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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-Q

(MARK ONE)

|     |  |                                                                                         
|---- |  | ----------------------------------------------------------------------------------------
|[X]  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|    
|     |  | For the quarterly period ended March 31, 2002                                           
|    
|     |  | OR                                                                                      
|    
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|    
|     |  | For the transition period from    to.                                                   



Commission file number 0-28977



VARSITY GROUP INC.(Exact Name of Registrant as Specified in Its Charter)

|                                                                                                                          |  |                                                              
|------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------
|Delaware(State of Incorporation)1130 Connecticut Ave., Suite 350
Washington, D.C.(Address of Principal Executive
Offices) |  | 54-1876848IRS Employer (Identification Number)20036(Zip Code)

Registrants telephone number, including area code: (202) 667-3400

(Former Name, Former Address and Former Fiscal Year, if Changed, Since Last
Report.)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  [X]     No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.  Yes     No

As of May 1, 2002, the registrant had 16,114,416 shares of common stock
outstanding.



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1



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VARSITY GROUP INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q
For the quarter ended March 31, 2002

INDEX

|        |  |                                                            |  |  |             |  |  | 
|------- |  | ---------------------------------------------------------- |  |  | ----------- |  |  | 
|        |  |                                                            |  |  | Page Number
|        |  |                                                            |  |  |            
|       
|        |  | PART I. FINANCIAL INFORMATION                              |  |  |             | 
|       
|Item 1. |  | Financial Statements                                       |  |  |             | 
|       
|        |  | Condensed consolidated statements of operations for the    |  |  | 3           | 
|        |  | three months ended March 31, 2001 and 2002                 |  |  |             | 
|       
|        |  | Condensed consolidated balance sheets as of December 31,   |  |  | 4           | 
|        |  | 2001 and March 31, 2002                                    |  |  |             | 
|       
|        |  | Condensed consolidated statements of cash flows for the    |  |  | 5           | 
|        |  | three months ended March 31, 2001 and 2002                 |  |  |             | 
|       
|        |  | Notes to condensed consolidated financial statements       |  |  | 6           | 
|       
|Item 2  |  | Management's Discussion and Analysis of Financial          |  |  | 6           | 
|        |  | Condition and Results of Operations                        |  |  |             | 
|       
|Item 3  |  | Quantitative and Qualitative Disclosures About Market Risk |  |  | 10          | 
|       
|        |  | PART II. OTHER INFORMATION                                 |  |  |             | 
|       
|Item 1  |  | Legal Proceedings                                          |  |  | 10          | 
|       
|Item 2  |  | Changes in Securities                                      |  |  | 10          | 
|       
|Item 3  |  | Defaults Upon Senior Securities                            |  |  | 10          | 
|       
|Item 4  |  | Submission of Matters to a Vote of Security Holders        |  |  | 10          | 
|       
|Item 5  |  | Other Information                                          |  |  | 10          | 
|       
|Item 6  |  | Exhibits and Reports on Form 8-K                           |  |  | 10          | 

2



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PART I.
FINANCIAL INFORMATION

Item 1: Financial Statements

VARSITY GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)

