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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-Q

(MARK ONE)

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|     
|      |  | For the quarterly period ended March 31, 2003                                           
|      |  | 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                                                                                                  |  | 54-1876848                                         
|(State of Incorporation)1850 M Street, Suite 1150Washington, D.C.(Address of Principal Executive
Offices) |  | IRS Employer (Identification
Number)20036(Zip Code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   [X]   No______

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

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes______No______

As of May 1, 2003, the registrant had 16,500,157 shares of common stock
outstanding.





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##### 



VARSITY GROUP INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q
For the quarter ended March 31, 2003

INDEX

|        |  |                                                                 |  |  |    |             |  | 
|------- |  | --------------------------------------------------------------- |  |  | -- | ----------- |  | 
|        |  |                                                                 |  |  |    | Page Number
|        |  |                                                                 |  |  |    |            
|        |  | PART I. FINANCIAL INFORMATION                                   |  |  |    |            
|       
|Item 1. |  | Financial Statements                                            |  |  |    |            
|       
|        |  | Condensed consolidated statements
        of operations for the |  |  |    |            
|        |  | three months ended March 31,
        2002 and 2003              |  |  | 3  |            
|       
|        |  | Condensed consolidated balance sheets as of December 31,        |  |  |    |            
|        |  | 2002 and March 31, 2003                                         |  |  | 4  |            
|       
|        |  | Condensed consolidated statements
        of cash flows for the |  |  |    |            
|        |  | three months ended March 31,
        2002 and 2003              |  |  | 5  |            
|       
|        |  | Notes to condensed consolidated financial statements            |  |  | 6  |            
|       
|Item 2. |  | Management's Discussion and
        Analysis of Financial       |  |  | 6  |            
|        |  | Condition and Results of Operations                             |  |  |    |            
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk      |  |  | 9  |            
|       
|        |  | PART II. OTHER INFORMATION                                      |  |  |    |            
|       
|Item 1. |  | Legal Proceedings                                               |  |  | 9  |            
|       
|Item 2. |  | Changes in Securities                                           |  |  | 9  |            
|       
|Item 3. |  | Defaults Upon Senior Securities                                 |  |  | 9  |            
|       
|Item 4. |  | Submission of Matters to a Vote
        of Security Holders     |  |  | 9  |            
|       
|Item 5. |  | Other Information                                               |  |  | 10 |            
|       
|Item 6. |  | Exhibits and Reports on Form
        8-K                        |  |  | 10 |            





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PART I.
FINANCIAL INFORMATION

Item 1: Financial Statements

VARSITY GROUP INC.

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

|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |            |       | 
|---------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ---- | ------------------ | ----- | ---- | ---- | ---------- | ----- | 
|                                   |                                                                                                                                                 |                                    |      | Three Months Ended
|                                   |                                                                                                                                                 |                                    |      | March 31,         
|                                   |                                                                                                                                                 |                                    |      |                   
|                                   |                                                                                                                                                 |                                    |      | 2002               |       | 2003
|                                   |                                                                                                                                                 |                                    |      |                    |       |     
|Net
          sales:               |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   | Product                                                                                                                                         |                                    | $    | 703                |       |      | $    | 1,068      |      
|                                   | Shipping                                                                                                                                        |                                    |      | 82                 |       |      |      | 155        |      
|                                   | Marketing
          services                                                                                                                    |                                    |      | 14                 |       |      |      |           |      
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   |                                                                                                                                                 | Total
          net sales          |      |                    | 799   |      |      |            | 1,223 | 
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|Operating expenses                 |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   | Cost
          of books  related party                                                                                                         |                                    |      | 501                |       |      |      | 776        |      
|                                   | Cost
          of shipping  related party                                                                                                      |                                    |      | 46                 |       |      |      | 91         |      
|                                   | Cost
          of marketing services                                                                                                            |                                    |      |                   |       |      |      |           |      
|                                   | Marketing
          and sales (including $38 and $52 with related party for three months
          ended March 31, 2002 and 2003, respectively) |                                    |      | 301                |       |      |      | 400        |      
|                                   | Product
          development                                                                                                                   |                                    |      | 35                 |       |      |      | 55         |      
|                                   | General
          and administrative                                                                                                            |                                    |      | 338                |       |      |      | 350        |      
|                                   | Non-cash
          compensation                                                                                                                 |                                    |      | 100                |       |      |      | 69         |      
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   |                                                                                                                                                 | Total
          operating expenses |      |                    | 1,321 |      |      |            | 1,741 | 
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|Loss
          from operations     |                                                                                                                                                 |                                    | (522 | )                  |       |      | (518 | )         
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|Other
          income, net:       |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   | Interest
          income                                                                                                                       |                                    |      | 57                 |       |      |      | 74         |      
|                                   | Other
          income                                                                                                                          |                                    |      |                   |       |      |      |           |      
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   | Other
          income, net                                                                                                                     |                                    |      | 57                 |       |      |      | 74         |      
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|Net
          loss                 |                                                                                                                                                 | $                                  | (465 | )                  |       | $    | (444 | )         
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|Net
          loss per share:      |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   | Basic
          and diluted                                                                                                                     |                                    | $    | (0.03              | )     |      | $    | (0.03      | )    
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|Weighted
          average shares: |                                                                                                                                                 |                                    |      |                    |       |      |      |           
|                                   | Basic
          and diluted                                                                                                                     |                                    |      | 15,973,703         |       |      |      | 16,211,126 |      
|                                   |                                                                                                                                                 |                                    |      |                    |       |      |      |           

