UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

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 June 30,
2000

OR



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

For the transition period from  to .



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Commission file number 0-28977



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VARSITY GROUP INC.

(Exact Name of Registrant as Specified in
Its Charter)


|                                                                                                |  |                                               
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Delaware(State of Incorporation)                                                                |  | 54-1876848IRS Employer (Identification Number)
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|2020 K Street, N.W., 6th Floor
        Washington, D.C.(Address of Principal Executive Offices) |  | 20006(Zip Code)                               

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

VarsityBooks.com Inc.

(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 August 7, 2000, the registrant had
15,760,142 shares of common stock outstanding.



---






---



VARSITY GROUP INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30, 2000


INDEX

|                               |  |                                                                                               |                                                                                                                           |             |    |   | 
|------------------------------ |  | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ----------- | -- | - | 
|                               |  |                                                                                               |                                                                                                                           | Page Number
|                               |  |                                                                                               |                                                                                                                           |            
|PART I.  FINANCIAL INFORMATION
|Item  1.                       |  | Financial Statements                                                                          |                                                                                                                           |             |    |  
|                              
|                              
|                              
|                              
|                               |  |                                                                                               | Condensed consolidated statements of operations for the three and
         six month periods ended June 30, 1999 and 2000 |             |    | 3 | 
|                              
|                              
|                              
|                              
|                               |  |                                                                                               | Condensed consolidated balance sheets as of December 31,
        1999 and June 30, 2000                                   |             |    | 4 | 
|                              
|                              
|                              
|                              
|                               |  |                                                                                               | Condensed consolidated statements of cash flows for the six
        months ended June 30, 1999 and 2000                   |             |    | 5 | 
|                              
|                              
|                              
|                              
|                               |  |                                                                                               | Notes to condensed consolidated financial statements                                                                      |             |    | 6 | 
|                              
|                              
|                              
|                              
|Item  2.                       |  | Managements Discussion and Analysis of Financial Condition
        and Results of Operations |                                                                                                                           |             | 8  |  
|                              
|                              
|                              
|                              
|Item  3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                    |                                                                                                                           |             | 14 |  
|                              
|                              
|                              
|                              
|PART II.  OTHER INFORMATION   
|                              
|                              
|                              
|                              
|Item  1.                       |  | Legal Proceedings                                                                             |                                                                                                                           |             | 15 |  
|                              
|                              
|                              
|                              
|Item  2.                       |  | Changes in Securities                                                                         |                                                                                                                           |             | 15 |  
|                              
|                              
|                              
|                              
|Item  3.                       |  | Defaults Upon Senior Securities                                                               |                                                                                                                           |             | 15 |  
|                              
|                              
|                              
|                              
|Item  4.                       |  | Submission of Matters to a Vote of Security Holders                                           |                                                                                                                           |             | 15 |  
|                              
|                              
|                              
|                              
|Item  5.                       |  | Other Information                                                                             |                                                                                                                           |             | 16 |  
|                              
|                              
|                              
|                              
|Item  6.                       |  | Exhibits and Reports on Form 8K                                                               |                                                                                                                           |             | 16 |  

