage ownership is based on 7,642,788 shares outstanding as of July
31, 1998, including 6,079,186 shares of Common Stock issuable upon
conversion of all outstanding preferred stock at the closing of this
offering. Shares of Common Stock subject to options currently exercisable
or exercisable within 60 days of July 31, 1998 are deemed outstanding for
purposes of computing the percentage ownership of the person holding such
options but are not deemed outstanding for computing the percentage
ownership of any other person. Except pursuant to applicable community
property laws or as indicated in the footnotes to this table, each
stockholder identified in the table possesses sole voting and investment
power with respect to all shares of Common Stock shown as beneficially
owned by such stockholder. Unless otherwise indicated, the address of each
of the individuals listed in the table is c/o Computer Literacy, Inc., 1308
Orleans Drive, Sunnyvale, CA 94089.

(2) Assumes the Underwriters' over-allotment option is not exercised.

(3) David C. Schwab, a director of the Company, is a venture partner of SV
Associates V, L.P. Peter C. Wendell, a director of the Company, is a
general partner of SV Associates V, L.P. SV Associates V, L.P. is the
general partner of Sierra Ventures V, L.P. Each of Messrs. Schwab and
Wendell disclaims beneficial ownership of the shares held by Sierra
Ventures V, L.P. except to the extent of his pecuniary interest therein.

51
<PAGE> 53

(4) Includes 1,056,480 shares held by Trinity Ventures V, LP and 61,739 shares
held by Trinity Ventures Side-By-Side Fund V, LP. Tod H. Francis, a
director of the Company, is a general partner of Trinity Ventures. Mr.
Francis disclaims beneficial ownership of such shares except to the extent
of his pecuniary interest therein.

(5) Includes 359,536 shares held by Needham Capital Partners II, L.P., 166,667
shares held by Needham Capital SBIC, L.P. and 79,388 shares held by Needham
Capital Partners II (Bermuda), L.P.

(6) Ralph C. Derrickson, a director of the Company, is an affiliate of Vulcan
Ventures Incorporated. Mr. Derrickson disclaims beneficial ownership of
such shares.

(7) Includes 87,315 shares of Common Stock issuable upon exercise of
immediately exercisable options, 47,296 shares of which are subject to the
Company's right of repurchase.

(8) Includes 32,682 shares of Common Stock issuable upon exercise of
immediately exercisable options, 17,703 shares of which are subject to the
Company's right of repurchase.

(9) Represents 75,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 75,000 shares of which are subject to the
Company's right of repurchase.

(10) Represents 75,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 67,500 shares of which are subject to the
Company's right of repurchase. Mr. Tokuno resigned from employment to
pursue other interests effective as of July 17, 1998.

(11) Represents 75,000 shares of Common Stock issuable upon exercise of
immediately exercisable options, 75,000 shares of which are subject to the
Company's right of repurchase.

(12) Includes 232,888 shares held by APV Technology Partners, L.P., 58,222
shares held by APV Technology Partners U.S., L.P. and 52,497 shares held by
APV Technology Partners II, L.P. (collectively, the "APV Funds"). Peter G.
Bodine is a managing member of APV Management Co., L.L.C., the general
partner of the APV Funds. Mr. Bodine disclaims beneficial ownership of such
shares except to the extent of his pecuniary interest therein.

(13) Includes 7,500 shares of Common Stock issuable upon exercise of immediately
exercisable options, all of which are subject to the Company's right of
repurchase.

(14) Includes 409,997 shares of Common Stock issuable upon exercise of
immediately exercisable options, 354,998 shares of which are subject to the
Company's right of repurchase.

52
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, par value $0.001, and
5,000,000 shares of Preferred Stock, par value $0.001.

Prior to the closing of this offering, the Company reincorporated in the
State of Delaware and, upon the closing of this offering, the Company intends to
amend and restate its Certificate of Incorporation. The following summary of
certain provisions of the Common Stock and Preferred Stock does not purport to
be complete and is subject to, and qualified in its entirety by, the provisions
of the forms of the Company's Second Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws to be effective upon the closing
of this offering, which are included as exhibits to the Registration Statement
of which this Prospectus forms a part, and by the provisions of applicable law.

COMMON STOCK

As of July 31, 1998, there were 7,642,788 shares of Common Stock
outstanding that were held of record by 38 stockholders (assuming conversion of
all shares of Preferred Stock into shares of Common Stock). There will be
10,642,788 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option and assuming no exercise after July 31, 1998
of outstanding options) after giving effect to the sale of the shares of Common
Stock to the public offered hereby.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of assets legally available therefor. See
"Dividend Policy." In the event of the liquidation, dissolution, or winding up
of the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Preferred
Stock will convert into shares of Common Stock. Thereafter, pursuant to the
Company's Second Amended and Restated Certificate of Incorporation, the Board of
Directors will have the authority to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix or alter the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series of
Preferred Stock or the designation of such series, without further vote or
action by the stockholders. The issuance of Preferred Stock may have the effect
of delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and other
rights of the holders of Common Stock. The issuance of Preferred Stock with
voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.

WARRANTS

As of July 31, 1998, a warrant was outstanding to purchase an aggregate of
15,624 shares of Common Stock (assuming the conversion of all shares of
Preferred Stock into shares of Common Stock) at an exercise price of $2.40 per
share. Such warrant will expire on May 28, 2002.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

The Second Amended and Restated Certificate of Incorporation provides that,
effective upon the closing of this offering, all stockholder actions must be
effected at a duly called meeting and not by written consent.

53
<PAGE> 55

This could discourage potential acquisition proposals and could delay or prevent
a change in control of the Company. This provision is intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provision is also intended to discourage certain tactics that may be used in
proxy fights. However, this provision could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
may inhibit fluctuations in the market price of the Company's shares that could
result from actual or rumored takeover attempts. This provision also may have
the effect of preventing changes in the management of the Company. See "Risk
Factors -- Anti-Takeover Effect of Certain Charter Provisions and Delaware Law."

The Company's Second Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws will provide that the Company will indemnify
officers and directors against losses that may incur in investigations and legal
proceedings resulting from their services to the Company, which may include
services in connection with takeover defense measures. Such provisions may have
the effect of preventing changes in the management of the Company.

Upon the closing of this offering, the Company will be subject to Section
203 of the Delaware General Corporation Law ("Section 203"), which, subject to
certain exceptions, prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years
following the time that such stockholder became an interested stockholder,
unless: (i) prior to such time, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by directors who are also officers of the Company and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) at or subsequent to such time, the business
combination is approved by the board of directors and authorized at an annual or
special meeting of stockholders, and not by written consent, by the affirmative
vote of at least two-thirds of the outstanding voting stock not owned by the
interested stockholder. Section 203 could prohibit or delay mergers or other
takeover or change-in-control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

REGISTRATION RIGHTS

After this offering, the holders of approximately 6,079,186 shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. Under the terms of an Investors' Rights
Agreement between the Company and the holders of such registrable securities, if
the Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are, subject to certain limitations, entitled to include shares
of Common Stock therein. Additionally, such holders are also entitled to certain
demand registration rights pursuant to which they may require the Company to
file a registration statement under the Securities Act at the Company's expense

54
<PAGE> 56

(other than underwriter's discounts and commissions) with respect to their
shares of Common Stock, and the Company is required to use its best efforts to
effect such registration. Further, holders may require, subject to certain
limitations, the Company to file additional registration statements on Form S-3
at the Company's expense (other than underwriters' discounts and commissions).
All of these registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares included in such registration and the right of the Company
not to effect a requested registration within six months following an offering
of the Company's securities, including the offering made hereby.

Each stockholder's registration rights expire upon the earlier of three (3)
years from the closing of this offering or such time that such stockholder can
sell all of his, her or its stock under Rule 144(k).

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock will be U.S. Stock
Transfer Corporation.

LISTING

The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol "CMPL."

55
<PAGE> 57

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering and based on the shares outstanding as of
July 31, 1998, there will be 10,642,788 shares of Common Stock outstanding,
assuming no exercise of outstanding options. Of these shares, the 3,000,000
shares sold in this offering (assuming no exercise of the underwriters'
over-allotment option) will be freely tradeable without restriction or further
registration unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. The remaining shares will be
"restricted securities" as that term is defined under Rule 144 (the "Restricted
Shares"). Sales of Restricted Shares in the public market, or the availability
of such shares for sale, could adversely affect the market price of the Common
Stock.

Of the Restricted Shares, an aggregate of 6,785,164 shares of Common Stock
will be eligible for sale in the public market subject to Rule 144 and Rule 701
under the Securities Act after expiration of a contractual lock-up beginning 180
days after the date of the Prospectus, unless earlier released, in whole or in
part, by NationsBanc Montgomery Securities LLC and thereafter an additional
857,624 shares will be eligible for sale pursuant to Rule 144 upon the
expiration of one-year holding periods on May 22, 1999. A significant portion of
such shares that become eligible for sale in the public market are held by the
Venture Stockholders. See "Risk Factors -- Control of the Company by Current
Stockholders and Venture Capital Firms" and "-- Shares Eligible for Future
Sale."

In general, under Rule 144, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least one year, including persons
who may be deemed to be "affiliates" of the Company, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 106,428 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock as
reported through the Nasdaq National Market during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the Restricted Shares proposed to be sold for at least two
years (including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, shares eligible for sale under Rule 144(k) may be
sold immediately upon completion of this offering.

Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts and prior to the date the issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subject to certain limitations on the aggregate offering
price of a transaction and certain other conditions, commencing 90 days after
the issuer becomes subject to the reporting requirements of the Exchange Act, in
reliance upon Rule 144, but without compliance with certain restrictions,
including the holding period requirements, contained in Rule 144. In addition,
the Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual lock-up restrictions described above, beginning
90 days after the date of this Prospectus, may be sold by persons other than
affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.

The Company has agreed that it will not sell, offer, contract for or grant
any options to purchase or otherwise dispose of any shares of its Common Stock
or securities convertible into or exchangeable for its Common Stock, except with
respect to options or other rights outstanding on the date of this Prospectus or
pursuant to the Company's stock plans described in this Prospectus, for a period
of 180 days after the date of the Prospectus without the prior written consent
of NationsBanc Montgomery Securities LLC.

56
<PAGE> 58

The Company intends to register on a Form S-8 registration statement under
the Securities Act, during the 180-day lockup period, the resale of 3,345,595
shares of Common Stock issuable upon exercise of outstanding options or reserved
for issuance under the 1996 Stock Plan, the 1998 Omnibus Equity Incentive Plan
and the 1998 Employee Stock Purchase Plan. See "Management -- Stock Plans." Such
registration will permit the resale of shares so registered by non-affiliates in
the public market without restriction under the Securities Act, subject to
vesting restrictions or contractual lock-ups.

Upon completion of this offering, the holders of 6,079,186 shares of Common
Stock will be entitled to certain registration rights with respect to such
shares. See "Description of Capital Stock -- Registration Rights." Registration
of such shares would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for share purchases by affiliates)
immediately upon the effectiveness of such registration.

57
<PAGE> 59

UNDERWRITING

The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Piper Jaffray Inc. and Needham & Company,
Inc. (the "Representatives"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters to pay for and accept delivery of the
shares of Common Stock are subject to certain conditions precedent, and that the
Underwriters are committed to purchase all of such shares, if any are purchased.

<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ----------
<S> <C>
NationsBanc Montgomery Securities LLC.......................
Piper Jaffray Inc...........................................
Needham & Company, Inc......................................