|                         |                                                                                                                             |                          |        |                    |       |      |      |            |       | 
|------------------------ | --------------------------------------------------------------------------------------------------------------------------- | ------------------------ | ------ | ------------------ | ----- | ---- | ---- | ---------- | ----- | 
|                         |                                                                                                                             |                          |        | Three Months Ended
|                         |                                                                                                                             |                          |        | March 31,         
|                         |                                                                                                                             |                          |        |                   
|                         |                                                                                                                             |                          |        | 2001               |       | 2002
|                         |                                                                                                                             |                          |        |                    |       |     
|Net sales:               |                                                                                                                             |                          |        |                    |       |      |      |           
|                         | Product                                                                                                                     |                          | $      | 1,135              |       |      | $    | 703        |      
|                         | Shipping                                                                                                                    |                          |        | 139                |       |      |      | 82         |      
|                         | Marketing services                                                                                                          |                          |        | 247                |       |      |      | 14         |      
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|                         |                                                                                                                             | Total net sales          |        |                    | 1,521 |      |      |            | 799   | 
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|Operating expenses       |                                                                                                                             |                          | 1,011  |                    |       |      | 501  |           
|                         | Cost of books  related party Cost of shipping  related party                                                              |                          |        | 98                 |       |      |      | 46         |      
|                         | Cost of marketing services                                                                                                  |                          |        | 25                 |       |      |      |           |      
|                         | Marketing and sales (including $63 and
$38 with related party for three
months ended March 31, 2001 and 2002,
respectively) |                          |        | 340                |       |      |      | 301        |      
|                         | Product development                                                                                                         |                          |        | 136                |       |      |      | 35         |      
|                         | General and administrative                                                                                                  |                          |        | 1,212              |       |      |      | 338        |      
|                         | Non-cash compensation                                                                                                       |                          |        | 275                |       |      |      | 100        |      
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|                         |                                                                                                                             | Total operating expenses |        |                    | 3,097 |      |      |            | 1,321 | 
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|Loss from operations     |                                                                                                                             |                          | (1,576 | )                  |       |      | (522 | )         
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|Other income, net:       |                                                                                                                             |                          |        |                    |       |      |      |           
|                         | Interest income                                                                                                             |                          |        | 188                |       |      |      | 57         |      
|                         | Other income                                                                                                                |                          |        | 58                 |       |      |      |           |      
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|                         | Other income, net                                                                                                           |                          |        | 246                |       |      |      | 57         |      
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|Net loss                 |                                                                                                                             | $                        | (1,330 | )                  |       | $    | (465 | )         
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|Net loss per share:      |                                                                                                                             |                          |        |                    |       |      |      |           
|                         | Basic and diluted                                                                                                           |                          | $      | (0.08              | )     |      | $    | (0.03      | )    
|                         |                                                                                                                             |                          |        |                    |       |      |      |           
|Weighted average shares: |                                                                                                                             |                          |        |                    |       |      |      |           
|                         | Basic and diluted                                                                                                           |                          |        | 16,154,996         |       |      |      | 15,973,703 |      
|                         |                                                                                                                             |                          |        |                    |       |      |      |           

See accompanying notes to condensed consolidated financial statements.

3



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VARSITY GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)

ASSETS

|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |         |             |  | 
|--------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ----------------- |  | -------------- | ------- | ----------- |  | 
|                      |                                                                                                                                                                             |                                            |                                      |         | December 31, 2001 |  | March 31, 2002
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |               
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |         | (unaudited)
|Current assets:       |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      | Cash and cash equivalents                                                                                                                                                   |                                            | $                                    | 16,811  |                   |  | $              | 13,543  |            
|                      | Short-term investments                                                                                                                                                      |                                            |                                      |        |                   |  |                | 3,000   |            
|                      | Accounts receivable, net
of allowance of doubtful
accounts of $48 at
December 31, 2001 and
$34 at March 31, 2002                                                            |                                            |                                      | 71      |                   |  |                | 81      |            
|                      | Other current assets                                                                                                                                                        |                                            |                                      | 432     |                   |  |                | 373     |            
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      | Total current assets                                                                                                                                                        |                                            |                                      | 17,314  |                   |  |                | 16,997  |            
|                      | Fixed assets, net                                                                                                                                                           |                                            |                                      | 204     |                   |  |                | 154     |            
|                      | Other assets                                                                                                                                                                |                                            |                                      | 79      |                   |  |                | 45      |            
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      |                                                                                                                                                                             | Total assets                               |                                      | $       | 17,597            |  |                | $       | 17,196      | 
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      |                                                                                                                                                                             |                                            | LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:  |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      | Accounts payable                                                                                                                                                            |                                            | $                                    | 222     |                   |  | $              | 208     |            
|                      | Other accrued expenses and other current liabilities                                                                                                                        |                                            |                                      | 196     |                   |  |                | 157     |            
|                      | Sales taxes payable                                                                                                                                                         |                                            |                                      | 1,281   |                   |  |                | 1,288   |            
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      |                                                                                                                                                                             | Total current liabilities                  |                                      |         | 1,699             |  |                |         | 1,653       | 
|Long-term liabilities |                                                                                                                                                                             |                                            |                                     |         |                   |  |               |        
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      |                                                                                                                                                                             | Total liabilities                          |                                      |         | 1,699             |  |                |         | 1,653       | 
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|Stockholders equity: |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      | Preferred stock: $.0001 par value, 20,000,000
shares authorized; 0 shares issued and outstanding
at December 31, 2001 and March 31, 2002                                    |                                            |                                      |        |                   |  |                |        |            
|                      | Common stock: $.0001 par value, 60,000,000 shares
authorized, 16,871,062 and 17,071,479 shares issued
and outstanding at December 31, 2001 and March 31,
2002, respectively |                                            |                                      | 2       |                   |  |                | 2       |            
|                      | Additional paid-in capital                                                                                                                                                  |                                            |                                      | 87,458  |                   |  |                | 87,600  |            
|                      | Deferred compensation                                                                                                                                                       |                                            |                                      | (527    | )                 |  |                | (559    | )          
|                      | Accumulated deficit                                                                                                                                                         |                                            |                                      | (70,461 | )                 |  |                | (70,926 | )          
|                      | Treasury Stock, $.0001 par value, 957,063 shares at
December 31, 2001 and March 31, 2002                                                                                    |                                            |                                      | (574    | )                 |  |                | (574    | )          
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      |                                                                                                                                                                             | Total stockholders equity                 |                                      |         | 15,898            |  |                |         | 15,543      | 
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        
|                      |                                                                                                                                                                             | Total liabilities and stockholders equity |                                      | $       | 17,597            |  |                | $       | 17,196      | 
|                      |                                                                                                                                                                             |                                            |                                      |         |                   |  |                |        