See accompanying notes to condensed consolidated financial statements.





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VARSITY GROUP INC.

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

ASSETS

|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |                |         |             |  | 
|------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---- | ------- | ----------------- | - | -------------- | ------- | ----------- |  | 
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         | December 31, 2002 |   | March 31, 2003
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |                |         | (unaudited)
|Current assets:                      |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             | Cash and cash equivalents                                                                                        |                                            | $    | 16,950  |                   |   | $              | 14,738  |            
|                                     |                                                                                                                                                                             | Short-term investments                                                                                           |                                            |      | 1,500   |                   |   |                | 3,000   |            
|                                     |                                                                                                                                                                             | Accounts receivable, net of allowance of doubtful
accounts of $13 at December 31, 2002 and $13
at March 31, 2003 |                                            |      | 263     |                   |   |                | 285     |            
|                                     |                                                                                                                                                                             | Other current assets                                                                                             |                                            |      | 297     |                   |   |                | 332     |            
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  | Total current assets                       |      |         | 19,010            |   |                |         | 18,355      | 
|                                     |                                                                                                                                                                             | Fixed assets, net                                                                                                |                                            |      | 41      |                   |   |                | 72      |            
|                                     |                                                                                                                                                                             | Other assets                                                                                                     |                                            |      | 23      |                   |   |                | 23      |            
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  | Total assets                               |      | $       | 19,074            |   |                | $       | 18,450      | 
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             | Accounts payable (including $111 with related party                                                              |                                            |      |         |                   |   |                |         |            
|                                     |                                                                                                                                                                             | at December 31, 2002 and $49 at March 31, 2003)                                                                  |                                            | $    | 203     |                   |   | $              | 65      |            
|                                     |                                                                                                                                                                             | Other accrued expenses and other current liabilities                                                             |                                            |      | 573     |                   |   |                | 239     |            
|                                     |                                                                                                                                                                             | Taxes payable                                                                                                    |                                            |      | 1,286   |                   |   |                | 1,271   |            
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  | Total current liabilities                  |      |         | 2,062             |   |                |         | 1,575       | 
|Long-term liabilities                |                                                                                                                                                                             |                                                                                                                  |                                           |      |         |                   |  |               
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  | Total liabilities                          |      |         | 2,062             |   |                |         | 1,575       | 
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|Stockholders equity:                |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     | Preferred stock: $.0001 par value, 20,000,000 shares
authorized; 0 shares issued and outstanding at
December 31, 2002 and March 31, 2003                                    |                                                                                                                  |                                            |     |         |                   |   |               |        
|                                     | Common stock: $.0001 par value, 60,000,000 shares
authorized, 17,098,666 and 17,457,220 shares issued
and outstanding at December 31, 2002 and March 31,
2003, respectively |                                                                                                                  |                                            | 2    |         |                   |   | 2              |        
|                                     |                                                                                                                                                                             | Additional paid-in capital                                                                                       |                                            |      | 87,638  |                   |   |                | 87,876  |            
|                                     |                                                                                                                                                                             | Deferred compensation                                                                                            |                                            |      | (254    | )                 |   |                | (185    | )          
|                                     |                                                                                                                                                                             | Accumulated deficit                                                                                              |                                            |      | (69,800 | )                 |   |                | (70,244 | )          
|                                     | Treasury Stock, $.0001 par value, 957,063 shares at
December 31, 2001 and March 31, 2002                                                                                    |                                                                                                                  |                                            | (574 | )       |                   |   | (574           | )      
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  | Total stockholders equity                 |      |         | 17,012            |   |                |         | 16,875      | 
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         | $                 |   |               
|                                     |                                                                                                                                                                             |                                                                                                                  | Total liabilities and stockholders equity |      | $       | 19,074            |   |                |         | 18,450      | 
|                                     |                                                                                                                                                                             |                                                                                                                  |                                            |      |         |                   |   |               