----------
Total............................................. 3,000,000
==========
</TABLE>

The Representatives have advised the Company that the Underwriters
initially propose to offer the shares of Common Stock to the public on the terms
set forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After, but not prior to, the
completion of this offering, the offering price and concessions and reallowances
to dealers may be changed by the Representatives. The Common Stock is offered
subject to receipt and acceptance by the Underwriters and to certain other
conditions, including the right to reject orders in whole or in part.

The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 450,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 3,000,000 shares to be purchased by
the Underwriters. To the extent that the Underwriters exercise this option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.

The directors, officers and certain stockholders and option holders of the
Company, holding in the aggregate 7,987,360 shares of Common Stock after this
offering, have agreed that, subject to certain exceptions, for a period of 180
days after the date of this Prospectus, they will not, without the prior written
consent of NationsBanc Montgomery Securities LLC, directly or indirectly sell,
offer to sell or otherwise dispose of any such shares of Common Stock or any
right to acquire such shares. In addition, the Company has agreed that, for a
period of 180 days after the date of this Prospectus, it will not, without the
prior written consent of NationsBanc Montgomery Securities LLC, issue, offer,
sell, grant options to purchase or otherwise dispose of any of the Company's
equity securities or any other securities convertible into or exercisable or
exchangeable for the Common Stock or other equity security, other than the grant
of options to purchase Common Stock or the issuance of shares of Common Stock
under the Company's stock option and stock purchase plans and the issuance of
shares of Common Stock pursuant to the exercise of outstanding options and
warrants.

58
<PAGE> 60

In January 1998, Needham Capital Partners II, L.P., Needham Capital SBIC,
L.P. and Needham Capital Partners II (Bermuda), L.P., entities affiliated with
Needham & Company, Inc., purchased an aggregate of 535,715 shares of the
Company's Series D Preferred Stock for an aggregate purchase price of
$2,250,000.90. In May 1998, Needham Capital Partners II, L.P and Needham Capital
Partners II (Bermuda), L.P., entities affiliated with Needham & Company, Inc.,
purchased an aggregate of 69,876 shares of the Company's Series E Preferred
Stock for an aggregate purchase price of $449,999.83. Such shares of Series D
Preferred Stock and Series E Preferred Stock held by the entities affiliated
with Needham & Company, Inc. will convert into 605,591 shares of Common Stock
upon the closing of this offering. In addition, an individual affiliated with
NationsBanc Montgomery Securities LLC purchased 23,810 shares of Series D
Preferred Stock and 3,882 shares of Series E Preferred Stock in January 1998 and
May 1998, respectively, for aggregate purchase prices of $99,999.90 and
$24,998.47, respectively. Such shares of Series D Preferred Stock and Series E
Preferred Stock held by the individual affiliated with NationsBanc Montgomery
Securities LLC will convert into 27,692 shares of Common Stock upon the closing
of this offering.

The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.

Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations will be the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, the Company's past and present operations, its past and
present financial performance, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities markets at the time of the offering and the market prices of and
demand for publicly traded common stock of comparable companies in recent
periods and other factors deemed relevant.

Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock
offered hereby. Such transactions may include stabilizing, the purchase of
Common Stock to cover syndicate short positions and the imposition of penalty
bids. A stabilizing bid means the placing of any bid or the effecting of any
purchase for the purpose of pegging, fixing or maintaining the price of the
Common Stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the offering. A penalty bid means an
arrangement that permits the Underwriters to reclaim a selling concession from a
syndicate member in connection with the offering when shares of Common Stock
sold by the syndicate member are purchased in syndicate covering transactions.
Such transactions may stabilize or maintain the market price of the Common Stock
at a level above that which otherwise might prevail in the open market and, if
commenced, may be discontinued at any time.

The Representatives have informed the Company that the Underwriters do not
expect to make sales in excess of 5% of the number of shares of Common Stock
offered hereby to accounts over which they exercise discretionary authority.

59
<PAGE> 61

LEGAL MATTERS

The validity of the Shares offered hereby and general corporate legal
matters will be passed upon for the Company by Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP, Menlo Park, California. As of July 31,
1998, an investment partnership comprised of members of that firm beneficially
owned 35,110 shares of the Company's Preferred Stock. Certain legal matters
relating to the sale of the shares of Common Stock in this offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California.

EXPERTS

The consolidated financial statements of Computer Literacy, Inc. as of
January 31, 1998, and for each of the two years in the period ended January 31,
1998, and the financial statements of Computer Literacy Bookshops, Inc. for the
eleven months ended May 31, 1997 and the year ended June 30, 1996 included in
this Prospectus and the Registration Statement have been audited by Deloitte &
Touche, LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form SB-2 under the Securities Act with respect to the Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the Financial Statements and related Notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved.

As a result of this offering, the Company will become subject to the
periodic reporting and other informational requirements of the Securities
Exchange Act of 1934, as amended. As long as the Company is subject to such
periodic reporting and informational requirements, it will file with the
Commission all reports, proxy statements and other information required thereby.
The Registration Statement, as well as such reports and other information filed
by the Company with the Commission, may be inspected at the public reference
facilities maintained by the Commission at its principal office located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World
Trade Center, 13th Floor New York, New York 10048. Copies of such material may
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the site is http://www.sec.gov.

60
<PAGE> 62

COMPUTER LITERACY, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED AND PRO FORMA FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMPUTER LITERACY, INC. AND SUBSIDIARY
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at January 31, 1998, July 31,
1998 (unaudited) and Pro forma at July 31, 1998
(unaudited)............................................... F-3
Consolidated Statements of Operations for the years ended
January 31, 1997 and 1998 and the six months ended July
31, 1997 and 1998 (unaudited)............................. F-4
Consolidated Statements of Stockholders' Equity for the
years ended January 31, 1997 and 1998 and the six months
ended July 31, 1998 (unaudited)........................... F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1997 and 1998 and the six months ended July
31, 1997 and 1998 (unaudited)............................. F-6
Notes to Consolidated Financial Statements.................. F-7

PRO FORMA INFORMATION (UNAUDITED)
Introduction to Pro Forma Combined Condensed Financial
Information (unaudited)................................... F-17
Pro Forma Combined Condensed Statement of Income for the
year ended January 31, 1998 (unaudited)................... F-18
Notes to Pro Forma Combined Condensed Statement of Income
for the year ended January 31, 1998 (unaudited)........... F-19

COMPUTER LITERACY BOOKSHOPS, INC.
Independent Auditors' Report................................ F-20
Statements of Income for the year ended June 30, 1996 and
the eleven months ended May 31, 1997...................... F-21
Statements of Stockholders' Equity for the year ended June
30, 1996 and the eleven months ended May 31, 1997......... F-22
Statements of Cash Flows for the year ended June 30, 1996
and the eleven months ended May 31, 1997.................. F-23
Notes to Financial Statements............................... F-24
</TABLE>

F-1
<PAGE> 63

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Computer Literacy, Inc.
Sunnyvale, California

We have audited the accompanying consolidated balance sheet of Computer
Literacy, Inc. and subsidiary (the "Company") as of January 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at January 31,
1998, and the results of its operations and its cash flows for each of the two
years in the period then ended in conformity with generally accepted accounting
principles.

DELOITTE & TOUCHE LLP

San Jose, California
July 10, 1998

(August 25, 1998 as to the fifth paragraph of

Note 1 and the last two paragraphs of Note 10)

F-2
<PAGE> 64

COMPUTER LITERACY, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
PRO FORMA
JANUARY 31, JULY 31, JULY 31,
1998 1998 1998
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and equivalents...................................... $ 4,974 $ 5,132
Accounts receivable, net of allowance of $67 and $114..... 153 511
Inventories............................................... 3,683 3,979
Prepaid expenses and other current assets................. 440 750
------- -------
Total current assets.............................. 9,250 10,372
Property and equipment, net................................. 1,182 1,723
Goodwill, net............................................... 2,962 2,855
Other assets................................................ 204 486
------- -------
Total assets...................................... $13,598 $15,436
======= =======

Current liabilities:
Accounts payable.......................................... $ 2,518 $ 2,476
Accrued expenses.......................................... 1,084 997
Current portion of capital lease obligations.............. 18 18
------- -------
Total current liabilities......................... 3,620 3,491
Capital lease obligations................................... 53 44
------- -------
Total liabilities................................. 3,673 3,535
Stockholders' equity:
Preferred stock, $0.001 par value, 5,500 and 6,275 shares
authorized, 5,222 and 6,079 shares issued and
outstanding at January 31, 1998 and July 31, 1998,
respectively; pro forma outstanding, none; (aggregate
liquidation preference of $13,843 and $19,366 at
January 31, 1998 and July 31, 1998, respectively; pro
forma, nil)............................................ 5 6 $ --
Common stock, $0.001 par value, 8,750 and 10,000 shares
authorized, 1,527 and 1,564 shares issued and
outstanding at January 31, 1998 and July 31, 1998,
respectively; pro forma issued and outstanding 7,643
shares................................................. 2 2 8
Additional paid-in capital................................ 13,764 19,376 19,376
Warrants.................................................. 12 12 12
Accumulated deficit....................................... (3,858) (7,495) (7,495)
------- ------- -------
Total stockholders' equity........................ 9,925 11,901 $11,901
------- ------- =======
Total liabilities and stockholders' equity........ $13,598 $15,436
======= =======
</TABLE>

See notes to consolidated financial statements.
F-3
<PAGE> 65

COMPUTER LITERACY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, SIX MONTHS ENDED JULY 31,
---------------------- -------------------------
1997 1998 1997 1998
------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Online....................................... $ 180 $ 3,021 $ 620 $ 4,225
Retail and other............................. -- 7,927 2,263 4,984
------ ------- ------- -------
Total revenues.......................... 180 10,948 2,883 9,209
Cost of revenues:
Online....................................... 150 2,189 418 3,291
Retail and other............................. -- 5,216 1,425 3,226
------ ------- ------- -------
Total cost of revenues.................. 150 7,405 1,843 6,517
------ ------- ------- -------
Gross profit................................... 30 3,543 1,040 2,692
Operating expenses:
Sales and marketing.......................... 130 4,192 1,240 4,056
Development and engineering.................. 110 860 213 1,148
General and administrative................... 412 1,674 596 1,224
------ ------- ------- -------
Total operating expenses................ 652 6,726 2,049 6,428
------ ------- ------- -------
Loss from operations........................... (622) (3,183) (1,009) (3,736)
Interest, net.................................. 55 (7) 23 99
------ ------- ------- -------
Net loss....................................... $ (567) $(3,190) $ (986) $(3,637)
====== ======= ======= =======
Basic and diluted net loss per share........... $(0.38) $ (2.11) $ (0.66) $ (2.37)
====== ======= ======= =======
Shares used in calculating basic and diluted
net loss per share........................... 1,504 1,509 1,504 1,533
====== ======= ======= =======
</TABLE>

See notes to consolidated financial statements.
F-4
<PAGE> 66

COMPUTER LITERACY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON PREFERRED PREFERRED PREFERRED PREFERRED
STOCK SERIES A SERIES B SERIES C SERIES D
--------------- --------------- --------------- --------------- ---------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, February 1, 1996.... 1,504 $ 2 117 $ --
Repayment of stockholder note
receivable.................. --
Issuance of Preferred Series B
(net of issuance costs of
$9)......................... 2,280 $ 2
Conversion of Preferred Series
A into Preferred Series B... (117) (--) 155 --
Net loss......................
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Balances, January 31, 1997.... 1,504 2 -- -- 2,435 2
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Issuance of Preferred Series
B........................... 19 --
Issuance of Preferred Series C
(net of issuance costs of
$5)......................... 1,042 $ 1
Issuance of Preferred Series D
(net of issuance costs of
$56)........................ 1,726 $ 2
Issuance of stockholder note
receivable..................
Exercise of stock options..... 23 --
Options granted to
consultants................. --
Warrants granted to
creditor....................
Net loss......................
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Balances, January 31, 1998.... 1,527 2 -- -- 2,454 2 1,042 1 1,726 2
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Repayment of stockholder note
receivable (unaudited)......
Options granted to consultants
(unaudited)................. --
Exercise of stock options
(unaudited)................. 37 --
Issuance of Preferred Series E
(net of issuance costs of
$24) (unaudited)............
Net loss (unaudited)..........
----- ---- ---- ----- ----- ------ ----- ------ ------ ------
Balances, July 31, 1998
(unaudited)................. 1,564 $ 2 -- $ -- 2,454 $ 2 1,042 $ 1 1,726 $ 2
===== ==== ==== ===== ===== ====== ===== ====== ====== ======