See accompanying notes to condensed consolidated financial statements.

4



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VARSITY GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |        |   |     |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------- | ---------------------------------------------------- | ----------------------------------------------------- | -- | ------------------ | ------ | ------ | - | --- | ------ | -
|                                                                            |                                                                        |                                    |                                                      |                                                       |    | Three Months Ended
|                                                                            |                                                                        |                                    |                                                      |                                                       |    | March 31,         
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                   
|                                                                            |                                                                        |                                    |                                                      |                                                       |    | 2001               |        | 2002  
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|Operating activities:                                                       |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            | Net loss                                                               |                                    | $                                                    | (1,330                                                | )  |                    | $      | (465   | )
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            | Depreciation and amortization                                          |                                    |                                                      | 285                                                   |    |                    |        | 60     |  
|                                                                            | Bad debt expense                                                       |                                    |                                                      | (74                                                   | )  |                    |        | (11    | )
|                                                                            | Loss on disposal of fixed assets and write off of underutilized assets |                                    |                                                      | (58                                                   | )  |                    |        |       |  
|                                                                            | Non-cash compensation                                                  |                                    |                                                      | 336                                                   |    |                    |        | 100    |  
|                                                                            | Changes in operating assets and liabilities:                           |                                    |                                                      |                                                       |    |                    |        |        |  
|                                                                            |                                                                        |                                    | Accounts receivable, net                             |                                                       |    | 893                |        |        |   | 1   |       
|                                                                            |                                                                        |                                    | Prepaid marketing                                    |                                                       |    | 5                  |        |        |   |    |       
|                                                                            |                                                                        |                                    | Other current assets                                 |                                                       |    | 242                |        |        |   | 59  |       
|                                                                            |                                                                        |                                    | Accounts payable                                     |                                                       |    | (488               | )      |        |   | (14 | )     
|                                                                            |                                                                        |                                    | Lease liability                                      |                                                       |    | (368               | )      |        |   |    |       
|                                                                            |                                                                        |                                    | Deferred revenue                                     |                                                       |    | 50                 |        |        |   |    |       
|                                                                            |                                                                        |                                    | Other accrued expenses and other current liabilities |                                                       |    | (290               | )      |        |   | (41 | )     
|                                                                            |                                                                        |                                    | Taxes payable                                        |                                                       |    | 2                  |        |        |   | 7   |       
|                                                                            |                                                                        |                                    | Other non-current liabilities                        |                                                       |    | (131               | )      |        |   |    |       
|                                                                            |                                                                        |                                    | Other non-current assets                             |                                                       |    | 53                 |        |        |   | 34  |       
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            |                                                                        |                                    |                                                      | Net cash used in operating activities                 |    |                    | (873   | )      |   |     | (270   | )
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|Investing activities:                                                       |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            | Additions to fixed assets                                              |                                    |                                                      |                                                      |    |                    |        | (10    | )
|                                                                            | Increase in short-term investments                                     |                                    |                                                      |                                                      |    |                    |        | (3,000 | )
|                                                                            |                                                                        | Proceeds from sale of fixed assets |                                                      |                                                       | 58 |                    |        |        |  |    
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            |                                                                        |                                    |                                                      | Net cash provided by / (used in) investing activities |    |                    | 58     |        |   |     | (3,010 | )
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|Financing activities:                                                       |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            | Proceeds from exercise of stock options                                |                                    |                                                      | 7                                                     |    |                    |        | 12     |  
|                                                                            | Proceeds from warrant subscription receivable                          |                                    |                                                      | 707                                                   |    |                    |        |       |  
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            |                                                                        |                                    |                                                      | Net cash provided by financing activities             |    |                    | 714    |        |   |     | 12     |  
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|Net decrease in cash and cash equivalents                                   |                                                                        |                                    | (101                                                 | )                                                     |    |                    | (3,268 | )     
|Cash and cash equivalents at beginning of period                            |                                                                        |                                    | 15,710                                               |                                                       |    |                    | 16,811 |       
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|Cash and cash equivalents at end of period                                  |                                                                        | $                                  | 15,609                                               |                                                       |    | $                  | 13,543 |       
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|Supplemental disclosure of cash flow information:                           |                                                                        |                                    |                                                      |                                                       |    |                    |        |       
|                                                                            | Cash paid for income taxes and interest                                |                                    | $                                                    | 16                                                    |    |                    | $      |       |  
|                                                                            |                                                                        |                                    |                                                      |                                                       |    |                    |        |       