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 |       |   |        | Six Months Ended
|                                             |                                            |                                                                                                                                                  |                          | June 30,           |       |   |        | June 30,        
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                 
|                                             |                                            |                                                                                                                                                  |                          | 1999               |       |   |        | 2000             |       |       |  | 1999 |       |   |        | 2000      
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |           
|Net sales:                                   |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                            
|                                            
|                                            
|                                            
|                                             | Product                                    |                                                                                                                                                  |                          |                    |       |   | $      | 337              |       |       |  |      |       |   | $      | 2,121      |       |       |  |   |       |   | $      | 1,568     |       |       |  |   |        |   | $       | 13,427     |       
|                                            
|                                            
|                                            
|                                            
|                                             | Shipping                                   |                                                                                                                                                  |                          |                    |       |   |        | 28               |       |       |  |      |       |   |        | 141        |       |       |  |   |       |   |        | 128       |       |       |  |   |        |   |         | 1,043      |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                             |                                            |                                                                                                                                                  | Total net sales          |                    |       |   |        |                  |       | 365   |  |      |       |   |        |            |       | 2,262 |  |   |       |   |        |           |       | 1,696 |  |   |        |   |         |            |        | 14,470 | 
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Operating expenses:                          |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                            
|                                            
|                                            
|                                            
|                                             | Cost of product-related party              |                                                                                                                                                  |                          |                    |       |   |        | 322              |       |       |  |      |       |   |        | 1,758      |       |       |  |   |       |   |        | 1,483     |       |       |  |   |        |   |         | 12,202     |       
|                                            
|                                            
|                                            
|                                            
|                                             | Cost of shipping-related party             |                                                                                                                                                  |                          |                    |       |   |        | 38               |       |       |  |      |       |   |        | 227        |       |       |  |   |       |   |        | 145       |       |       |  |   |        |   |         | 1,409      |       
|                                            
|                                            
|                                            
|                                            
|                                             | Equity transactions-related party          |                                                                                                                                                  |                          |                    |       |   |        |                 |       |       |  |      |       |   |        |           |       |       |  |   |       |   |        | 169       |       |       |  |   |        |   |         |           |       
|                                            
|                                            
|                                            
|                                            
|                                             | Marketing and sales:                       |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |            |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Non-cash charges                                                                                                                                 |                          | $                  | 115   |   |        |                  |       |       |  | $    | 281   |   |        |            |       |       |  | $ | 160   |   |        |           |       |       |  | $ | 1,019  |   |         |            |        |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Other marketing and sales (including $139 and $858 with related
        party for three and six months ended June 30, 2000
        respectively) |                          |                    | 1,147 |   |        |                  | 1,262 |       |  |      | 3,813 |   |        |            | 4,094 |       |  |   | 3,229 |   |        |           | 3,389 |       |  |   | 16,656 |   |         |            | 17,675 |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                             | Product development:                       |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |            |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Non-cash charges                                                                                                                                 |                          |                    | 43    |   |        |                  |       |       |  |      | 14    |   |        |            |       |       |  |   | 50    |   |        |           |       |       |  |   | (24    | ) |         |            |        |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Other product development                                                                                                                        |                          |                    | 530   |   |        |                  | 573   |       |  |      | 1,270 |   |        |            | 1,284 |       |  |   | 754   |   |        |           | 804   |       |  |   | 3,357  |   |         |            | 3,333  |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                             | General and administrative:                |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |            |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Non-cash charges                                                                                                                                 |                          |                    | 353   |   |        |                  |       |       |  |      | 588   |   |        |            |       |       |  |   | 360   |   |        |           |       |       |  |   | 2,184  |   |         |            |        |       
|                                            
|                                            
|                                            
|                                            
|                                             |                                            | Other general and administrative                                                                                                                 |                          |                    | 338   |   |        |                  | 691   |       |  |      | 1,739 |   |        |            | 2,327 |       |  |   | 824   |   |        |           | 1,184 |       |  |   | 4,149  |   |         |            | 6,333  |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                             |                                            |                                                                                                                                                  | Total operating expenses |                    |       |   |        |                  |       | 2,886 |  |      |       |   |        |            |       | 9,690 |  |   |       |   |        |           |       | 7,174 |  |   |        |   |         |            |        | 40,952 | 
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Loss from operations                         |                                            |                                                                                                                                                  |                          |                    |       |   | (2,521 | )                |       |       |  |      |       |   | (7,428 | )          |       |       |  |   |       |   | (5,478 | )         |       |       |  |   |        |   | (26,482 | )         
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Other income (expense), net:                 |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                            
|                                            
|                                            
|                                            
|                                             | Interest income                            |                                                                                                                                                  |                          |                    |       |   |        | 67               |       |       |  |      |       |   |        | 489        |       |       |  |   |       |   |        | 100       |       |       |  |   |        |   |         | 717        |       
|                                            
|                                            
|                                            
|                                            
|                                             | Interest expense                           |                                                                                                                                                  |                          |                    |       |   |        |                 |       |       |  |      |       |   |        | (121       | )     |       |  |   |       |   |        | (43       | )     |       |  |   |        |   |         | (138       | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Other expense                              |                                                                                                                                                  |                          |                    |       |   |        |                 |       |       |  |      |       |   |        | (58        | )     |       |  |   |       |   |        |          |       |       |  |   |        |   |         | (58        | )     
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                             | Other income (expense), net                |                                                                                                                                                  |                          |                    |       |   |        | 67               |       |       |  |      |       |   |        | 310        |       |       |  |   |       |   |        | 57        |       |       |  |   |        |   |         | 521        |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Net loss                                     |                                            |                                                                                                                                                  |                          |                    |       |   | (2,454 | )                |       |       |  |      |       |   | (7,118 | )          |       |       |  |   |       |   | (5,421 | )         |       |       |  |   |        |   | (25,961 | )         
|                                            
|                                            
|                                            
|                                            
|Preferred stock dividends                    |                                            |                                                                                                                                                  |                          |                    |       |   | 199    |                  |       |       |  |      |       |   |       |            |       |       |  |   |       |   | 271    |           |       |       |  |   |        |   |        |           
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Net losses applicable to common stockholders |                                            |                                                                                                                                                  |                          |                    |       | $ | (2,653 | )                |       |       |  |      |       | $ | (7,118 | )          |       |       |  |   |       | $ | (5,692 | )         |       |       |  |   |        | $ | (25,961 | )         
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Net loss per share (basic and diluted):      |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                            
|                                            
|                                            
|                                            
|                                             | Net loss                                   |                                                                                                                                                  |                          |                    |       |   | $      | (1.21            | )     |       |  |      |       |   | $      | (0.45      | )     |       |  |   |       |   | $      | (2.66     | )     |       |  |   |        |   | $       | (2.09      | )     
|                                            
|                                            
|                                            
|                                            
|                                             | Preferred stock dividends                  |                                                                                                                                                  |                          |                    |       |   |        | 0.09             |       |       |  |      |       |   |        |           |       |       |  |   |       |   |        | 0.14      |       |       |  |   |        |   |         |           |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                             | Net loss applicable to common stockholders |                                                                                                                                                  |                          |                    |       |   | $      | (1.30            | )     |       |  |      |       |   | $      | (0.45      | )     |       |  |   |       |   | $      | (2.80     | )     |       |  |   |        |   | $       | (2.09      | )     
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|Weighted average shares:                     |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           
|                                            
|                                            
|                                            
|                                            
|                                             | Basic and diluted                          |                                                                                                                                                  |                          |                    |       |   |        | 2,035,714        |       |       |  |      |       |   |        | 15,703,416 |       |       |  |   |       |   |        | 2,035,714 |       |       |  |   |        |   |         | 12,393,816 |       
|                                             |                                            |                                                                                                                                                  |                          |                    |       |   |        |                  |       |       |  |      |       |   |        |            |       |       |  |   |       |   |        |           |       |       |  |   |        |   |         |           

See accompanying notes to condensed consolidated financial
statements.