<CAPTION>
PREFERRED
SERIES E ADDITIONAL TOTAL
--------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS DEFICIT EQUITY
------ ------ ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, February 1, 1996.... $ 151 $ (101) $ 52
Repayment of stockholder note
receivable.................. 125 125
Issuance of Preferred Series B
(net of issuance costs of
$9)......................... 3,789 3,791
Conversion of Preferred Series
A into Preferred Series B... -- --
Net loss...................... (567) (567)
----- ------ ------- ------ ------- --------
Balances, January 31, 1997.... 4,065 (668) 3,401
----- ------ ------- ------ ------- --------
Issuance of Preferred Series
B........................... 31 31
Issuance of Preferred Series C
(net of issuance costs of
$5)......................... 2,494 2,495
Issuance of Preferred Series D
(net of issuance costs of
$56)........................ 7,192 7,194
Issuance of stockholder note
receivable.................. (25) (25)
Exercise of stock options..... 4 4
Options granted to
consultants................. 3 3
Warrants granted to
creditor.................... $ 12 12
Net loss...................... (3,190) (3,190)
----- ------ ------- ------ ------- --------
Balances, January 31, 1998.... 13,764 12 (3,858) 9,925
----- ------ ------- ------ ------- --------
Repayment of stockholder note
receivable (unaudited)...... 25 25
Options granted to consultants
(unaudited)................. 5 5
Exercise of stock options
(unaudited)................. 84 84
Issuance of Preferred Series E
(net of issuance costs of
$24) (unaudited)............ 857 $ 1 5,498 $ 5,499
Net loss (unaudited).......... (3,637) (3,637)
----- ------ ------- ------ ------- --------
Balances, July 31, 1998
(unaudited)................. 857 $ 1 $19,376 $ 12 $(7,495) $ 11,901
===== ====== ======= ====== ======= ========
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE> 67

COMPUTER LITERACY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
JANUARY 31, JULY 31,
----------------- ------------------
1997 1998 1997 1998
------ ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (567) $(3,190) $ (986) $(3,637)
Adjustments to reconcile net loss to net cash used
in operations:
Depreciation and amortization................... 13 297 80 232
Options and warrants granted to consultants and
creditor...................................... -- 15 10 5
Changes in operating assets and liabilities:
Accounts receivable............................. -- (35) (4) (358)
Inventories..................................... (96) (1,145) (38) (296)
Prepaid expenses and other assets............... (18) (173) (118) (613)
Accounts payable................................ 89 1,680 845 (42)
Accrued expenses................................ 5 (117) (132) (87)
------ ------- ------- -------
Net cash used in operations..................... (574) (2,668) (343) (4,796)

Cash flows from investing activities:
Purchase of property and equipment................. (140) (941) (176) (645)
Acquisition of CLBI, net of cash acquired.......... -- (4,334) (4,334) --
------ ------- ------- -------
Net cash used in investing activities.............. (140) (5,275) (4,510) (645)

Cash flows from financing activities:
Repayment of capital lease obligation.............. (2) (10) (4) (9)
Borrowings under line of credit.................... -- -- 1,000 --
Issuance of preferred stock, net................... 3,916 9,695 2,522 5,524
Exercise of stock options, net..................... -- 4 -- 84
------ ------- ------- -------
Net cash provided by financing activities.......... 3,914 9,689 3,518 5,599
------ ------- ------- -------

Net increase/(decrease) in cash and equivalents...... 3,200 1,746 (1,335) 158
Cash and equivalents at beginning of period.......... 28 3,228 3,228 4,974
------ ------- ------- -------
Cash and equivalents at end of period................ $3,228 $ 4,974 $ 1,893 $ 5,132
====== ======= ======= =======
Non-cash investing and financing activities:
Equipment acquired through capital lease
transactions.................................... $ 42 $ 42
Sale of preferred stock for note receivable........ $ -- $ 25
Cash paid to acquire CLBI, net of cash acquired:
Assets acquired................................. $ 2,926 $ 2,926
Liabilities assumed............................. (1,897) (1,897)
Excess of purchase price over net assets
acquired...................................... 3,095 3,095
Covenant not to compete......................... 210 210
------- -------
Cash paid to acquire CLBI, net of cash
acquired...................................... $ 4,334 $ 4,334
======= =======
Supplemental disclosure of cash flow information:
Cash paid for interest............................. $ 1 $ 74 $ 27 $ 3
</TABLE>

See notes to consolidated financial statements.
F-6
<PAGE> 68

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of Business and Basis of Presentation

Computer Literacy, Inc., formerly CBooks Express, Inc., was incorporated in
California in November 1994 and reincorporated in Delaware in July 1998. The
Company is an online retailer of technical books, technology based training
solutions, product manuals, research reports and other information resources,
all of which are targeted to information technology professionals. Business is
transacted through the Company's online store or through one of its four
physical retail locations.

On May 31, 1997, the Company acquired Computer Literacy Bookshops, Inc.
("CLBI") (see Note 2). The acquisition was accounted for as a purchase. The
accompanying financial statements include the operations of CLBI from the date
of acquisition.

The Company's fiscal year ends on January 31. The accompanying financial
statements include the years ended January 31, 1997 ("fiscal 1997") and January
31, 1998 ("fiscal 1998").

Principles of Consolidation

The consolidated financial statements include the accounts of Computer
Literacy, Inc. and its wholly owned subsidiary, CLBI. All significant
intercompany balances and transactions have been eliminated in the consolidated
financial statements.

Reverse Stock Split

On August 25, 1998, the Board of Directors authorized a four-for-one
reverse stock split and an increase in the authorized number of shares of Common
Stock to 10,000,000 shares, subject to stockholder approval. All share and per
share amounts have been restated to reflect such split.

Cash Equivalents

Cash equivalents are highly liquid debt instruments acquired with an
original maturity of three months or less. The recorded carrying amounts of the
Company's cash equivalents approximate the fair market value.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents and
receivables. Risks associated with cash equivalents are mitigated by banking
with credit worthy institutions. Risks associated with receivables are mitigated
as the Company performs on-going credit evaluations of its customers and
requires deposits for sales on credit when deemed necessary. The Company
maintains reserves for estimated credit losses. The carrying value of accounts
receivable approximate fair value due to their short-term maturity. No one
customer accounted for more than 10% of accounts receivable at January 31, 1998.

Inventories

Inventories are valued at the lower of average cost (first in, first out
method) or market. The Company's largest vendor accounted for approximately 30%
of the Company's book purchases in fiscal 1998.

F-7
<PAGE> 69

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

Property and Equipment

Property and equipment is recorded at cost less accumulated depreciation
and amortization. Furniture and equipment are depreciated using the
straight-line method over the estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the lesser of
the lease term or the estimated useful life.

Long-lived Assets

Goodwill arising from the acquisition of Computer Literacy Bookshops, Inc.
is amortized over its estimated life of 15 years. Accumulated amortization was
approximately $133,000 at January 31, 1998. The Company evaluates the
recoverability of its long-lived assets in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. No such impairments have been identified to date.
The Company assesses the impairment of long-lived assets when events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable.

Revenue Recognition

The Company recognizes revenue from product sales, net of any discounts,
when the products are shipped to customers. Outbound shipping charges are
included in net sales. International sales, measured as shipments to addresses
outside the United States, were $60,000 for the year ended January 31, 1997. For
the year ended January 31, 1998, international sales were less than 10% of total
revenues. No foreign country or geographical area accounted for more than 10% of
revenue in any of the periods presented.

Advertising Costs

The cost of advertising is expensed as incurred. For the years ended
January 31, 1997 and 1998, the Company incurred advertising expense of $45,000
and $920,000, respectively, and $240,000 and $1.1 million for the six month
periods ended July 31, 1997 and 1998, respectively.

Product Development

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

Income Taxes

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

F-8
<PAGE> 70

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

Stock-Based Compensation

Stock-based compensation is recognized under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations, using the intrinsic value method. Therefore, the Company
measures compensation cost for stock options as the difference, if any, between
the quoted market price of the Company's stock, at the date of grant, and the
price the employee must pay to acquire the stock under its stock option plans.
SFAS No. 123 "Accounting for Stock-Based Compensation," establishes financial
accounting and reporting standards for stock-based compensation plans. The
accounting standards prescribed are optional, although certain pro forma
disclosures are required, and allows for a company to account for stock-based
compensation cost under existing accounting rules. Therefore, the Company will
continue to account for its compensation costs under APB No. 25. The Company
adopted the disclosure requirements of SFAS No. 123.

Net Loss Per Share

Net loss per share is computed based on the weighted average number of
common shares outstanding. During the fourth quarter of 1998, the Company
adopted SFAS No. 128, Earnings per Share and, retroactively, restated the 1997
earnings per share (EPS) for the change. SFAS No. 128 requires a dual
presentation of basic and diluted EPS. Basic EPS for all periods presented is
computed by dividing net loss by the weighted average of common shares
outstanding. Diluted EPS for all periods presented was the same as basic EPS
since the effect of all other potential dilutive securities is excluded as they
are anti-dilutive because of the Company's net losses.

Recently Issued Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130 "Reporting Comprehensive Income," which requires that an entity report,
by major components and as a single total, the change in its net assets during
the period from non-shareholder sources; and SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," which establishes annual and
interim reporting standards for an entity's business segments and related
disclosures about its products, services, geographic areas, and major customers.
Adoption of these statements will not impact the Company's financial position,
results of operations or cash flows. Both statements are effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. This statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Although the Company has
not fully assessed the implications of this new statement, the Company does not
believe adoption of this statement will have a material impact on the Company's
financial statements.

The Company adopted SFAS No. 130 in fiscal 1999. For the periods presented,
net loss and comprehensive loss were the same.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the

F-9
<PAGE> 71

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.

Unaudited Interim Financial Information

The financial information as of July 31, 1998 and for the six months ended
July 31, 1997 and 1998 is unaudited, and includes all adjustments (consisting
only of normal recurring adjustments) that the Company considers necessary for a
fair presentation of the financial position at such dates and the operations and
cash flows for the periods then ended. Operating results for the six months
ended July 31, 1997 and 1998 are not necessarily indicative of results that may
be expected for the entire year.

2. ACQUISITION

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

The following unaudited pro forma statements of operations summary combines
the results of operations of the Company and Computer Literacy Bookshops, Inc.
as if the acquisition had occurred at the beginning of fiscal 1997. The pro
forma statements of operations summary does not necessarily reflect the results
as they would have been if these combined companies had constituted a single
entity during these periods.