See accompanying notes to consolidated financial statements

5



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VARSITY GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of Operations

Varsity Group Inc. (the Company) is an Internet retailer of new textbooks and
educational materials targeting private middle and high schools, small colleges
and distance and continuing education markets. Varsity Group Inc. was
incorporated on December 16, 1997 and launched its website in August 1998, at
which time the Company began generating revenues. In August 1999, the Company
established two wholly-owned subsidiaries, CollegeImpact.com, Inc. and
VarsityBooks.com, LLC to assist in the overall management of its marketing and
retailing activities, respectively.

The Company is an online retailer of new textbooks and educational materials,
targeting private middle and high schools, small colleges and distance and
continuing education markets through its eduPartner program. As an
Internet-based retailer of textbooks, the Company uses its website,
www.VarsityBooks.com, to sell textbooks and other learning materials to
students nationwide.

In February 2000, the Company completed an initial public offering. Net
proceeds to the Company from the initial public offering totaled $36.0 million.
Effective upon the closing of the offering, all shares of the Companys
preferred stock converted into 8,966,879 shares of the Companys common stock.

Note 2: Basis of Presentation

The condensed consolidated financial statements of Varsity Group Inc. and
subsidiaries included herein have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments which are, in the opinion of management, necessary
for a fair presentation of the results for the interim period in conformity
with generally accepted accounting principles.

Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The interim financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2001. Operating results for the interim periods are not
necessarily indicative of results for an entire year.

Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.

Item 2:Managements Discussion and Analysis of Financial Condition and
Results of Operations

Forward Looking Statements

This document contains forward-looking statements. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, will,
should, except, plan, anticipate, expect, believe, estimate,
predict, potential or continue, the negative of such terms or other
comparable terminology. These statements are only predictions. Actual events
or results may differ materially.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date of this report to conform such
statements to actual results or to changes in our expectations.

Readers are also urged to carefully review and consider the various disclosures
made by us that attempt to advise interested parties of the factors which
affect our business, including without limitation the disclosures made under
the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations included herein and under the captions Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Risk Factors included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2001 and other reports and filings made with the
Securities and Exchange Commission.

6



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Overview

We are a leading online retailer of new textbooks and educational materials
targeting private middle and high schools, colleges and distance and continuing
education markets. Through eduPartners, our program serving schools and
organizations directly, we provide an opportunity for educational institutions
to maximize their resources and offer increased convenience and value to their
students by outsourcing to us the sale of new textbooks and other learning
materials.

We were incorporated in December 1997 and began offering books for sale on our
website on August 10, 1998. To date, our revenues have consisted primarily of
sales of new textbooks. In January 1999 we created eduPartners, whereby we
became the exclusive provider of new books and learning materials to a variety
of learning institutions. This program is a cost-effective model that enables
us to increase the number of customers to our website and generate book sales
that does not require the significant marketing and brand building expenses
associated with our earlier model.