3



---



VARSITY GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


ASSETS

|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |         |        | 
|------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------------- | ------ |  | ----- | ------- | ------ | 
|                                     |                                                                                                                                                                                                                | December 31, 1999                          |       | June 30, 2000
|                                     |                                                                                                                                                                                                                |                                            |       |              
|                                     |                                                                                                                                                                                                                |                                            |       | (unaudited)  
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                                                                                                      |                                            | $     | 7,813         |        |  | $     | 22,682  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Short-term investments                                                                                                                                                                                         |                                            |       | 480           |        |  |       | 480     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net of allowance for doubtful accounts of
	$100 at December 31, 1999 and June 30, 2000 (including
	$94 and $175 with related party at December 31, 1999 and
	June 30, 2000, respectively) |                                            |       | 626           |        |  |       | 742     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid marketing                                                                                                                                                                                              |                                            |       | 4,625         |        |  |       | 1,841   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred charge                                                                                                                                                                                                |                                            |       | 1,024         |        |  |       |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other                                                                                                                                                                                                          |                                            |       | 517           |        |  |       | 1,080   |       
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                     |                                                                                                                                                                                                                | Total current assets                       |       |               | 15,085 |  |       |         | 26,825 | 
|                                    
|                                    
|                                    
|                                    
|Fixed assets, net                    |                                                                                                                                                                                                                |                                            | 2,040 |               |        |  | 2,542 |        
|                                    
|                                    
|                                    
|                                    
|Other assets                         |                                                                                                                                                                                                                |                                            | 937   |               |        |  | 93    |        
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                     |                                                                                                                                                                                                                | Total assets                               |       | $             | 18,062 |  |       | $       | 29,460 | 
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                                                                                               |                                            | $     | 1,482         |        |  | $     | 625     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued marketing expenses                                                                                                                                                                                     |                                            |       | 1,511         |        |  |       | 1,662   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other accrued expenses and other current liabilities                                                                                                                                                           |                                            |       | 1,610         |        |  |       | 764     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Taxes payable                                                                                                                                                                                                  |                                            |       | 607           |        |  |       | 956     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued employee compensation and benefits                                                                                                                                                                     |                                            |       | 712           |        |  |       | 934     |       
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                     |                                                                                                                                                                                                                | Total current liabilities                  |       |               | 5,922  |  |       |         | 4,941  | 
|                                    
|                                    
|                                    
|                                    
|Long-term liabilities                |                                                                                                                                                                                                                |                                            | 93    |               |        |  | 145   |        
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                     |                                                                                                                                                                                                                | Total liabilities                          |       |               | 6,015  |  |       |         | 5,086  | 
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|Commitments and contingencies        |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|Stockholders equity:                |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Series A convertible preferred stock: $.0001 par value,
	 2,071,420 shares authorized, issued and outstanding at
	December 31, 1999 (liquidation preference of $1,450 at
	December 31, 1999                    |                                            |       |              |        |  |       |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Series B convertible preferred stock: $.0001 par value,
	 6,933,806 shares authorized, issued and outstanding at
	December 31, 1999 (liquidation preference of $10,658 at
	December 31, 1999)                  |                                            |       | 1             |        |  |       |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Series C convertible preferred stock: $.0001 par value,
	 9,755,633 shares authorized; 8,928,571 shares issued
	and outstanding at December 31, 1999 (liquidation preference
	 of $30,815 at December 31, 1999 |                                            |       | 1             |        |  |       |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Preferred stock: $.001 par value, 20,000,000 shares
	authorized; 0 shares issued and outstanding                                                                                                               |                                            |       |              |        |  |       |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.0001 par value, 27,932,927 and
	60,000,000 shares authorized; 2,643,277 and 15,749,831 
	 shares issued and outstanding at December 31, 1999 and
	June 30, 2000, respectively                  |                                            |       |              |        |  |       | 2       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                                                                                                                                     |                                            |       | 53,707        |        |  |       | 92,540  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Warrant subscription receivable and other                                                                                                                                                                      |                                            |       |              |        |  |       | (3,295  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Notes receivable from stockholders                                                                                                                                                                             |                                            |       | (124          | )      |  |       | (124    | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred compensation                                                                                                                                                                                          |                                            |       | (7,341        | )      |  |       | (4,591  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                                                                                                                                                                                            |                                            |       | (34,197       | )      |  |       | (60,158 | )     
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                     |                                                                                                                                                                                                                | Total stockholders equity                 |       |               | 12,047 |  |       |         | 24,374 | 
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        
|                                     |                                                                                                                                                                                                                | Total liabilities and stockholders equity |       | $             | 18,062 |  |       | $       | 29,460 | 
|                                     |                                                                                                                                                                                                                |                                            |       |               |        |  |       |        

See accompanying notes to condensed consolidated financial
statements.

4



---



VARSITY GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


(unaudited)


|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |         |       |         |  
|--------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------ | ---- | ------ | ------ | ------- | ----- | ------- | -
|                                                                            |                                                                                         |                                                     
|                                                                            |                                                                                         | Six Months Ended                                    
|                                                                            |                                                                                         | June 30,                                            
|                                                                            |                                                                                         |                                                     
|                                                                            |                                                                                         | 1999                                                 |                                           | 2000  
|                                                                            |                                                                                         |                                                      |                                           |       
|Operating activities:                                                       |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Net loss                                                                                |                                                      | $                                         | (5,421 | )    |        | $      | (25,961 | )    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Adjustment to reconcile net loss to net cash used in operating
	activities: |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Depreciation and amortization                                                           |                                                      |                                           | 47     |      |        |        | 575     |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Loss on sale of fixed assets                                                            |                                                      |                                           |       |      |        |        | 58      |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Non-cash charges                                                                        |                                                      |                                           | 570    |      |        |        | 3,179   |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Amortization of discount on convertible notes payable                                   |                                                      |                                           | 12     |      |        |        |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Equity transactions with related party and interest expense
	related to warrants issued |                                                      |                                           | 201    |      |        |        | 120     |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Changes in operating assets and liabilities:                                            |                                                      |                                           |        |      |        |        |         |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Accounts receivable, net                             |                                           |        | (45  | )      |        |         | (116  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Prepaid marketing                                    |                                           |        | 101  |        |        |         | 2,785 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Deferred charges                                     |                                           |        |     |        |        |         | 1,024 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Other current assets                                 |                                           |        |     |        |        |         | (912  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Accounts payable                                     |                                           |        | (131 | )      |        |         | (857  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Accrued marketing expenses                           |                                           |        |     |        |        |         | 151   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Other accrued expenses and other current liabilities |                                           |        | 25   |        |        |         | (847  | )      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Taxes payable                                        |                                           |        | 99   |        |        |         | 349   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Accrued employee compensation and benefits           |                                           |        | 132  |        |        |         | 223   |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            |                                                                                         | Other non-current liabilities                        |                                           |        |     |        |        |         | 52    |        
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                            |                                                                                         |                                                      | Net cash used in operating activities     |        |      | (4,410 | )      |         |       | (20,177 | )
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|Investing activities:                                                       |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Additions to fixed assets                                                               |                                                      |                                           | (723   | )    |        |        | (1,234  | )    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from sale of fixed assets                                                      |                                                      |                                           |       |      |        |        | 100     |      
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                            |                                                                                         |                                                      | Net cash used in investing activities     |        |      | (723   | )      |         |       | (1,134  | )
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|Financing activities:                                                       |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from issuance of preferred stock                                               |                                                      |                                           | 8,551  |      |        |        |        |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from issuance of common stock                                                  |                                                      |                                           |       |      |        |        | 35,930  |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from notes payable                                                             |                                                      |                                           |       |      |        |        | 2,500   |      
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Repayment of notes payable                                                              |                                                      |                                           |       |      |        |        | (2,500  | )    
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Proceeds from warrant subscription receivable                                           |                                                      |                                           |       |      |        |        | 250     |      
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                            |                                                                                         |                                                      | Net cash provided by financing activities |        |      | 8,551  |        |         |       | 36,180  |  
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|Net increase in cash and cash equivalents                                   |                                                                                         |                                                      | 3,418                                     |        |      |        | 14,869 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Cash and cash equivalents at beginning of period                            |                                                                                         |                                                      | 1,481                                     |        |      |        | 7,813  |        
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|Cash and cash equivalents at end of period                                  |                                                                                         | $                                                    | 4,899                                     |        |      | $      | 22,682 |        
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|Supplemental disclosure of cash flow information:                           |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Cash paid for income taxes and interest                                                 |                                                      | $                                         |       |      |        | $      | 17      |      
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|Supplemental schedule of noncash investing and financing
	activities:       |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Conversion of convertible notes payable to Series B
	preferred stock                    |                                                      | $                                         | 1,160  |      |        | $      |        |      
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        
|                                                                            | Warrant subscription receivable and other                                               |                                                      | $                                         |       |      |        | $      | 2,693   |      
|                                                                            |                                                                                         |                                                      |                                           |        |      |        |        |        

See accompanying notes to condensed consolidated financial
statements.