PRO FORMA STATEMENTS OF OPERATIONS SUMMARY

<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998
-------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net sales................................................ $15,172 $15,886
------- -------
Gross profit............................................. 5,236 5,238
------- -------
Net income (loss)........................................ $ 138 $(3,050)
======= =======
Net income (loss) per share.............................. $ 0.09 $ (2.02)
======= =======
Shares used to compute per share information............. 1,504 1,509
------- -------
</TABLE>

F-10
<PAGE> 72

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

3. PROPERTY AND EQUIPMENT

Property and equipment, at cost, consists of the following:

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Computer and office equipment........................ $ 901 $1,384
Software............................................. 574 715
Leasehold improvements............................... 252 278
Furniture and fixtures............................... 158 169
------ ------
1,885 2,546
Less accumulated depreciation and amortization....... (703) (823)
------ ------
Property and equipment, net.......................... $1,182 $1,723
====== ======
</TABLE>

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

<TABLE>
<CAPTION>
JANUARY 31, JULY 31,
1998 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related benefits............ $ 420 $ 444
Accrued sales tax payable............................ 306 95
Store and mail order credits......................... 158 162
Other accrued expenses............................... 200 296
------ ------
Total...................................... $1,084 $ 997
====== ======
</TABLE>

5. LINE OF CREDIT

During fiscal 1997, the Company entered into a loan and security agreement,
under which the Company may borrow up to $2 million. In January 1998, the line
of credit was increased to $3 million. This line of credit expires in November
1998. Borrowings under the agreement bear interest at one-half of a percent
(0.5%) above the bank's prime rate (8.5% at January 31, 1998 and July 31, 1998)
and are collateralized by substantially all of the Company's assets including
certain intellectual property. The line of credit also contains restrictive
covenants, including restriction on payment of dividends, a maximum debt to
tangible effective net worth ratio, minimum cash requirements and limitations on
losses. There were no borrowings under this agreement at January 31, 1998. At
January 31, 1998, the Company was out of compliance with certain of its
reporting requirements and received a waiver concerning such non-compliance as
of that date.

During fiscal 1998, in connection with the Company's bank line of credit
agreement, the Company issued warrants to the bank to purchase up to 20,832
shares of the Company's Series C Preferred Stock at a price of $2.40 per share
(15,624 shares were exercisable at January 31, 1998). The Company recorded
expense of approximately $12,000 related to the warrants. These warrants expire
in May 2002.

F-11
<PAGE> 73

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

6. STOCKHOLDERS' EQUITY

Preferred Stock

At January 31, 1998, the amounts, terms and liquidation values of Series B,
Series C, and Series D preferred stock are as follows (in thousands):

<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK AGGREGATE
SHARES ISSUED AMOUNT, NET OF RESERVED FOR LIQUIDATION
SERIES DESIGNATED AND OUTSTANDING ISSUANCE COSTS CONVERSION PREFERENCE
- ------ ---------- --------------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
B.. 2,454 2,454 $ 4,080 2,454 $ 4,093
C.. 1,042 1,042 2,495 1,042 2,500
D.. 1,875 1,726 7,169 1,726 7,250
------ ------ ------- ------ -------
5,371 5,222 $13,744 5,222 $13,843
</TABLE>

Significant terms of the outstanding preferred stock are as follows:

- Each share of preferred stock is convertible into shares of common stock
on a one to one basis, subject to adjustment in certain instances, at the
option of the stockholder. Such shares will be converted automatically
following the effectiveness of a registration statement under the
Securities Act of 1933, as amended, meeting certain criteria or the
affirmative vote of the holders of a majority of the shares of preferred
stock outstanding at the time of such vote.

- Each share of preferred stock has voting rights equivalent to the number
of shares of common stock into which it is convertible.

- Stockholders are entitled to receive noncumulative dividends when and if
declared by the Board of Directors out of any assets legally available,
prior to and in preference to any declaration or payment of any dividend
on the common stock. The dividend rate for Series B, Series C and Series
D per share per annum is $0.088, $0.12, and $0.20, respectively. No
dividends have been declared as of July 31, 1998.

- In the event of liquidation, dissolution or winding up of the Company,
stockholders of Series B, Series C and Series D preferred stock are
entitled to receive the original issue price ($1.67, $2.40, and $4.20,
respectively), plus any declared and unpaid dividends with respect to
such shares. If the assets and funds to be distributed are insufficient
to permit full payment, then the funds shall be distributed on a pro rata
basis. Upon completion of the distribution, the holders of the common
stock will receive all remaining assets of the corporation.

Common Stock

At January 31, 1998, the Company had 8,750,000 shares of Common Stock
authorized of which 1,527,085 were issued and outstanding. At January 31, 1998,
the Company had reserved shares of common stock for issuance as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Issuance under stock option plans...................... 1,216
Conversion of warrants................................. 21
Conversion of convertible preferred stock.............. 5,222
------
Total shares reserved........................ 6,459
======
</TABLE>

F-12
<PAGE> 74

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

Stock Option Plan

Under the 1996 Stock Plan, which provides for the issuance of incentive and
non-qualified stock options, the Company may grant options to purchase up to
1,215,686 shares of common stock to employees, directors and consultants at
prices not less than the fair market value at date of grant for incentive stock
options and not less than 85% of fair value for nonstatutory stock options.
These options generally vest 25% one year from the vest start date and ratably
over the next 36 months and expire 10 years from the date of grant. Shares
issued upon exercise of options that are unvested are subject to repurchase by
the Company upon termination of employment or services. There were no shares
issued under the 1996 Stock Plan and outstanding at January 31, 1998 that were
subject to repurchase.

Option activity under the 1996 Stock Plan is as follows (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (000'S) EXERCISE PRICE
-------------- ----------------
<S> <C> <C>
Outstanding, February 1, 1996............................... -- --
Options granted (weighted average fair value of $0.03 per
share)................................................. 277 $ 0.18
----- ------
Outstanding, January 31, 1997 (8 vested at a weighted
average price of $0.18)................................... 277 0.18
Options granted (weighted average fair value of $0.09 per
share)................................................. 795 0.57
Options exercised......................................... (23) (0.18)
Options canceled.......................................... (183) (0.26)
----- ------
Outstanding, January 31, 1998 (118 vested at a weighted
average price of $0.28)................................... 866 $ 0.52
===== ======
</TABLE>

At January 31, 1998 there were 326,460 shares available for future grant
under the 1996 Stock Plan.

Additional information regarding options outstanding as of January 31, 1998
is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
---------------------------------------------------- ----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
EXERCISE PRICE SHARES LIFE (YRS) EXERCISE PRICE SHARES EXERCISE PRICE
- -------------- --------- --------------------- ---------------- --------- ----------------
(SHARES IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
$0.18 337 8.9 $ 0.18 97 $ 0.18
$0.24 319 9.5 $ 0.24 10 $ 0.24
$0.72-$1.20 129 9.8 $ 1.08 10 $ 1.18
$2.00-$2.20 81 10.0 $ 2.16 1 $ 2.00
- ------------- ----- ----- ------ --- ------
$0.18-$2.20 866 9.4 $ 0.52 118 $ 0.28
============= ===== ===== ====== === ======
</TABLE>

Additional Stock Plan Information

As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB No.
25, "Accounting for Stock Issued to Employees," and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements granted at fair value.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma net
loss and net loss per share had the Company adopted the fair value method as of
the beginning of fiscal 1997. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of the minimum value method,
and subsequently through the use of

F-13
<PAGE> 75

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and the expected time to exercise, which significantly affect the
calculated values. The Company's calculations were made using the minimum value
option pricing model with the following weighted average assumptions: expected
life, 48 months following the grant; risk-free interest rate of 5.5% for 1997
and 1998; and no dividends during the expected term. The Company's calculations
are based on a multiple option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the 1997 and 1998 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $575,000 ($0.38 per share) and $3.3 million ($2.19 per share) in
1997 and 1998, respectively.

During fiscal 1998 and the six months ended July 31, 1998, the Company
granted 29,301 and 8,651 options to consultants at exercise prices ranging from
$0.18 to $2.20 per share, and recorded expense of approximately $3,000 and
$5,000, respectively.

7. INCOME TAXES

The Company's deferred tax balances at January 31, 1997 and 1998 consist of
the following:

<TABLE>
<CAPTION>
1997 1998
----- -------
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carryforwards............................ $ 238 $ 1,043
Expenses not currently deductible........................... -- 246
Other....................................................... (12) 129
----- -------
226 1,418
Valuation allowance......................................... (226) (1,418)
----- -------
Net deferred tax asset...................................... $ -- $ --
===== =======
</TABLE>

A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company has
established a valuation allowance of $226,000 and $1,418,000 as of January 31,
1997 and 1998, respectively, due to the uncertainty of realizing future tax
benefits from its net operating loss carryforwards and other deferred tax
assets.

At January 31, 1998, the Company had federal and state net operating loss
carryforwards of approximately $2,962,000, which expire through 2013 and 2004,
respectively.

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

8. LEASE COMMITMENTS

At January 31, 1998, the Company leased equipment with a cost of $84,000
(accumulated amortization of $14,000) under capital leases.

The Company currently leases office and warehouse space, retail store space
and equipment under noncancelable operating leases. Rental expense under
operating lease agreements, net of sublease income, for the years ended January
31, 1997 and 1998 was approximately $18,000, and $390,000, respectively, and
$115,000 and $309,000 for the six months ended July 31, 1997 and 1998,
respectively. Estimated future rents to be recovered under sublease agreements
are approximately $62,000 in fiscal 1999.

F-14
<PAGE> 76

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

Future minimum lease commitments, net of sublease income, under
noncancelable capital and operating leases and service agreements as of January
31, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL LEASES LEASES
------ --------- -------
<S> <C> <C>
1999........................................................ $418 $ 25
2000........................................................ 245 25
2001........................................................ 178 25
2002........................................................ 30 11
---- ----
Total............................................. $871 86
====
Less: amount representing interest.......................... (15)
----
Present value of future minimum lease payments.............. 71
Current portion............................................. (18)
----
Long-term portion........................................... $ 53
====
</TABLE>

9. EMPLOYEE BENEFIT PLANS

As a result of the acquisition of CLBI, the Company has a money purchase
pension plan, under which the Company contributes to the plan an amount equal to
10% of the employee's annual compensation through June 30, 1997. The Company has
suspended and is in the process of terminating the money purchase pension plan
effective June 28, 1998. The effect of the termination is not expected to have a
material adverse effect on the Company's financial position or results of
operation. The Company's contribution to such Plan for fiscal 1998 was $10,000.

Effective November 1997, the Company adopted the Computer Literacy, Inc.
401(k) Plan (the "401(k) Plan") that qualifies as a deferred salary arrangement
under Section 401 of the Internal Revenue Code. All full-time equivalent
employees over 21 years of age are eligible and may participate in the 401(k)
Plan one year subsequent to their hire date. Under the 401(k) Plan,
participating employees may defer a portion of their pre-tax earnings not to
exceed 15% of their total compensation. The Company matches 50% of the first 4%
contributed by the employee. The total Company contribution was $7,000 for
fiscal 1998 and $15,000 for the six months ended July 31, 1998.

F-15
<PAGE> 77

COMPUTER LITERACY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(INFORMATION AS OF JULY 31, 1998 AND

FOR THE SIX MONTHS ENDED JULY 31, 1997 AND JULY 31, 1998 IS UNAUDITED)

10. SUBSEQUENT EVENTS

In May 1998, the Company issued 857,624 shares of Series E Preferred Stock
for $6.44 per share. The terms of the Preferred Stock, which has a dividend rate
of $0.32 per share per annum and a liquidation preference of $6.44 per share,
are substantially the same as those described in Note 6.