During 2000, we began to focus resources on the growth and development of our
eduPartner program and we extended that focus throughout 2001. In quarter
ending September 30, 2001, revenues from eduPartners accounted for
approximately 97% of our overall sales of books, an increase from the 69% share
of total book revenues eduPartners represented during the quarter ending
September 30, 2000. We expect eduPartners to remain the primary source of
textbook revenues moving forward. Net sales consist of sales of books and
charges to customers for outbound shipping and are net of allowances for
returns, promotional discounts and coupons. Revenues from sales of textbooks
are recognized at the time products are received by the customer.

Presently, we are the exclusive new textbook supplier for approximately 120
educational institutions in our eduPartners program. At these institutions we
are endorsed as the schools official bookstore and gain direct access and
exposure to their students. Benefits of this business model include
significantly lower marketing and customer acquisition costs than our
historical college-focused retail book business, greater sales visibility,
higher margins and attractive sell-through or penetration per school account.
We are able to reduce the overhead associated with textbook sales because we do
not maintain individual on-site stores and we outsource our ordering,
inventory, warehousing and fulfillment needs with Baker & Taylor, a leading
distributor of books, videos and music products. In addition to providing new
textbooks at competitive prices, we are committed to providing top quality
customer service and account management support.

The Company has also provided marketing services for other businesses seeking
to reach the college and private middle and high school demographics by
marketing to students online through its website and on college campuses
utilizing a nationwide network of student marketing representatives. During
2001, we made a strategic decision to focus resources on the growth and
development of the eduPartners program. We determined that the eduPartners
model presented the greatest prospects for long-term growth and shareholder
value creation and elected to concentrate the resources and energy of the
entire organization on maximizing this opportunity. We completed all
outstanding on-campus marketing services contracts during 2001 and ceased new
development of on-campus marketing services programs. We anticipate future
marketing services revenue will likely represent a relatively small percentage
of textbook revenues and will be focused on delivering online solutions
compatible with our target eduPartners market. Revenues from our marketing
programs are recognized straight-line over the contract term, provided that no
significant performance obligations remain and the collection of the related
receivable is probable. Costs associated with our marketing programs are
recognized as incurred.

Throughout 2001, our business priorities, focus and resources adapted to meet
the changing market dynamics and economic realities. We successfully lowered
overall expenses and increased the margins of our retail book business to
accelerate our path to profitability. In addition, we made significant
reductions in the marketing and sales overhead expenses associated with our
business. As a result, during the three months ending September 30, 2001, we
recorded the first profitable fiscal period in our history, posting over $1
million in net operating profits. We also recognized positive cash flows
from operations of $0.4 million for the year ended December 31, 2001.

Although our margins have increased and our overall expenses have been lowered
significantly, our ability to reach annual operating profitability depends on
our ability to generate and sustain higher net revenues. We base our current
and future expense levels on our operating plans and estimates of future
revenues. In view of the rapidly evolving nature of our business and our
limited operating history, we have limited experience forecasting our revenues.
Therefore we believe that period-to-period comparisons of our financial
results might not necessarily be meaningful and you should not rely on them as
an indication of future performance. If we cannot achieve and sustain
profitability or positive cash flow from operations, we may be unable to meet
our working capital requirements or to obtain additional financing, which would
adversely affect our business and my cause us to discontinue operations.

We have incurred substantial losses in every fiscal year since inception. For
the year ended December 31, 2001, we incurred a loss from operations of
approximately $2.8 million and positive cash flows from operations of $0.4
million. For the year ended December 31, 2000, we incurred a loss from
operations of approximately $34.8 million and negative cash flows from
operations of $27.5 million. For the year ended December 31, 1999, we incurred
a loss from operations of approximately $31.9

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million and negative cash flows from operations of $29.4 million. As of
December 31, 2000 and 2001 we had accumulated deficits of approximately $68.2
million and $70.5 million, respectively.

However, during the three months ending September 30, 2001, the Company
recorded the first profitable fiscal period in its history with a net profit of
approximately $1.0 million in the critical back-to-school textbook buying
season. We were also able to record positive cash flows from operations of
$0.4 million for the year ended December 31, 2001. Yet, the operating profits
from this quarter were not sufficient to reverse the losses recorded in the
other three fiscal quarters of 2001, resulting in a net loss of approximately
$2.2 million for the year ended December 31, 2001.

During the three months ending March 31, 2002 the Company reported a net loss
of approximately $0.5 million, down from a net loss of $1.3 million for the
same period in 2001. Cash used in operating activities during the three months
ending March 31, 2002 was approximately $0.3 million, down from $0.9 million
for the three months ending March 31, 2001.