5



---



VARSITY GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 1: Description of Operations

Varsity Group Inc. (formerly VarsityBooks.com Inc., the
Company), a leading online college retailer and
provider of marketing services to the college demographic, 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 (formerly CollegeOps.com LLC), to assist in
 the overall management of its marketing and retailing
activities, respectively.

In February 2000, we issued 4,000,000 shares of Common Stock
 at an initial public offering price of $10.00 per share. In
March 2000, we sold an additional 35,000 shares pursuant to
the exercise of the underwriters over-allotment option at
$10.00 per share. Total net proceeds were approximately
$35.9 million. On February 22, 2000, approximately
$2.5 million of this amount was used to pay all amounts due
under the credit facility with Imperial Bank
(Imperial)(see discussion below). As of June 30,
 2000, approximately $10.7 million had been used for working
capital purposes. The balance of approximately $22.7 million
 was invested in cash and cash equivalents at June 30, 2000.

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, 1999. 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.

Note 3: Revolving Credit Facility

On January 19, 2000, the Company executed an agreement with
Imperial to provide the Company with a revolving credit facility
in the aggregate amount of $7.5 million with sublimits of
$3.0 million for purchases of property, equipment and
software and $750,000 for letters of credit. The maturity date
for advances of working capital is December 31, 2000 and for
 property, equipment and software advances, the maturity date is
October 18, 2002. Interest on outstanding balances accrued
at Imperials prime rate (9.5% at June 30, 2000) plus
1% until the closing of the Companys initial public
offering, and afterwards at Imperials prime rate. All
amounts outstanding, which could be up to $7.5 million, are
collateralized by a pledge of all of the Companys assets.
Under the terms of the credit facility, as amended, the Company
must maintain a tangible net worth of $15.0 million and a
ratio of its current assets to its current liabilities of 1.5 to
1. The Company also issued warrants to Imperial to purchase
37,500 shares of its common stock at an exercise price of $10 per
 share. The Company borrowed $2.5 million under the
revolving credit facility during February 2000 and repaid
such borrowings on February 22, 2000 with a portion of the
net proceeds of its initial public offering. No amounts were
outstanding under the agreement at June 30, 2000 with the
exception of a letter of credit in the amount of
$0.3 million.

6



---



VARSITY GROUP INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 4: Marketing Services and Product Promotion Agreements

On February 3, 2000, the Company entered into a marketing
services agreement and a product promotion agreement with Sallie
Mae, Inc. Pursuant to the marketing services agreement, Sallie
Mae will pay the Company $2.0 million over a two year
period. In exchange, the Company will develop and execute a
marketing plan for Sallie Mae to reach the college market.

Pursuant to the product promotion agreement, the Company will pay
 Sallie Mae referral fees based on a percentage of any revenue
generated by Sallie Mae customers during the term of the
arrangement. Sallie Mae will promote the Companys products
to Sallie Mae customers. Sallie Mae will also actively promote
eduPartners, the Companys partnership program, to the
schools to which it sells and promotes Sallie Mae products. In
addition, the Company will be the exclusive textbook retailer on
the Sallie Mae Web site. In exchange, the Company granted Sallie
Mae a warrant to purchase up to 616,863 shares of common stock,
which represented 3.5% of its aggregate common stock outstanding
and reserved for issuance immediately prior to the completion of
the Companys initial public offering, at a price equal to
the initial public offering of price of $10 per share. Of these
shares, 352,493 vested on February 3, 2000 and the remaining
 264,370 shares will vest over the two year term of the agreement
 depending on the number of customer transactions and eduPartner
school referrals Sallie Mae delivers during that period. The
Company has assumed that Sallie Mae will be able to meet the
criteria needed to allow it to exercise the performance-based
warrants. As a result, the Company began to record an expense for
 the performance-based warrants from the date of issuance.

Due to disparity in practice regarding the accounting for
contracts similar to the Sallie Mae agreements, the Company is in
 process of seeking a determination from the United States
Securities and Exchange Commission as to the proper accounting
for these two separate agreements. Until such determination is
made, the Company has elected to take the most conservative
position with regard to the accounting for the agreements in
these condensed consolidated financial statements.

In the accompanying condensed consolidated financial statements
for the quarter ended June 30, 2000, the Company has
combined the two agreements for accounting purposes and recorded
a receivable of $2.0 million and a deferred charge of
$0.6 million. The total of the receivable and deferred
charge of $2.6 million equaled the fair value of the vested
portion of the warrant on the date of the grant. The fair value
of the warrant was estimated using the Black-Scholes option
pricing model with the following assumptions: dividend yield of
0.0%; volatility of 74%; risk free interest rate of 6.0%; and
expected term of 7 years. The receivable will be relieved as
 payments are made under the marketing services agreement and the
 deferred charge will be amortized on a straight-line basis over
the two-year life of the agreement. Expense of approximately
$125,000 was recorded as of June 30, 2000. The receivable
and deferred charge are recorded as warrant subscription
receivable and other, an offset to stockholders equity, in
the accompanying condensed consolidated balance sheet as of
June 30, 2000.

If the agreements were accounted for as separate and distinct
agreements then the $2 million of payments under the
Marketing Services Agreement would be recognized as revenue as
the related services are rendered. In addition, the fair value of
 the vested portion of the warrant of $2.6 million would be
recognized as expense over the two year life of the agreement. It
 should be noted that the net impact on income (loss) from
operations during the agreement term would be the same under
either scenario. The Company expects the accounting for these
agreements to be finalized in the third quarter of 2000.

7



---



VARSITY GROUP INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|         |                                                                                       
|-------- | --------------------------------------------------------------------------------------
|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 which 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, 1999 and other reports and filings made with
the Securities and Exchange Commission.

Overview

We are a leading online retailer of new college textbooks and we
provide marketing services to other businesses interested in
reaching the nations 15 million college students. We were
incorporated in December 1997 and began offering books for
sale on our Web site on August 10, 1998. For the period from
 inception through August 9, 1998, our primary activities
consisted of:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | developing our business model;                                                               
|
| |  | establishing, negotiating and consummating a relationship with
	our supplier, Baker & Taylor;
|
| |  | initial planning and development of our Web site;                                            
|
| |  | developing our information systems infrastructure;                                           
|
| |  | developing our marketing plans; and                                                          
|
| |  | establishing finance and administrative functions.                                           

Since the launch of our Web site, we have continued these
activities and have also focused on increasing sales, expanding
our product and service offerings, improving the efficiency of
our order and fulfillment process, recruiting and training
employees, recruiting and training our student representatives,
developing our booklist operations, enhancing finance and
administrative functions, and increasing customer services
operations and the depth of our management team to help implement
 our growth strategy.