In July 1998, the Company reincorporated in Delaware and pursuant to such
reincorporation, each share of Common Stock and Preferred Stock has a par value
of $0.001 per share and an additional paid-in capital account has been created.
In addition, in July 1998, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to permit the
Company to sell shares of its common stock to the public and authorized
management to effect such filing. Upon completion of the Company's initial
public offering, each outstanding share of preferred stock will convert into
common stock. Unaudited pro forma stockholders' equity reflects the assumed
conversion of the preferred stock into common stock as of July 31, 1998.

In July 1998, the Board of Directors approved the Company's 1998 Omnibus
Equity Incentive Plan (the "Omnibus Plan") and the Employee Stock Purchase Plan
("ESPP"), subject to stockholder approval. The Plans become effective upon the
closing of the Company's initial public offering. Under the Omnibus Plan,
employees, non-employee members of the Board and consultants may be awarded
options to purchase shares of common stock, stock appreciation rights,
restricted shares and stock units. At July 31, 1998, there were 3,045,595 shares
available for grant. Under the ESPP, eligible employees may purchase common
stock through payroll deductions, which may not exceed 15% of any employee's
compensation, nor more than 500 shares of any purchase date. A total of 300,000
shares of Common Stock will be reserved for issuance under the ESPP.

In July 1998, the Company entered into an agreement with CBT Systems, Ltd.
The agreement requires that the Company make a $1,250,000 minimum purchase
commitment, as follows: fiscal 1999: $300,000; fiscal 2000: $375,000; fiscal
2001: $345,000 and fiscal 2002: $230,000.

F-16
<PAGE> 78

INTRODUCTION TO PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)

The acquisition of Computer Literacy Bookshops, Inc. ("CLBI") on May 31,
1997 was accounted for under the purchase method of accounting. This method
requires the purchase price of approximately $5.1 million be allocated to the
acquired assets and assumed liabilities of CLBI on the basis of their estimated
fair values as of the date of acquisition. Consequently, upon consummation of
the purchase, the combined company has established a new accounting and
reporting basis for the acquired assets and liabilities. The following Pro Forma
Combined Condensed Statement of Income (the "Pro Forma Statement of Income") for
the year ended January 31, 1998 (unaudited) presents the combined historical
financial statements of Computer Literacy, Inc. adjusted to give effect to the
transaction on a pro forma basis as if the acquisition had occurred on February
1, 1997 and includes adjustments directly attributable to the acquisition and
expected to have a continuing impact on the combined company.

The Pro Forma Statement of Income and related notes are provided for
informational purposes only. The Pro Forma Statement of Income presented is not
necessarily indicative of the results of operations of Computer Literacy, Inc.
as they may be in the future or as they might have been had the purchase been
effected on the assumed date. The Pro Forma Statement of Income should be read
in conjunction with the historical consolidated financial statements of Computer
Literacy, Inc., and CLBI and the related notes thereto, which are included
elsewhere in this prospectus.

F-17
<PAGE> 79

COMPUTER LITERACY, INC.

PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED JANUARY 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA
COMPUTER -------------------------
LITERACY, INC. CLBI(A) SUBTOTAL ADJUSTMENTS COMBINED
-------------- ------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Online.......................... $ 3,021 $ -- $ 3,021 $ 3,021
Retail and other................ 7,927 4,938 12,865 12,865
---------- ------ ------- ------ ----------
Total revenues.................... 10,948 4,938 15,886 15,886
Gross profit...................... 3,543 1,695 5,238 5,238
Operating expense................. 6,726 1,764 8,490 $ (225)(b) 8,265
Interest, net..................... (7) 14 7 (30)(c) (23)
---------- ------ ------- ------ ----------
Net loss.......................... $ (3,190) $ (55) $(3,245) $ 195 $ (3,050)
========== ====== ======= ====== ==========
Basic and diluted net loss per
share........................... $ (2.11) $ (2.02)
Shares used in calculating basic
and diluted net loss per
share........................... 1,509 1,509
</TABLE>

See Notes to Pro Forma Combined Condensed Statement of Income.
F-18
<PAGE> 80

COMPUTER LITERACY, INC.

NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
(UNAUDITED)

The following adjustments represent those necessary to show how the
purchase could have affected the historical consolidated statement of income had
the acquisition been consummated at February 1, 1997.

(a) The CLBI Statement of Operations data is for the period from February
1, 1997 through May 31, 1997 (date of acquisition).

(b) Reflects additional amortization of goodwill and the covenant not to
compete ($79,000) offset by acquisition costs paid by CLBI ($292,000)
and reduction of depreciation for assets written-off by Computer
Literacy, Inc. ($12,000) as if the acquisition of CLBI had occurred
February 1, 1997. Goodwill and the covenant not to compete are
amortized on a straight-line basis over fifteen years and five years,
respectively.

(c) Reflects additional interest expense that would have been paid on the
line of credit had the acquisition occurred at February 1, 1997.

F-19
<PAGE> 81

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Computer Literacy, Inc.
Sunnyvale, California

We have audited the accompanying statements of income, stockholders' equity, and
cash flows of Computer Literacy Bookshops, Inc. for the year ended June 30, 1996
and the eleven months ended May 31, 1997. These financial statements are the
responsibility of the management of Computer Literacy Bookshops, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits.

In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Computer Literacy
Bookshops, Inc. for the year ended June 30, 1996 and the eleven months ended May
31, 1997 in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Jose, California
July 10, 1998

F-20
<PAGE> 82

COMPUTER LITERACY BOOKSHOPS, INC.

STATEMENTS OF INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
<S> <C> <C>
Net revenues................................................ $13,834 $13,613
Cost of revenues............................................ 8,957 8,761
------- -------
Gross profit................................................ 4,877 4,852
Selling, general and administrative expenses................ 4,142 4,372
------- -------
Income from operations...................................... 735 480
Interest, net............................................... 5 44
------- -------
Income before income taxes.................................. 740 524
Provision for income taxes.................................. 296 320
------- -------
Net income.................................................. $ 444 $ 204
======= =======
</TABLE>

See notes to financial statements.
F-21
<PAGE> 83

COMPUTER LITERACY BOOKSHOPS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balances, July 1, 1995.............................. 200 $50 $1,576 $1,626
Net income.......................................... -- -- 444 444
--- --- ------ ------
Balances, June 30, 1996............................. 200 50 2,020 2,070
Net income.......................................... -- -- 204 204
--- --- ------ ------
Balances, May 31, 1997.............................. 200 $50 $2,224 $2,274
=== === ====== ======
</TABLE>

See notes to financial statements.
F-22
<PAGE> 84

COMPUTER LITERACY BOOKSHOPS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- --------------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................. $ 444 $ 204
Adjustments to reconcile net income to net cash provided by
(used in) operations:
Depreciation........................................... 98 96
Gain on sale of property and equipment................. 4 --
Changes in operating assets and liabilities:
Accounts receivable.................................... 207 (68)
Prepaid expenses and other current assets.............. 52 (105)
Inventory.............................................. 234 (167)
Accounts payable....................................... (101) (447)
Accrued expenses....................................... 132 49
Other.................................................. 24 (10)
------ ------
Net cash provided by (used in) operations:.................. 1,094 (448)
Cash flows from investing activities:
Purchases of property and equipment.................... (47) (70)
------ ------

Net increases/(decrease) in cash and equivalents............ 1,047 (518)
Cash and equivalents at beginning of period................. 230 1,277
------ ------
Cash and equivalents at end of period....................... $1,277 $ 759
====== ======
Supplemental disclosure of cash flow information
Income taxes paid...................................... $ 39 $ 566
====== ======
</TABLE>

See notes to financial statements.
F-23
<PAGE> 85

COMPUTER LITERACY BOOKSHOPS, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization and Sale of Company

Computer Literacy Bookshops, Inc., ("CLBI"), was incorporated in July 1986.
CLBI is a retailer of technical and other information-based products, all of
which are targeted to information technology professionals. Business is
transacted through CLBI's four retail locations in California and Virginia.

On May 31, 1997, all of the outstanding shares of the CLBI were acquired by
Computer Literacy, Inc. The purchase price was approximately $5.1 million and
the acquisition was accounted for using the purchase method of accounting. The
accompanying financial statements reflect operations for the fiscal year ended
June 30, 1996 (fiscal 1996) and for the eleven months ended May 31, 1997, the
date of acquisition (fiscal 1997).

Use of Estimates

Concentration of Credit Risk

Financial instruments that potentially subject CLBI to concentrations of
credit risk consist principally of cash equivalents and receivables. Risks
associated with cash equivalents are mitigated by banking with credit worthy
institutions. Risks associated with receivables are mitigated as CLBI performs
on-going credit evaluations of its customers and requires deposits for sales on
credit when deemed necessary. CLBI maintains reserves for estimated credit
losses. The carrying value of accounts receivable approximate fair value due to
their short-term maturity. No one customer accounted for more than 10% of
accounts receivable at June 30, 1996 and May 31, 1997.

Income Taxes

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

Revenue Recognition

CLBI recognizes revenue from product sales, net of any discounts, at the
time of sale for retail sales and when the products are shipped to customers for
mail-order sales. Outbound shipping charges are included in net revenues.

Advertising Costs

The cost of advertising is expensed as incurred. CLBI incurred advertising
expense of $214,000 in fiscal 1996 and $177,000 in fiscal 1997.

F-24
<PAGE> 86
COMPUTER LITERACY BOOKSHOPS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. STOCKHOLDERS' EQUITY

Convertible Preferred Stock

At May 31, 1997, CLBI had 2,000,000 authorized shares of preferred stock,
none of which had been issued or was outstanding.

Common Stock

At May 31, 1997, CLBI had 6,000,000 shares of common stock authorized,
200,000 of which were issued and outstanding.

3. INCOME TAXES

The provision for income taxes consists of (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
<S> <C> <C>
Current:
Federal............................................. $195 $315
State............................................... 59 88
---- ----
Total current income taxes.................. 254 403
---- ----
Deferred:
Federal............................................. 36 (66)
State............................................... 6 (17)
---- ----
Total deferred income taxes................. 42 (83)
---- ----
Provision for income taxes............................ $296 $320
==== ====
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
CLBI's deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset (liability):
Nondeductible acquisition costs..................... $21 $78
State taxes......................................... (27) (30)
Other............................................... (2) 27
--- ---
Net deferred tax asset (liability):................... ($8) $75
=== ===
</TABLE>

CLBI's effective income tax rate differs from the federal statutory income
tax rate as follows:

<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS
JUNE 30, ENDED MAY 31,
1996 1997
---------- -------------
<S> <C> <C>
Federal statutory income tax rate..................... 35.0% 35.0%
State taxes, net of federal benefit................... 5.7 5.7
Nondeductible acquisition expenses.................... -- 19.4
Other................................................. (0.7) 1.0
---- ----
Effective income tax rate........................... 40.0% 61.1%
==== ====
</TABLE>

F-25
<PAGE> 87
COMPUTER LITERACY BOOKSHOPS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. LEASE COMMITMENTS

CLBI leases office and warehouse space, retail store space and equipment
under noncancelable operating leases. Rental expense under operating lease
agreements for fiscal 1996 was $413,000 and $396,000 fiscal 1997.

Future minimum lease commitments under noncancelable leases as of May 31,
1997 are as follows:

<TABLE>
<CAPTION>
FISCAL YEARS ENDING
JUNE 30, (IN THOUSANDS)
------------------- -------------------
<S> <C>
1998.................................... $388
1999.................................... 247
2000.................................... 178
2001.................................... 149
----
Total.............................. $962
====
</TABLE>

5. EMPLOYEE BENEFIT PLANS

CLBI has a money purchase pension plan under which it agrees to contribute
an amount equal to 10% of the employees annual compensation for eligible
employees who have completed one year of service, as defined in such plan. CLBI
has suspended and is in the process of terminating the money purchase pension
plan effective June 28, 1998. CLBI contributed $110,000 and $113,000 to the plan
for fiscal 1996 and 1997, respectively.