We expect that operating losses and negative cash flows from operations will
likely continue until our seasonally critical back-to-school buying season in
the third quarter of 2002. Based upon our current cost structure and recent
growth levels within the eduPartners program, we believe we are positioned to
improve upon the financial performance of 2001. As part of the increased
emphasis on eduPartners and lower overhead cost structure, we expect the costs
and expenses related to brand development, marketing and other promotional
activities associated with our traditional retail book business will continue
to decrease from recent levels. Although this is more likely to result in
decreased revenues from the sales of new textbooks than would be the case if we
continued to spend at or above our previous levels, we believe, in the
aggregate, that this will reduce the historical losses and negative cash flows
from our sales of textbooks. We intend to increase spending on the development
of eduPartners and relationships with other related businesses. Failure to
generate sufficient revenues, raise additional capital or, if necessary, reduce
discretionary spending could harm our results of operations and financial
condition.

Three Months Ended March 31, 2002
compared to
Three Months Ended March 31, 2001

Net Sales

Net sales decreased to $0.8 million for the three months ended March 31, 2002
from $1.5 million for the three months ended March 31, 2001. This decrease was
primarily attributable to the Companys focus on building core revenues within
the eduPartners program. Consistent with this eduPartner focus, the Company
significantly reduced marketing expenditures for non-eduPartner sales,
resulting in a decrease in traditional retail textbook sales and marketing
services revenues. Revenues from our core eduPartners program increased to
over $0.6 million for the three months ending March 31, 2002 from approximately
$0.4 million for the same period in 2001. Marketing services revenue totaled
$14,000 for the three months ended March 31, 2002, a decrease from the $247,000
recognized in the same period in 2001. This decrease was attributable to our
decision to close our on-campus marketing services business. No new
significant marketing services contracts were signed during the three months
ending March 31, 2002.

Operating Expenses

Cost of Books  Related Party (Baker & Taylor).Cost of books  related party
consists of the cost of books sold to customers. Cost of books-related party
decreased to approximately $0.5 million for the three months ended March 31,
2002 from $1.0 million for the three months ended March 31, 2001. This decrease
was primarily attributable to our decreased sales volume.

Cost of Shipping  Related Party (Baker & Taylor).Cost of shipping  related
party consists of outbound shipping to the customer. Cost of shipping decreased
to approximately $46,000 for the three months ended March 31, 2002 from
approximately $0.1 million for the three months ended March 31, 2001. This
decrease was primarily attributable to our decreased sales volume.

Cost of Marketing ServicesCost of marketing services includes personnel
costs associated with the implementation of our on campus marketing programs
and other directly identifiable costs associated with our online advertising
and on campus promotions. We did not incur any marketing services costs during
the three months ended March 31, 2002. This decrease from approximately $25,000
for the three months ended March 31, 2001 was attributable to lack of any
on-campus marketing programs .

Marketing and Sale Marketing and sales expense consists primarily of
advertising and promotional expenditures and payroll and related expenses such
as the amortization of deferred compensation for personnel engaged in marketing
and expansion of eduPartners. Marketing and sales expense was $0.3 million for
the three months ended March 31, 2002 , consistent with expenses of $0.3
million for the three months ended March 31, 2001.

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Product Development Product development expense consists of payroll and
related expenses such as the amortization of deferred compensation for
development and systems personnel and consultants. Product development expense
decreased to approximately $35,000 for the three months ended March 31, 2002
from $0.1 million for the three months ended March 31, 2001. This decrease was
primarily attributable to decreased web development, consulting and personnel
costs between periods.

General and Administrative General and administrative expense consists of
payroll and related expenses for executive and administrative personnel such as
the amortization of deferred compensation, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expense decreased to $0.3 million for the three months ended
March 31, 2002 from $1.2 million for the three months ended March 31, 2001.
This decrease was primarily attributable to decreased personnel and
professional services expenses between years.

Non-Cash Compensation Non-cash compensation expense consists of expenses
related to the granting of employee options and restricted stock grants
measured based on the intrinsic value of the stock option or grant. Non-cash
compensation expense decreased to $0.1 million for the three months ended March
31, 2002 from $0.3 million for the three months ended March 31, 2001. This
decrease was primarily attributable to lower amortized compensation expense for
options issued before the Companys initial public offering. Non-cash
compensation expense is amortized based upon an accelerated expense schedule,
resulting in higher than average expenses in the early years and lower than
average expenses in the later years.