To date, our revenues have consisted primarily of sales of new
textbooks. 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 shipped to
customers. We have also generated revenues through the sales of
general interest books, banner advertisements and marketing
service agreements, as well as co-marketing programs, pursuant to
 which we have arrangements to sell textbooks through other Web
sites. Revenues from the sales of Internet advertisements are
recognized net of commissions paid. Revenues from our marketing
programs are recognized over the period in which the services are
 delivered, provided that no significant performance obligations
remain and the collection of the related receivable is probable.

8



---



During the fourth quarter of fiscal 1999, we began generating
revenues from marketing programs for which we used our student
representative network as well as our online capabilities to
market to students on behalf of other businesses. In
May 2000, we announced our intent to accelerate the
migration of our business more towards this higher margin
marketing services business. In addition, as part of this
increased emphasis on our marketing services business, we have
initiated an effort to lower the overall operating expenses of
our retail book business.

We have incurred substantial losses and negative cash flows from
operations in every fiscal period since our inception. For the
year ended December 31, 1999, we incurred a loss from
operations of $31.9 million and negative cash flows from
operations of $29.4 million. For the six month period ended
June 30, 2000, we incurred a loss from operations of
$26.5 million and a negative cash flows from operations of
$20.2 million. As of December 31, 1999 and June 30,
2000, we have accumulated deficits of $34.2 million and
$60.2 million respectively. We expect operating losses and
negative cash flows to continue until at least the second half of
 2001.

Results of Operations

The following table and discussion provides information which
management believes is relevant to an assessment and
understanding of the Companys consolidated results of
operations and financial condition. The discussion should be read
 in conjunction with the condensed consolidated financial
statements and accompanying notes thereto included elsewhere
herein.

|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |        |       | 
|------------------- | --------------------------------- | ------------------------ |  | -------------- | ----- | ---- |  | ------ | ----- |  |  | ------ | ----- |  |  | ------ | ----- | 
|                    |                                   |                         
|                    |                                   | Percentage of Revenues  
|                    |                                   |                         
|                    |                                   |                          |  |               
|                    |                                   | Three Months             |  | Six Months    
|                    |                                   | Ended June 30,           |  | Ended June 30,
|                    |                                   |                          |  |               
|                    |                                   | 1999                     |  | 2000           |       | 1999 |  | 2000  
|                    |                                   |                          |  |                |       |      |  |       
|Net Sales:          |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|                   
|                   
|                   
|                   
|                    | Product                           |                          |  | 92.3           | %     |      |  | 93.8   | %     |  |  | 92.5   | %     |  |  | 92.8   | %    
|                   
|                   
|                   
|                   
|                    | Shipping                          |                          |  | 7.7            |       |      |  | 6.2    |       |  |  | 7.5    |       |  |  | 7.2    |      
|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|                    |                                   | Total net sales          |  |                | 100.0 |      |  |        | 100.0 |  |  |        | 100.0 |  |  |        | 100.0 | 
|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|Operating expenses: |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|                   
|                   
|                   
|                   
|                    | Cost of productrelated party     |                          |  | 88.2           |       |      |  | 77.7   |       |  |  | 87.4   |       |  |  | 84.3   |      
|                   
|                   
|                   
|                   
|                    | Cost of shippingrelated party    |                          |  | 10.4           |       |      |  | 10.0   |       |  |  | 8.6    |       |  |  | 9.7    |      
|                   
|                   
|                   
|                   
|                    | Equity transactionsrelated party |                          |  |               |       |      |  |       |       |  |  | 10.0   |       |  |  |       |      
|                   
|                   
|                   
|                   
|                    | Marketing and sales               |                          |  | 345.8          |       |      |  | 181.0  |       |  |  | 199.8  |       |  |  | 122.2  |      
|                   
|                   
|                   
|                   
|                    | Product development               |                          |  | 157.0          |       |      |  | 56.8   |       |  |  | 47.4   |       |  |  | 23.0   |      
|                   
|                   
|                   
|                   
|                    | General and administrative        |                          |  | 189.3          |       |      |  | 102.9  |       |  |  | 69.8   |       |  |  | 43.8   |      
|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|                    |                                   | Total operating expenses |  |                | 790.7 |      |  |        | 428.4 |  |  |        | 423.0 |  |  |        | 283.0 | 
|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|                    | Loss from operations              |                          |  | (690.7         | )     |      |  | (328.4 | )     |  |  | (323.0 | )     |  |  | (183.0 | )    
|                   
|                   
|                   
|                   
|                    | Other income, net                 |                          |  | 18.4           |       |      |  | 13.7   |       |  |  | 3.4    |       |  |  | 3.6    |      
|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       
|                    | Net loss                          |                          |  | (672.3         | )%    |      |  | (314.7 | )%    |  |  | (319.6 | )%    |  |  | (179.4 | )%   
|                    |                                   |                          |  |                |       |      |  |        |       |  |  |        |       |  |  |       

Three Months Ended June 30, 2000

compared to


Three Months Ended June 30, 1999


Net Sales

Net sales increased to $2.3 million for the three months
ended June 30, 2000 from $0.4 million for the three
months ended June 30, 1999, as a result of the significant
growth in orders primarily from our expanding customer base as
well as the commencement of eduPartners, our partnership program.
 In addition, marketing services sales were less than
$0.1 million for the three months ended June 30, 2000.
There were no marketing services sales during the three months
ended June 30, 1999.

9



---



Operating Expenses

Cost of ProductRelated Party (Baker & Taylor).
Cost of product-related party consists of the cost of products
sold to customers. Cost of product-related party increased to
$1.8 million for the three months ended June 30, 2000 from
$0.3 million for the three months ended June 30, 1999.
This increase was primarily attributable to our increased sales
volume between years.

Cost of Shipping  Related Party (Baker & Taylor). Cost of shippingrelated party consists of outbound
shipping. Cost of shipping increased to $0.2 million for the
 three months ended June 30, 2000 from less than
$0.1 million for the three months ended June 30, 1999.
This increase was primarily attributable to our increased sales
volume between years. Also for the three months ended
June 30, 2000, cost of shippingrelated party exceeded
shipping revenue by approximately $0.1 million, or 61.0%. As
 part of our business strategy, we charge a flat rate for
shipping, which is less than our actual costs. We believe that
this strategy is responsive to the competitive nature of our
business and is positively perceived by our customer base. During
 July 2000, we increased shipping rates charged to our
customers such that we anticipate that the difference between our
 actual cost and the amount we charge our customers will decline.