6. RELATED PARTY TRANSACTIONS

During the periods presented, CLBI provided management and administrative
services to an entity under common ownership. Revenue recognized by CLBI during
fiscal 1996 and 1997 was approximately $14,000 and $13,000, respectively. The
related receivables at June 30, 1996 and May 31, 1997 were approximately $53,000
and $22,000, respectively.

F-26
<PAGE> 88

[ART WORK]
<PAGE> 89

DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER.
- -------------------
Screen Shot of Computer Literacy Web site on Thursday, August 27, 1998:
Computerliteracy.com, Resources for technical minds

GATEFOLD.
- ---------
MORE THAN ANOTHER ON-LINE BOOKSTORE:

COMPUTER LITERACY IS A LOT MORE THAN COMPETITIVE PRICES, STRONG CUSTOMER
SERVICE, AND EFFICIENT SHIPPING. IT'S A COMPLETE INFORMATION RESOURCE CENTER FOR
THE TECHNICAL MIND.

FOCUSED AND COMPREHENSIVE
By focusing specifically on the needs of the technical mind, Computer
Literacy is able to provide more ways for customers to solve their problems.
With more than 300,000 books, training products, research reports, and manuals,
from more than 8,000 publishers, Computer Literacy has everything under one
virtual roof.

ENLIGHTENED
By combining superior search technology with an interface engineered to
allow a variety of search options, Computer Literacy provides the tools to help
technology professionals find exactly what they need. Users can conduct
searches based on subject, title, author, publisher, ISBN, recommendations, and
more.

AUTHORITATIVE
Computer Literacy is part of the technology community. And the reviews from
its in-house editorial staff and industry leaders are both relevant and
insightful. They help to engage the customer and add to the shopping experience.

PERSONALIZED
Computer Literacy has several e-mail notification services, that allow
customers to subscribe to preference lists that notify them of new titles
related to their specific interests. Customers can also join Special Interest
Groups, and stay informed of weekly specials and upcoming events.

PICTURE OF BOOKS
More than 300,000 titles from more than 8,000 publishers. We have a broad
selection of titles in stock, so customers receive products faster.

PICTURE OF MANUALS
Complete selection of IBM Red Books.

PICTURE OF RESEARCH REPORTS
Market research from Zona Research Inc., a leading supplier of market
research for the Internet industry.

PICTURE OF A COMPUTER-BASED TRAINING PRODUCT
More than 1,500 interactive training and certification products from
partners such as CBT Systems and Microsoft.

SCREEN SHOT OF THE COMPUTER LITERACY SITE
CL's easy-to-use interface helps customers find exactly what they need.
Featured items are added constantly, so there's always a reason to visit.

SCREEN SHOT OF AFFILIATES PROGRAM
CL's Affiliate program allows anyone with a Web site to become a
distributor. Affiliates receive a commission for every new customer they send
to Computer Literacy.

SCREEN SHOT OF A CO-BRANDED STORE
CL's Corporate program allows partners such as Microsoft and IBM to offer
a co-branded store for visitors to their site. Unique product collections are
tailored to the partner's audience.

SCREEN SHOT OF A CO-BRANDED INTRANET
CL's Corporate program allows partners such as Sun Microsystems, Apple
Computer, and Cisco Systems to provide a unique selection of books, training,
and documentation for their employees, in addition to CL's complete inventory.

<PAGE> 90

DESCRIPTION OF GRAPHICS

BACK COVER.
- -----------

SCREEN SHOT OF SELECTION
Our focused and comprehensive selection means that a search on Oracle
leads to titles on the database application, not Egyptian oracles or the Oracle
of Delphi.

SCREEN SHOT OF UNIQUE CONTENT
In addition to reviews and commentary from our in-house editorial staff,
Computer Literacy features columns from industry leaders in key technology
subject areas.

SCREEN SHOT OF PERSONALIZATION
Computer Literacy's Keep Me Posted e-mail service allows customers to
choose from more than 700 technology subject areas and stay up to date on
specific areas of interest.

SCREEN SHOT OF ADVANCED SEARCH
Three methods of search and a detailed subject browse function with 700
categories allow users to find what they need quickly.

<PAGE> 91

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

No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities offered hereby in
any jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
-------------------------------------------

TABLE OF CONTENTS
-------------------------------------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 5
Use of Proceeds........................ 16
Dividend Policy........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial Data................ 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 20
Business............................... 29
Management............................. 40
Certain Transactions................... 50
Principal Stockholders................. 51
Description of Capital Stock........... 53
Shares Eligible for Future Sale........ 56
Underwriting........................... 58
Legal Matters.......................... 60
Experts................................ 60
Additional Information................. 60
Index to Financial Statements.......... F-1
</TABLE>

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

Until after , 1998 (25 days after the date of this Prospectus),
all dealers effecting transactions in the Common Stock offered hereby, whether
or not participating in this distribution, may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.

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

3,000,000 SHARES

LOGO

COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
NationsBanc Montgomery
Securities LLC

Piper Jaffray Inc.

Needham & Company, Inc.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 92

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 7.6, of the Registrant's
Amended and Restated Bylaws which will be effective upon the closing of the
offering of Common Stock registered hereunder provides for mandatory
indemnification of its directors and permissible indemnification of officers or
employees to the maximum extent permitted by the Delaware General Corporation
Law.

The Registrant's Certificate of Incorporation, which will be effective upon
the closing of the offering of Common Stock registered hereunder, provides that,
pursuant to Delaware law, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty as directors to the Company and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.

The Registrant intends to enter into Indemnification Agreements with its
officers and directors, a form of which has been filed as Exhibit 10.1 hereto
and is incorporated herein by reference. The Indemnification Agreements provide
the Registrant's officers and directors with further indemnification, that in
some cases, may be broader than the specific indemnification provisions
contained in the Delaware General Corporation Law.

Reference is made to Section 8 of the Underwriting Agreement contained in
Exhibit 1.1 hereto, indemnifying officers and directors of the Registrant
against certain liabilities.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq National Market
listing fee.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 10,178
NASD fee.................................................... 3,950
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving expenses............................. 100,000
Legal fees and expenses..................................... 350,000
Accounting fees and expenses................................ 200,000
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... 15,000
Miscellaneous fees and expenses............................. 25,872
--------
Total............................................. $800,000
========
</TABLE>

II-1
<PAGE> 93

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Since June 30, 1995, the Company issued and sold the following unregistered
securities pursuant to the exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Act"), provided by Section 4(2) of the
Act or Rule 701 of the Act:

(1) In September and December 1996, the Company issued 2,453,701
shares of Series B Preferred Stock to a group of private investors for
aggregate cash consideration of $3,825,000 and the exchange of shares of
Series A Preferred Stock.

(2) In May 1997, the Company issued 1,041,667 shares of Series C
Preferred Stock to a group of private investors for aggregate cash
consideration of $2,500,000.

(3) In May 1997, the Company issued a warrant to purchase up to 20,832
shares of Series C Preferred Stock at an exercise price of $2.40 to a
lender of the Company. At July 31, 1998, such warrant was exercisable to
purchase 15,624 shares of Series C Preferred Stock.

(4) In January 1998, the Company issued 1,726,194 shares of Series D
Preferred Stock to a group of private investors for aggregate cash
consideration of $7,250,000.

(5) In May 1998, the Company issued 857,624 shares of Series E
Preferred Stock to a group of private investors for aggregate cash
consideration of $5,523,071.

(6) Between July 1, 1995 and July 31, 1998, the Company granted
options to employees and consultants of the Company pursuant to its 1996
Stock Option Plan, at exercise prices between $0.18 and $11.20. At July 31,
1998, options to purchase 1,110,351 shares of Common Stock were
outstanding.

(7) Between July 1, 1995 and July 1, 1998, the Company issued and sold
59,705 shares of Common Stock upon the exercise of stock options for an
aggregate consideration of $87,966.

ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement (preliminary form).
2.1** Stock Acquisition Agreement by and among the Registrant,
Computer Literacy Bookshops, Inc., Rachel Unkefer and Daniel
A. Doernberg, dated as of May 28, 1997.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Second Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.3** Bylaws of the Registrant.
3.4** Form of Amended and Restated Bylaws of the Registrant to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* Specimen Common Stock certificate.
4.3** Amended and Restated Investors' Rights Agreement, dated May
22, 1998 and as amended on June 30, 1998 among the
Registrant and the parties thereto.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1 Form of Indemnification Agreement.
10.2** 1996 Stock Plan.
10.3** 1998 Omnibus Equity Incentive Plan.
10.4** 1998 Employee Stock Purchase Plan.
10.5** Sub-Sublease by and between Miller Freeman, Inc. and the
Registrant, dated November 1, 1996 and adjacent Sublease
Agreement by and between Control Data Systems, Inc., dated
June 25, 1997 for the premises located at 1306 Orleans
Drive, Sunnyvale, California.
10.6+** CBT Systems, Ltd. and Computer Literacy, Inc. Agreement,
dated as of March 7, 1998, as amended from time to time.
</TABLE>

II-2
<PAGE> 94

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.7** Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. MacAskill.
10.8** Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. Orumchian.
10.9** Offer Letter dated October 2, 1997 to Mr. Tokuno.
10.10** Offer Letter dated August 26, 1997 to Mr. Alvarez.
10.11** Offer Letter dated February 27, 1998 to Mr. Cudd.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (Reference is made to Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule (Fiscal 1998).
27.2 Financial Data Schedule (Six months ended July 31, 1998).
</TABLE>

- ---------------
* To be filed by amendment

** Filed previously

+ Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment.

(B) FINANCIAL STATEMENT SCHEDULES

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.

ITEM 28. UNDERTAKINGS

The small business issuer hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1993 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer,
or controlling person of the small business issuer in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the small business issuer will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

The small business issuer hereby undertakes that:

(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer pursuant to Rule 424(b)(1), or (4), or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time the Commission declared it effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement for the securities offered in the
registration statement, and the offering of the securities at that time as
the initial bona fide offering of the securities.

II-3
<PAGE> 95

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Sunnyvale, State of California, on this 3rd day
of September 1998.

COMPUTER LITERACY, INC.