Other income, net

Other income, net consists primarily of interest income on our cash and cash
equivalents and investments and gains or losses associated with the disposal of
fixed assets. Other income was $57,000 for the three months ended March 31,
2002 compared to $0.2 million for the three months ended March 31, 2001.
Interest income decreased largely due to lower rates of return compared to the
previous period.

Income Taxes

As of March 31, 2002, we had net operating loss carryforwards for federal
income tax purposes of approximately $60 million, which expire beginning in
2018. We have provided a full valuation allowance on the resulting deferred tax
asset because of uncertainty regarding its realizability. For the three months
ended March 31, 2002, no income tax expense was recognized because the
reduction in the deferred tax asset related to net operating losses was offset
by a related reduction in the valuation allowance.

Liquidity and Capital Resources

As of March 31, 2002, we had $16.5 million of cash, cash equivalents and short
term investments. As of that date, our principal commitments consisted of
obligations outstanding, accounts payable and accrued liabilities. Although we
have no material commitments for capital expenditures, we may experience
increases in our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.

Net cash used in operating activities was $0.3 million for the three months
ended March 31, 2002 compared to $0.9 million net cash used in operations for
the three months ended March 31, 2001. This decrease was largely attributable
to reduced operating losses adjusted for changes in accounts receivable,
accounts payable and accrued expenses.

Net cash used in investing activities was $3.0 million for the three months
ended March 31, 2002 compared to net cash provided by investing activities of
$58,000 for the three months ended March 31, 2001. This increase was largely
to purchase of high-grade short-term investments.

Net cash provided by financing activities was $12,000 for the three months
ended March 31, 2002 and $0.7 million the three months ended March 31, 2001.
Net cash provided by financing activities during the three months ending March
31, 2001, consisted primarily of net proceeds from the exercise of employee
stock options. Net cash provided by financing activities during the three
months ending March 31, 2002, consisted primarily of net proceeds from warrant
subscription receivables.

As part of the increased emphasis on eduPartners, we anticipate that costs and
expenses related to brand development, marketing and other promotional
activities associated with our traditional retail book business will continue
to decrease from previous levels associated with our original national
college-focused retail book business. Although this may result in decreased
revenues from the sales of new textbooks than would be the case if we continued
to spend at or above our historical levels, we believe, in the aggregate, that
this will reduce the losses and negative cash flows historically associated
with our sales of new textbooks. We intend to increase spending on the
development of eduPartners and relationships with other

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businesses. Our failure to generate sufficient revenues, raise additional
capital or, if necessary, reduce discretionary spending could harm our results
of operations and financial condition.

We currently anticipate that our available funds will be sufficient to meet our
anticipated needs for working capital and capital expenditures until such time
as we achieve annual operating profitability. We may need to raise additional
funds prior to the expiration of such period if, for example, we pursue new
business, technology or intellectual property acquisitions or experience net
losses that exceed our current expectations. Any required additional financing
may be unavailable on terms favorable to us, or at all.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to interest rate risk on its cash and cash equivalents,
short-term investments and credit facility. If market rates were to increase
immediately and uniformly by 10% from the level at March 31, 2002, the change
to the Companys interest sensitive assets and liabilities would have an
immaterial effect on the Companys financial position, results of operations
and cash flows over the next fiscal year.

PART II.
OTHER INFORMATION

Item 1:Legal Proceedings

Not Applicable


Item 2:Changes in Securities

Not Applicable


Item 3:Defaults Upon Senior Securities

Not Applicable


Item 4:Submission of Matters to a Vote of Security Holders

Not Applicable


Item 5:Other Information

Not Applicable


Item 6:Exhibits and Reports on Form 8-K



| |               
| | --------------
| | (a)   Exhibits
| | None          



| |                               
| | ------------------------------
| | (b)   Reports on Form 8-K None
| | None                          

SIGNATURES

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

|                  |  |                                              | 
|----------------- |  | -------------------------------------------- | 
|Date: May 2, 2002 |  | Varsity Group Inc.                           | 
|                 
|                  |  | By:          
         /s/    Jack M. Benson | 
|                  |  |                                              | 
|                  |  | Jack M. Benson                               | 
|                  |  | Chief Financial Officer                      | 

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