Marketing and Sales.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 the expenses
associated with the continued development of our nationwide
network of student representatives. Marketing and sales expense
increased to $4.1 million for the three months ended
June 30, 2000 from $1.3 million for the three months
ended June 30, 1999. This increase was primarily
attributable to increased personnel and related expenses,
continued expansion of eduPartners, expenses associated with the
Companys agreement with AOL/ ICQ, Inc. and scholarship
programs, and marketing fees assessed by Baker & Taylor.
Included in marketing and sales is $0.3 million and
$0.1 million of non-cash charges for the three months ended
June 30, 2000 and 1999, respectively. Non-cash charges
consist of the amortization of deferred compensation and charges
related to warrants issued under the Sallie Mae and AOL/ ICQ,
Inc. agreements. Non-cash charges increased primarily as a result
 of additional option grants and the impact of warrants issued in
 connection with the AOL/ ICQ, Inc. and Sallie Mae agreements
which were executed in December 1999 and February 2000,
respectively.

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 increased to
$1.3 million for the three months ended June 30, 2000
from $0.6 million for the three months ended June 30, 1999.
This increase was primarily attributable to increased personnel
costs between years.

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 increased to $2.3 million for the
 three months ended June 30, 2000 from $0.7 million for
 the three months ended June 30, 1999. This increase was
primarily attributable to the hiring of additional personnel and
increased professional services expenses between years. Included
in general and administrative expenses is $0.6 million and
$0.4 million of non-cash charges for the three months ended
June 30, 2000 and 1999, respectively. Non-cash charges
increased primarily as a result of additional option grants.

Other Income (expense), net

Other income (expense), net consists primarily of interest income
 on our cash and cash equivalents and investments, and interest
expense attributable to our credit facility with Imperial Bank at
 June 30, 2000. Other income was $0.3 million for the
three months ended June 30, 2000 compared to less than
$0.1 million for the three months ended June 30, 1999.
This increase is primarily attributable to interest income on
higher average cash, cash equivalent and short-term investment
balances during the three months ended June 30, 2000, offset
 by interest expense of $0.1 million related to a warrant
issued to Imperial Bank in connection with the Companys
credit facility (see discussion below) and a less than
$0.1 million loss from the disposition of excess computer
equipment.

10



---



Income Taxes

As of June 30, 2000, we had net operating loss carryforwards
 for federal income tax purposes of $51.6 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.

Six Months Ended June 30, 2000

compared to


Six Months Ended June 30, 1999


Net Sales

Net sales increased to $14.5 million for the six months
ended June 30, 2000 from $1.7 million for the six
months ended June 30, 1999, as a result of the significant
growth in orders as well as the commencement of eduPartners. In
addition, marketing services sales increased to $0.3 million
 for the six months ended June 30, 2000. There were no
marketing services sales during the six months ended
June 30, 1999.

Operating Expenses

Cost of Product  Related Party (Baker &
Taylor). Cost of product-related party consists of the cost
of products sold to customers. Cost of product-related party
increased to $12.2 million for the six months ended June 30,
 2000 from $1.5 million for the six months ended
June 30, 1999. This increase was primarily attributable to
our increased sales volume between years.

Cost of Shipping  Related Party (Baker & Taylor). Cost of shippingrelated party consists of outbound
shipping. Cost of shipping increased to $1.4 million for the
 six months ended June 30, 2000 from approximately
$0.1 million for the six months ended June 30, 1999.
This increase was primarily attributable to our increased sales
volume. Also for the six months ended June 30, 2000, cost of
 shippingrelated party exceeded shipping revenue by
approximately $0.4 million, or 35.0%. As part of our
business strategy, we charge a flat rate for shipping, which is
less than our actual costs. We believe that this strategy is
responsive to the competitive nature of our business and is
positively perceived by our customer base. During July 2000,
 we increased shipping rates charged to our customers such that
we anticipate that the difference between our actual cost and the
 amount we charge our customers will decline.

Equity Transactions  Related Party (Baker
& Taylor). Equity transactions-related party consists of
the fair value of warrants issued to Baker & Taylor. During
1999, we issued warrants to purchase up to 5,950 and 62,500
shares of our common stock at an exercise price of $2.33 and
$0.22 per share, respectively, to Baker & Taylor. We
estimated the fair value of the warrants on the date of grant
using an established option pricing model. In connection with the
 Baker & Taylor equity transactions, we recorded an aggregate
 expense of $169,000 for the six months ended June 30, 1999.

Marketing and Sales.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 the expenses
associated with the continued development of our nationwide
network of student representatives. Marketing and sales expense
increased to $17.7 million for the six months ended
June 30, 2000 from $3.4 million for the six months
ended June 30, 1999. This increase was primarily
attributable to expansion of our online and offline advertising,
continued growth of eduPartners, expenses associated with the
Companys agreement with AOL/ ICQ and scholarship programs,
and marketing fees assessed by Baker & Taylor. Included in
marketing and sales is $1.0 million and $0.2 million of
 non-cash charges for the six months ended June 30, 2000 and
 1999, respectively. Non-cash charges consist of the amortization
 of deferred compensation and charges related to warrants issued
under the Sallie Mae and AOL/ ICQ, Inc. agreements. Non-cash
charges increased primarily as a result of additional option
grants and the impact of warrants issued in connection with the
AOL/ ICQ, Inc. and Sallie Mae agreements which were executed in
December 1999 and February 2000, respectively.

11



---



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 increased to
$3.3 million for the six months ended June 30, 2000
from $0.8 million for the six months ended June 30, 1999.
This increase was primarily attributable to increased personnel
costs between years.

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 increased to $6.3 million for the
 six months ended June 30, 2000 from $1.2 million for the
six months ended June 30, 1999. This increase was primarily
attributable to the hiring of additional personnel and increased
professional services expenses between years. Included in general
 and administrative expenses is $2.2 million and
$0.4 million of non-cash charges for the six months ended
June 30, 2000 and 1999, respectively. Non-cash charges
increased primarily as a result of additional options grants and
the accelerated vesting of shares owned by our former Executive
Vice President of Development in March 2000.