By: /s/ CHRIS MACASKILL

------------------------------------
Chris MacAskill
President and Chief Executive
Officer

In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been signed by
the following persons in the capacities and on the dates indicated:

/s/ CHRIS MACASKILL President, Chief Executive September 3, 1998
- ----------------------------------------------------- Officer (Principal Executive
Chris MacAskill Officer) and Director

/s/ DONALD P. ALVAREZ* Vice President of Finance and September 3, 1998
- ----------------------------------------------------- Chief Financial Officer
Donald P. Alvarez (Principal Financial and
Accounting Officer)

/s/ PETER G. BODINE* Director September 3, 1998
- -----------------------------------------------------
Peter G. Bodine

/s/ RALPH C. DERRICKSON* Director September 3, 1998
- -----------------------------------------------------
Ralph C. Derrickson

/s/ ALAN S. FISHER* Director September 3, 1998
- -----------------------------------------------------
Alan S. Fisher

/s/ TOD H. FRANCIS* Director September 3, 1998
- -----------------------------------------------------
Tod H. Francis

/s/ KIM ORUMCHIAN* Director September 3, 1998
- -----------------------------------------------------
Kim Orumchian

/s/ DAVID C. SCHWAB* Director September 3, 1998
- -----------------------------------------------------
David C. Schwab

/s/ PETER C. WENDELL* Director September 3, 1998
- -----------------------------------------------------
Peter C. Wendell
</TABLE>

*By: /s/ CHRIS MACASKILL

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

Chris MacAskill

Attorney-In-Fact

II-4
<PAGE> 96

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement (preliminary form).
2.1** Stock Acquisition Agreement by and among the Registrant,
Computer Literacy Bookshops, Inc., Rachel Unkefer and Daniel
A. Doernberg, dated as of May 28, 1997.
3.1** Amended and Restated Certificate of Incorporation of the
Registrant.
3.2** Form of Second Amended and Restated Certificate of
Incorporation to be filed upon the closing of the offering
made pursuant to this Registration Statement.
3.3** Bylaws of the Registrant.
3.4** Form of Amended and Restated Bylaws of the Registrant to be
filed upon the closing of the offering made pursuant to this
Registration Statement.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2 * Specimen Common Stock certificate.
4.3** Amended and Restated Investors' Rights Agreement, dated May
22, 1998 and as amended on June 30, 1998 among the
Registrant and the parties thereto.
5.1 Opinion of Gunderson Dettmer Stough Villeneuve Franklin &
Hachigian, LLP.
10.1 Form of Indemnification Agreement.
10.2** 1996 Stock Plan.
10.3** 1998 Omnibus Equity Incentive Plan.
10.4** 1998 Employee Stock Purchase Plan.
10.5** Sub-Sublease by and between Miller Freeman, Inc. and Cbooks
Express, dated November 1, 1996 and adjacent Sublease
Agreement by and between Control Data Systems, Inc., dated
June 25, 1997 for the premises located at 1306 Orleans
Drive, Sunnyvale, California.
10.6+** CBT Systems, Ltd. and Computer Literacy Inc. Agreement,
dated as of March 7, 1998, as amended from time to time.
10.7** Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. MacAskill.
10.8** Employment Agreement dated December 18, 1996, and amendment
thereto, dated May 30, 1997 with Mr. Orumchian.
10.9** Offer Letter dated October 2, 1997 to Mr. Tokuno.
10.10** Offer Letter dated August 26, 1997 to Mr. Alvarez.
10.11** Offer Letter dated February 27, 1998 to Mr. Cudd.
23.1 Independent Auditors' Consent.
23.2 Consent of Counsel (Reference is made to Exhibit 5.1).
24.1** Power of Attorney.
27.1 Financial Data Schedule (Fiscal 1998).
27.2 Financial Data Schedule (Six months ended July 31, 1998).
</TABLE>

- ---------------
* To be filed by amendment

** Filed previously

+ Specified portions of this agreement have been omitted and have been filed
separately with the Commission pursuant to a request for confidential
treatment.

<PAGE> 1
EXHIBIT 5.1

Computer Literacy
1308 Orleans Drive
Sunnyvale, CA 94089

Re: Registration Statement on Form SB-2

Ladies and Gentlemen:

We have examined the Registration Statement on Form SB-2 (File No.
333-59361) originally filed by Computer Literacy, Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on July 17, 1998, as
thereafter amended or supplemented (the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended, of up to
3,000,000 shares of the Company's Common Stock (the "Shares"). The Shares, which
include an over-allotment option to the Underwriters to purchase up to 450,000
additional shares of the Company's Common Stock, are to be sold to the
Underwriters by the Company as described in the Registration Statement. As your
counsel in connection with this transaction, we have examined the proceedings
taken and are familiar with the proceedings proposed to be taken by you in
connection with the sale and issuance of the Shares.

It is our opinion that, upon completion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares being sold by the Company and upon completion of the proceedings being
taken in order to permit such transactions to be carried out in accordance with
the securities laws of the various states where required, the Shares being sold
by the Company, when issued and sold in the manner described in the Registration
Statement and in accordance with the resolutions adopted by the Board of
Directors of the Company, will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to said Registration
Statement and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment or supplement thereto.

Very truly yours,

/s/ Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian, LLP
----------------------------------------
Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian, LLP

<PAGE> 1
INDEMNIFICATION AGREEMENT

THIS AGREEMENT (the "Agreement") is made and entered into as of
___________, ____ between Computer Literacy, Inc., a Delaware corporation ("the
Company"), and _____________________.

WITNESSETH THAT:

WHEREAS, the individual signatory hereto performs a valuable
service for the Company; and

WHEREAS, the Board of Directors of the Company has adopted Bylaws
(the "Bylaws") providing for the indemnification of the officers and directors
of the Company to the maximum extent authorized by Section 145 of the Delaware
General Corporation Law, as amended ("Law"); and

WHEREAS, the Bylaws and the Law, by their nonexclusive nature,
permit contracts between the Company and the officers or directors of the
Company with respect to indemnification of such officers or directors; and

WHEREAS, in accordance with the authorization as provided by the
Law, the Company may purchase and maintain a policy or policies of directors'
and officers' liability insurance ("D & O Insurance"), covering certain
liabilities which may be incurred by its officers or directors in the
performance of their obligations to the Company; and

WHEREAS, in recognition of past services and in order to induce
the individual signatory hereto to continue to serve as an officer or director
of the Company, the Company has determined and agreed to enter into this
contract with such individual;

NOW, THEREFORE, in consideration of such individual's service as
an officer or director after the date hereof, the parties hereto agree as
follows:

1. Indemnity of Indemnitee. The Company hereby agrees to hold
harmless and indemnify Indemnitee (as defined in Section 13(e) below) to the
full extent authorized or permitted by the provisions of the Law, as such may be
amended from time to time, and Article VII, Section 7.6 of the Bylaws, as such
may be amended. In furtherance of the foregoing indemnification, and without
limiting the generality thereof:

(a) Proceedings Other Than Proceedings by or in the Right of the
Company. Indemnitee shall be entitled to the rights of indemnification provided
in this Section l(a) if, by reason of his Corporate Status (as defined in
Section 13(a) below), he is, or is threatened to be made, a party to or
participant in any Proceeding (as defined in Section 13(g) below) other than a
Proceeding by or in the right of the Company. Pursuant to this Section 1(a),
Indemnitee shall be indemnified against all Expenses (as defined in Section
13(d) below), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if
<PAGE> 2
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful.

(b) Proceedings by or in the Right of the Company. Indemnitee
shall be entitled to the rights of indemnification provided in this Section 1(b)
if, by reason of his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the right of the
Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against
all Expenses actually and reasonably incurred by him or on his behalf in
connection with such Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that, if applicable law so provides, no
indemnification against such Expenses shall be made in respect of any claim,
issue or matter in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Company unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such indemnification may
be made.

(c) Indemnification for Expenses of a Party Who is Wholly or
Partly Successful. Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.

2. Additional Indemnity. In addition to, and without regard to
any limitations on, the indemnification provided for in Section 1, the Company
shall and hereby does indemnify and hold harmless Indemnitee against all
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred by him or on his behalf if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the Company),
including, without limitation, all liability arising out of the negligence or
active or passive wrongdoing of Indemnitee. The only limitation that shall exist
upon the Company's obligations pursuant to this Agreement shall be that the
Company shall not be obligated to make any payment to Indemnitee that is finally
determined (under the procedures, and subject to the presumptions, set forth in
Sections 6 and 7 hereof) to be unlawful to be made to the individual signatory
hereto under Delaware law.

3. Contribution in the Event of Joint Liability.

(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any threatened, pending or
completed action, suit or proceeding in which Company is jointly liable with
Indemnitee (or would be if joined in such action, suit or

2
<PAGE> 3

proceeding), Company shall pay, in the first instance, the entire amount of any
judgment or settlement of such action, suit or proceeding without requiring
Indemnitee to contribute to such payment and Company hereby waives and
relinquishes any right of contribution it may have against Indemnitee. Company
shall not enter into any settlement of any action, suit or proceeding in which
Company is jointly liable with Indemnitee (or would be if joined in such action,
suit or proceeding) unless such settlement provides for a full and final release
of all claims asserted against Indemnitee.

(b) Without diminishing or impairing the obligations of
the Company set forth in the preceding subparagraph, if, for any reason,
Indemnitee shall elect or be required to pay all or any portion of any judgment
or settlement in any threatened, pending or completed action, suit or proceeding
in which Company is jointly liable with Indemnitee (or would be if joined in
such action, suit or proceeding), Company shall contribute to the amount of
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred and paid or payable by Indemnitee in
proportion to the relative benefits received by the Company and all officers,
directors or employees of the Company other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand, from the
transaction from which such action, suit or proceeding arose; provided, however,
that the proportion determined on the basis of relative benefit may, to the
extent necessary to conform to law, be further adjusted by reference to the
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, in connection with the events that resulted in
such expenses, judgments, fines or settlement amounts, as well as any other
equitable considerations which the law may require to be considered. The
relative fault of Company and all officers, directors or employees of the
Company other than Indemnitee who are jointly liable with Indemnitee (or would
be if joined in such action, suit or proceeding), on the one hand, and
Indemnitee, on the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by intent to gain
personal profit or advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or passive.

(c) Company hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be brought by
officers, directors or employees of the Company other than Indemnitee who may be
jointly liable with Indemnitee.

4. Indemnification for Expenses of a Witness. Notwithstanding any
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness in any Proceeding to which Indemnitee is not
a party, he shall be indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection therewith.

5. Advancement of Expenses. Notwithstanding any other provision
of this Agreement, the Company shall advance all Expenses incurred by or on
behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee's
Corporate Status within ten (10) days after the receipt by the Company of a
statement or statements from Indemnitee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by

3
<PAGE> 4

Indemnitee and shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately
be determined that Indemnitee is not entitled to be indemnified against such
Expenses. Any advances and undertakings to repay pursuant to this Section 5
shall be unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Company to advance Expenses pursuant to this Section 5 shall
be subject to the condition that, if, when and to the extent that the Company
determines that Indemnitee would not be permitted to be indemnified under
applicable law, the Company shall be entitled to be reimbursed, within thirty
(30) days of such determination, by Indemnitee (who hereby agrees to reimburse
the Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed).

6. Procedures and Presumptions for Determination of Entitlement
to Indemnification. It is the intent of this Agreement to secure for Indemnitee
rights of indemnity that are as favorable as may be permitted under the law and
public policy of the State of Delaware. Accordingly, the parties agree that the
following procedures and presumptions shall apply in the event of any question
as to whether Indemnitee is entitled to indemnification under this Agreement:

(a) To obtain indemnification (including, but not
limited to, the advancement of Expenses and contribution by the Company) under
this Agreement, Indemnitee shall submit to the Company a written request,
including therein or therewith such documentation and information as is
reasonably available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to indemnification. The
Secretary of the Company shall, promptly upon receipt of such a request for
indemnification, advise the Board of Directors in writing that Indemnitee has
requested indemnification.

(b) Upon written request by Indemnitee for indemnification
pursuant to the first sentence of Section 6(a) hereof, a determination, if
required by applicable law, with respect to Indemnitee's entitlement thereto
shall be made in the specific case by one of the following three methods, which
shall be at the election of Indemnitee: (1) by a majority vote of the
disinterested directors, even though less than a quorum, or (2) by independent
legal counsel in a written opinion, or (3) by the stockholders.