Other Income (expense), net

Other income (expense), net consists primarily of interest income
 on our cash and cash equivalents and investments, and interest
expense attributable to our convertible notes payable at
June 30, 1999 and credit facility with Imperial Bank at
June 30, 2000. Other income was $0.5 million for the
six months ended June 30, 2000 compared to less than
$0.1 million for the six months ended June 30, 1999.
This increase is primarily attributable to interest income on
higher average cash, cash equivalent and short-term investment
balances during the six months ended June 30, 2000, offset
by interest expense of $0.1 million related to a warrant
issued to Imperial Bank in connection with the Companys
credit facility (see discussion below) and a less than $0.1
million loss from the disposition of excess computer equipment.

Income Taxes

As of June 30, 2000, we had net operating loss carryforwards
 for federal income tax purposes of $51.6 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.

Liquidity and Capital Resources

From inception until our initial public offering, we financed our
 operations primarily through private sales of our convertible
preferred stock. On August 6, 1998 and December 3,
1998, we issued an aggregate of 2,071,420 shares of Series A
 preferred stock at a purchase price of $.70 per share, resulting
 in gross proceeds of approximately $1.5 million. On
February 25, 1999, we issued 6,933,806 shares of
Series B preferred stock at a purchase price of $1.44 per
share, resulting in gross proceeds of approximately
$10.0 million. On August 27, 1999 and
September 21, 1999, we issued an aggregate of 8,928,571
shares of Series C preferred stock at a purchase price of
$3.36 per share, resulting in gross proceeds of approximately
$30.0 million. Upon the closing of our initial public
offering, shares of our Series A, B and C preferred stock
were converted into 8,966,879 shares of our common stock.

In April 1999, we entered into an agreement with Campus
Pipeline, Inc. under which a warrant to purchase 25,000 shares of
 our common stock with an exercise price of $6.00 per share was
issued and will be exercisable upon the achievement of
contractual revenues of $30.0 million on or before
December 31, 2000, with an additional warrant for 50,000
shares with an exercise price of $6.00 per share which will be
exercisable if contractual revenues equal or exceed
$80.0 million on or before July 31, 2001. Since the
exercisability of these warrants is based on the achievement of
uncertain future revenue targets, we have not recorded any
expense for these warrants.

In December 1999, we granted AOL a warrant to purchase
493,246 shares of our common stock, which does not include the
additional warrant to purchase 1,125 shares which we granted to
AOL when we entered into definitive agreements with Imperial Bank
 and the additional warrant to purchase 34,367 shares which we

12



---





In February 2000, we granted Sallie Mae, Inc. warrants to
purchase up to 616,863 shares of our common stock, with an
exercise price of $10 per share. Of these shares, warrants to
purchase 352,493 are immediately exercisable and the warrants to
purchase the remaining 264,370 shares will vest over the two year
 period following the grant date based on Sallie Maes
performance under our product promotion agreement.

In February 2000, we issued 4,000,000 shares of Common Stock
 at an initial public offering price of $10.00 per share. In
March 2000, we sold an additional 35,000 shares pursuant to
the exercise of the underwriters over-allotment option at
$10.00 per share. Total net proceeds (after deducting discounts,
commissions and other expenses of the offering) were
approximately $35.9 million. On February 22, 2000,
approximately $2.5 million of this amount was used to pay
all amounts outstanding under the credit facility with Imperial
Bank (see discussion below). As of June 30, 2000,
approximately $10.7 million had been used for working
capital purposes. The balance of approximately $22.7 million was
invested in cash and cash equivalents at June 30, 2000.

As of June 30, 2000, prepaid marketing expenses were
$1.8 million compared to $4.6 million at
December 31, 1999. The decrease is a result of costs
incurred in conjunction with our January/ February selling
period.

As of December 31, 1999, we deferred expenses of
approximately $1.0 million related to our initial public
offering. These costs were offset against
additional-paid-in-capital upon the completion of our offering in
 February 2000. Such costs are reflected as a deferred
charge in the accompanying December 31, 1999 consolidated
balance sheet.

Net cash used in operating activities was $20.2 million for
the six months ended June 30, 2000, compared to
$4.4 million for the six months ended June 30, 1999,
consisting primarily of net losses adjusted for changes in
accounts receivable, accounts payable and accrued expenses.

Net cash used in investing activities was $1.1 million for
the six months ended June 30, 2000, and $0.7 million
for the six months ended June 30, 1999, consisting primarily
 of purchases of computer equipment and fixtures and furniture
totaling $1.2 million and $0.7 million at June 30,
 2000 and 1999, respectively. Also, for the six months ended
June 30, 2000, the Company capitalized $0.6 million of
development costs primarily related to its Web site. Such costs
will be amortized over an 18 month period.

Net cash provided by financing activities was $36.2 million
for the six months ended June 30, 2000 and $8.6 million
 for the six months ended June 30, 1999 consisting primarily
 of the net proceeds from the Companys initial public
offering and the issuance of preferred stock, respectively.

On January 19, 2000 we entered into a revolving credit
agreement with Imperial Bank in an aggregate amount of
$7.5 million with sublimits of $3.0 million for purchases of
 property, equipment and software and $750,000 for letters of
credit. The maturity date for working capital advances is
December 31, 2000 and the maturity date for property, equipment
and software advances is October 18, 2002. Interest on
outstanding balances accrued at Imperial Banks prime rate
(9.5% at June 30, 2000) plus 1.0% until the closing of our
initial public offering, and afterwards at Imperial Banks
prime rate. All amounts outstanding, which could be up to
$7.5 million, are collateralized by a pledge of all of our
assets. Under the terms of the credit facility, as amended, we
must maintain a tangible net worth of $15 million and a
ratio of our current assets to our current liabilities of 1.5 to
1. We also issued a warrant to Imperial Bank to purchase 37,500
shares of our common stock at an exercise price of $10 per share.
 We borrowed $2.5 million under the revolving credit
facility during February 2000 and repaid such borrowings on
February 22, 2000 with a portion of the proceeds of our
initial public offering. No amounts were outstanding under the
agreement at June 30, 2000 with the exception of a letter of
 credit in the amount of $0.3 million.

13



---



We expect that operating losses and negative cash flows will
continue until at least the second half of 2001. As part of the
increased emphasis on our higher margin marketing services
business, we anticipate that costs and expenses related to brand
development, marketing and other promotional activities
associated with our retail book business will decrease from
current 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 current levels,
 we believe, in the aggregate, that this will reduce the losses
and negative cash flows from our sales of new textbooks. We
intend to increase spending on development of relationships with
other businesses. We believe that we can capture additional
revenues, on which we expect to recognize higher gross margins,
by increasing the number of businesses for whom we provide
marketing services. 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 expect that cash, cash equivalent and short term
investment balances will be sufficient to meet our anticipated
needs for working capital and capital expenditures into the third
 quarter of 2001. 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 June 30, 2000, 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.

14



---



PART II.

OTHER INFORMATION

Item 1:  Legal Proceedings

On October 29, 1999, the Company was sued by the National
Association of College Stores, or N.A.C.S., in the United States
District Court for the District of Columbia. In their complaint,
N.A.C.S. alleged that the Company uses false and misleading
advertisements in its efforts to sell textbooks. Specifically,
the complaint alleges that the Company falsely advertises
discounts of 40% on textbooks on its Web site. The complaint also
 alleges that there is no suggested retail price for textbooks
from which to calculate the discounts. N.A.C.S. claims that, in
making the alleged false and misleading statements, the Company
is implying that N.A.C.S. member stores overcharge students for
their textbooks. The complaint requests that the Company be
prevented from claiming in any advertising or promotional
material, packaging or the like, or representing in any way, that
 it offers discounts or percentages off of textbooks unless the
Company clearly and prominently identifies the true basis for the
 claimed discount, the source of the comparative price it uses to
 determine the discounts it offers and the true percentage of
textbooks offered at the stated discounted price. In addition,
N.A.C.S. seeks to have the Company retract all prior claims
through prominent statements on its Web site. The complaint does
not seek monetary damages, other than attorneys fees.

The Company believed these claims to be without merit and, on
November 22, 1999, the Company filed a motion to dismiss
these claims. On May 26, 2000, the District Court announced
that it would grant the Companys motion to dismiss as to
the first of the two counts in N.A.C.S. complaint and would
 defer its ruling on the second count to allow the partners to
continue settlement negotiations.

The Company and N.A.C.S. continued their ongoing settlement
negotiations in an attempt to resolve these remaining claims
without the necessity of further litigation, and an agreement was
 reached between the parties on or about August 4, 2000. The
 complaint was dismissed with prejudice by stipulation filed with
 the District Court on August 7, 2000.



|        |                      
|------- | ---------------------
|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

A.  The Annual Meeting of Stockholders was held on
May 18, 2000. All of the proposals presented for the
stockholders consideration at the Annual Meeting were
approved. The following is a tabulation of the voting on each
proposal presented at the Annual Meeting.

Proposal 1  Election of Directors

|                    |  |              |  |           |            |               |  |                |   |                  |  |                  |        |  |  |  |   |  |  |  |   | 
|------------------- |  | ------------ |  | --------- | ---------- | ------------- |  | -------------- | - | ---------------- |  | ---------------- | ------ |  |  |  | - |  |  |  | - | 
|Elected Director    |  | Term Expires |  | Votes For |            | Votes Against |  | Votes Withheld |   | Votes Abstaining |  | Broker Non-Votes
|                    |  |              |  |           |            |               |  |                |   |                  |  |                 
|Andrew J. Oleszczuk |  | 2003         |  |           | 12,287,300 |               |  |                | 0 |                  |  |                  | 14,039 |  |  |  | 0 |  |  |  | 0 | 
|James S. Ulsamer    |  | 2003         |  |           | 12,287,020 |               |  |                | 0 |                  |  |                  | 14,319 |  |  |  | 0 |  |  |  | 0 | 

Other directors whose terms of office continued after the Annual
Meeting include Mr. Jonathan N. Grayer,
Mr. Allen L. Morgan, Mr. Eric J. Kuhn and
Mr. Gene Riechers.

15



---



Proposal 2  Ratification of the appointment of
PricewaterhouseCoopers LLP as the independent auditors of the
Company for the fiscal year ending December 31, 2000.

|           |  |               |       |                |  |                  |   |                  |  |  |     |  |  |  |   | 
|---------- |  | ------------- | ----- | -------------- |  | ---------------- | - | ---------------- |  |  | --- |  |  |  | - | 
|Votes For  |  | Votes Against |       | Votes Withheld |  | Votes Abstaining |   | Broker Non-Votes
|           |  |               |       |                |  |                  |   |                 
|12,298,691 |  |               | 1,805 |                |  |                  | 0 |                  |  |  | 843 |  |  |  | 0 | 

Proposal 3  Approval of the Companys 1998 Stock
Option Plan, as amended to increase the number of shares of
common stock that may be issued under the Plan by 1,500,000
shares and make certain technical amendments to permit grants to
comply with the provisions of the compensation deduction
limitations of Section 162(m) of the Federal tax laws.

|          |  |               |         |                |  |                  |   |                  |  |  |        |  |  |  |   | 
|--------- |  | ------------- | ------- | -------------- |  | ---------------- | - | ---------------- |  |  | ------ |  |  |  | - | 
|Votes For |  | Votes Against |         | Votes Withheld |  | Votes Abstaining |   | Broker Non-Votes
|          |  |               |         |                |  |                  |   |                 
|9,357,785 |  |               | 467,957 |                |  |                  | 0 |                  |  |  | 30,060 |  |  |  | 0 | 

B.  A Special Meeting of Stockholders was held on
June 22, 2000 to vote on a proposal to amend the Certificate
 of Incorporation of the Company, as amended, to change the
Companys name from VarsityBooks.com Inc. to
Varsity Group Inc. The proposal was approved. The
following is a tabulation of the voting on the proposal.

|          |  |               |       |                |  |                  |   |                  |  |  |       |  |  |  |   | 
|--------- |  | ------------- | ----- | -------------- |  | ---------------- | - | ---------------- |  |  | ----- |  |  |  | - | 
|Votes For |  | Votes Against |       | Votes Withheld |  | Votes Abstaining |   | Broker Non-Votes
|          |  |               |       |                |  |                  |   |                 
|9,279,264 |  |               | 4,616 |                |  |                  | 0 |                  |  |  | 1,115 |  |  |  | 0 | 

Item 5:  Other Information

Not Applicable

Item 6:  Exhibits and Reports on
Form 8-K

(a)  Exhibits

|            |    |             |  |                                         
|----------- | -- | ----------- |  | ----------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 11 |             |  | Computation of Earnings Per Common Share
|            | 27 |             |  | Financial Data Schedule                 

(b)  Reports on Form 8-K

None

16



---



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:  August 11, 2000

| |                   
| | ------------------
| | Varsity Group Inc.



| |     |                                                                                            
| | --- | -------------------------------------------------------------------------------------------
| | By: | /s/ RICHARD HOZIK 
         _______________________________________ 
         Richard Hozik

| |                                      
| | -------------------------------------
| | Senior Vice President,               
| | Treasurer and Chief Financial Officer

17