(c) If the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b)
hereof, the Independent Counsel shall be selected as provided in this Section
6(c). The Independent Counsel shall be selected by Indemnitee (unless Indemnitee
shall request that such selection be made by the Board of Directors). Indemnitee
or the Company, as the case may be, may, within 10 days after such written
notice of selection shall have been given, deliver to the Company or to
Indemnitee, as the case may be, a written objection to such selection; provided,
however, that such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the

4
<PAGE> 5

requirements of "Independent Counsel" as defined in Section 13 of this
Agreement, and the objection shall set forth with particularity the factual
basis of such assertion. Absent a proper and timely objection, the person so
selected shall act as Independent Counsel. If a written objection is made and
substantiated, the Independent Counsel selected may not serve as Independent
Counsel unless and until such objection is withdrawn or a court has determined
that such objection is without merit. If, within 20 days after submission by
Indemnitee of a written request for indemnification pursuant to Section 6(a)
hereof, no Independent Counsel shall have been selected and not objected to,
either the Company or Indemnitee may petition the Court of Chancery of the State
of Delaware or other court of competent jurisdiction for resolution of any
objection which shall have been made by the Company or Indemnitee to the other's
selection of Independent Counsel and/or for the appointment as Independent
Counsel of a person selected by the court or by such other person as the court
shall designate, and the person with respect to whom all objections are so
resolved or the person so appointed shall act as Independent Counsel under
Section 6(b) hereof. The Company shall pay any and all reasonable fees and
expenses of Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 6(b) hereof, and the Company shall
pay all reasonable fees and expenses incident to the procedures of this Section
6(c), regardless of the manner in which such Independent Counsel was selected or
appointed.

(d) In making a determination with respect to entitlement
to indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.

(e) Indemnitee shall be deemed to have acted in good faith
if Indemnitee's action is based on the records or books of account of the
Enterprise, including financial statements, or on information supplied to
Indemnitee by the officers of the Enterprise in the course of their duties, or
on the advice of legal counsel for the Enterprise or on information or records
given or reports made to the Enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Enterprise. In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall not be imputed
to Indemnitee for purposes of determining the right to indemnification under
this Agreement. Whether or not the foregoing provisions of this Section 6(e) are
satisfied, it shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company. Anyone seeking to overcome this
presumption shall have the burden of proof and the burden of persuasion, by
clear and convincing evidence.

If the person, persons or entity empowered or selected under Section 6 to
determine whether Indemnitee is entitled to indemnification shall not have made
a determination within thirty (30) days after receipt by the Company of the
request therefor, the requisite determination of entitlement to indemnification
shall be deemed to have been made and Indemnitee shall be entitled to such
indemnification, absent (i) a misstatement by Indemnitee of a material fact, or
an omission of a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for indemnification, or
(ii) a prohibition of such indemnification

5
<PAGE> 6

under applicable law; provided, however, that such 30 day period may be extended
for a reasonable time, not to exceed an additional fifteen (15) days, if the
person, persons or entity making the determination with respect to entitlement
to indemnification in good faith requires such additional time for the obtaining
or evaluating documentation and/or information relating thereto; and provided,
further, that the foregoing provisions of this Section 6(g) shall not apply if
the determination of entitlement to indemnification is to be made by the
stockholders pursuant to Section 6(b) of this Agreement and if (A) within
fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
determination is made thereat.

(f) Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.

(g) The Company acknowledges that a settlement or other
disposition short of final judgment may be successful if it permits a party to
avoid expense, delay, distraction, disruption and uncertainty. In the event that
any action, claim or proceeding to which Indemnitee is a party is resolved in
any manner other than by adverse judgment against Indemnitee (including, without
limitation, settlement of such action, claim or proceeding with or without
payment of money or other consideration) it shall be presumed that Indemnitee
has been successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear and convincing evidence.

7. Remedies of Indemnitee.

(a) In the event that (i) a determination is made
pursuant to Section 6 of this Agreement that Indemnitee is not entitled to
indemnification under this Agreement, (ii) advancement of Expenses is not timely
made pursuant to Section 5 of this Agreement, (iii) no determination of
entitlement to indemnification shall have been made pursuant to Section 6(b) of
this Agreement within 90 days after receipt by the Company of the request for
indemnification, (iv) payment of indemnification is not made pursuant to this
Agreement within ten (10) days after receipt by the Company of a written request
therefor, or (v) payment of indemnification is

6
<PAGE> 7

not made within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification or such determination is deemed to
have been made pursuant to Section 6 of this Agreement, Indemnitee shall be
entitled to an adjudication in an appropriate court of the State of Delaware, or
in any other court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding seeking an
adjudication within 180 days following the date on which Indemnitee first has
the right to commence such proceeding pursuant to this Section 7(a). The Company
shall not oppose Indemnitee's right to seek any such adjudication.

(b) In the event that a determination shall have been made
pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding commenced pursuant to this Section 7
shall be conducted in all respects as a de novo trial, on the merits and
Indemnitee shall not be prejudiced by reason of that adverse determination under
Section 6(b).

(c) If a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is entitled to indemnification,
the Company shall be bound by such determination in any judicial proceeding
commenced pursuant to this Section 7, absent a prohibition of such
indemnification under applicable law.

(d) In the event that Indemnitee, pursuant to this Section
7, seeks a judicial adjudication of his rights under, or to recover damages for
breach of, this Agreement, or to recover under any directors' and officers'
liability insurance policies maintained by the Company the Company shall pay on
his behalf, in advance, any and all expenses (of the types described in the
definition of Expenses in Section 13 of this Agreement) actually and reasonably
incurred by him in such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification, advancement of
expenses or insurance recovery.

(e) The Company shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that the procedures and
presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court that the Company is bound by all the provisions of
this Agreement.

8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.

(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to which Indemnitee
may at any time be entitled under applicable law, the certificate of
incorporation of the Company, the Bylaws, any agreement, a vote of stockholders
or a resolution of directors, or otherwise. No amendment, alteration or repeal
of this Agreement or of any provision hereof shall limit or restrict any right
of Indemnitee under this Agreement in respect of any action taken or omitted by
such Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the Law, whether by statute or judicial
decision, permits greater indemnification than would be afforded currently under
the Bylaws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and

7
<PAGE> 8

every other right and remedy shall be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance
policy or policies providing liability insurance for directors, officers,
employees, or agents or fiduciaries of the Company or of any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
which such person serves at the request of the Company, Indemnitee shall be
covered by such policy or policies in accordance with its or their terms to the
maximum extent of the coverage available for any such director, officer,
employee or agent under such policy or policies.

(c) In the event of any payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder if and to the
extent that Indemnitee has otherwise actually received such payment under any
insurance policy, contract, agreement or otherwise.

9. Exception to Right of Indemnification. Notwithstanding any
other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors of the
Company or (b) such Proceeding is being brought by the Indemnitee to assert,
interpret or enforce his rights under this Agreement.

10. Duration of Agreement. All agreements and obligations of the
Company contained herein shall continue during the period Indemnitee is an
officer or director of the Company (or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any Proceeding (or any
proceeding commenced under Section 7 hereof) by reason of his Corporate Status,
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
and be enforceable by the parties hereto and their respective successors
(including any direct or indirect successor by purchase, merger, consolidation
or otherwise to all or substantially all of the business or assets of the
Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as an officer or director of the Company or any
other Enterprise at the Company's request.

8
<PAGE> 9

11. Security. To the extent requested by the Indemnitee and
approved by the Board of Directors of the Company, the Company may at any time
and from time to time provide security to the Indemnitee for the Company's
obligations hereunder through an irrevocable bank line of credit, funded trust
or other collateral. Any such security, once provided to the Indemnitee, may not
be revoked or released without the prior written consent of the Indemnitee.

12. Enforcement.

(a) The Company expressly confirms and agrees that it
has entered into this Agreement and assumed the obligations imposed on it hereby
in order to induce Indemnitee to serve as an officer or director of the Company,
and the Company acknowledges that Indemnitee is relying upon this Agreement in
serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings, oral, written and implied,
between the parties hereto with respect to the subject matter hereof.

13. Definitions. For purposes of this Agreement:

(a) "Corporate Status" describes the status of a person
who is or was a director, officer, employee or agent or fiduciary of the Company
or of any other corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at the express
written request of the Company.

(b) "Disinterested Director" means a director of the
Company who is not and was not a party to the Proceeding in respect of which
indemnification is sought by Indemnitee.

(c) "Enterprise" shall mean the Company and any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise of which Indemnitee is or was serving at the express written request
of the Company as a director, officer, employee, agent or fiduciary.

(d) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts, witness fees,
travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees, and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, participating, or being or
preparing to be a witness in a Proceeding.

(e) "Indemnitee" includes the individual signatory hereto,
each corporation, partnership, limited liability company, entity or other
organization on whose behalf such individual renders service by serving in the
capacity he serves on the Company's behalf (an "Affiliate Organization"), each
director, officer, general and limited partner, managing and limited member,
employee, or other affiliate of such Affiliate Organization, and each lineal
ancestor and descendant of such individual.

9
<PAGE> 10

(f) "Independent Counsel" means a law firm, or a member
of a law firm, that is experienced in matters of corporation law and neither
presently is, nor in the past five years has been, retained to represent: (i)
the Company or Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under this Agreement, or
of other indemnitees under similar indemnification agreements), or (ii) any
other party to the Proceeding giving rise to a claim for indemnification
hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall
not include any person who, under the applicable standards of professional
conduct then prevailing, would have a conflict of interest in representing
either the Company or Indemnitee in an action to determine Indemnitee's rights
under this Agreement. The Company agrees to pay the reasonable fees of the
Independent Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages arising out of or
relating to this Agreement or its engagement pursuant hereto.

(g) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute resolution mechanism,
investigation, inquiry, administrative hearing or any other actual, threatened
or completed proceeding, whether brought by or in the right of the Company or
otherwise and whether civil, criminal, administrative or investigative, in which
Indemnitee was, is or will be involved as a party or otherwise, by reason of the
fact that Indemnitee is or was a director of the Company, by reason of any
action taken by him or of any inaction on his part while acting as an officer or
director of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other Enterprise; in each case
whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement; including one pending on or before the date of this Agreement;
and excluding one initiated by an Indemnitee pursuant to Section 7 of this
Agreement to enforce his rights under this Agreement.

14. Severability. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to be invalid,
void, illegal or otherwise unenforceable for any reason whatsoever: (a) the
validity, legality and enforceability of the remaining provisions of this
Agreement (including without limitation, each portion of any section of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby and shall remain enforceable to the
fullest extent permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation, each portion of any
section of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that is not itself invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested thereby.

15. Modification and Waiver. No supplement, modification,
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.

10
<PAGE> 11

16. Notice By Indemnitee. Indemnitee agrees promptly to notify
the Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise unless and only
to the extent that such failure or delay materially prejudices the Company.

17. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed, or (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:

(a) If to Indemnitee, to the address set forth below
Indemnitee's signature hereto.

(b) If to the Company, to:

1308 Orleans Drive
Sunnyvale, California 94089
Attention: President

or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.

18. Identical Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.

19. Headings. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.

20. Governing Law. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the laws of the
State of Delaware without application of the conflict of laws principles
thereof.

21. Gender. Use of the masculine pronoun shall be deemed to
include usage of the feminine pronoun where appropriate.

11
<PAGE> 12

IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.

COMPUTER LITERACY, INC.

By:____________________________________
Name:_________________________________
Title:__________________________________

________________________________________

Name: ________________________________

Address:

________________________________________
________________________________________
________________________________________

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-59361 of Computer Literacy, Inc. of our report dated July 10, 1998 (August
25, 1998 as to the fifth paragraph of Note 1 and the last two paragraphs of Note
10) appearing in the Prospectus, which is part of such Registration Statement,
and to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.

We also consent to the use in this Amendment No. 1 to Registration
Statement No. 333-59361 of Computer Literacy, Inc. of our report dated July 10,
1998, on the financial statements of Computer Literacy Bookshops, Inc. appearing
in the Prospectus, which is part of this Registration Statement.

San Jose, California
September 2, 1998

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