See accompanying notes to condensed consolidated financial statements.





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VARSITY GROUP INC.

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

|                                                                            |                                              |                                                      |                                           |        |                    |        |        |        |      |        |  
|--------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------ | ------------------ | ------ | ------ | ------ | ---- | ------ | -
|                                                                            |                                              |                                                      |                                           |        | Three Months Ended
|                                                                            |                                              |                                                      |                                           |        | March 31,         
|                                                                            |                                              |                                                      |                                           |        |                   
|                                                                            |                                              |                                                      |                                           |        | 2002               |        | 2003  
|                                                                            |                                              |                                                      |                                           |        |                    |        |       
|Operating activities:                                                       |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            | Net loss                                     |                                                      | $                                         | (465   | )                  |        | $      | (444   | )   
|Adjustments to reconcile net loss to net cash used in
operating activities: |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            | Depreciation and amortization                |                                                      |                                           | 60     |                    |        |        | 8      |     
|                                                                            | Bad debt expense                             |                                                      |                                           | (11    | )                  |        |        |       |     
|                                                                            | Non-cash compensation                        |                                                      |                                           | 100    |                    |        |        | 69     |     
|                                                                            | Changes in operating assets and liabilities: |                                                      |                                           |        |                    |        |        |        |     
|                                                                            |                                              | Accounts receivable, net                             |                                           |        | 1                  |        |        |        | (22  | )     
|                                                                            |                                              | Other current assets                                 |                                           |        | 59                 |        |        |        | (35  | )     
|                                                                            |                                              | Accounts payable                                     |                                           |        | (14                | )      |        |        | (138 | )     
|                                                                            |                                              | Other accrued expenses and other current liabilities |                                           |        | (41                | )      |        |        | (334 | )     
|                                                                            |                                              | Taxes payable                                        |                                           |        | 7                  |        |        |        | (15  | )     
|                                                                            |                                              | Other non-current assets                             |                                           |        | 34                 |        |        |        |     |       
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            |                                              |                                                      | Net cash used in operating activities     |        |                    | (270   | )      |        |      | (911   | )
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|Investing activities:                                                       |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            | Additions to fixed assets                    |                                                      |                                           | (10    | )                  |        |        | (39    | )   
|                                                                            | Increase in short-term investments           |                                                      |                                           | (3,000 | )                  |        |        | (1,500 | )   
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            |                                              |                                                      | Net cash used in investing activities     |        |                    | (3,010 | )      |        |      | (1,539 | )
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|Financing activities:                                                       |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            | Proceeds from exercise of stock options      |                                                      |                                           | 12     |                    |        |        | 238    |     
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|                                                                            |                                              |                                                      | Net cash provided by financing activities |        |                    | 12     |        |        |      | 238    |  
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|Net decrease in cash and cash equivalents                                   |                                              |                                                      | (3,268                                    | )      |                    |        | (2,212 | )     
|Cash and cash equivalents at beginning of period                            |                                              |                                                      | 16,811                                    |        |                    |        | 16,950 |       
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       
|Cash and cash equivalents at end of period                                  |                                              | $                                                    | 13,543                                    |        |                    | $      | 14,738 |       
|                                                                            |                                              |                                                      |                                           |        |                    |        |        |       

See accompanying notes to consolidated financial statements





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VARSITY GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Description of Operations

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

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

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

Note 2: Basis of Presentation

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

Certain information and footnote disclosure normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The interim financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2002. Operating results for the interim periods are not
necessarily indicative of results for an entire year.

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

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

Forward Looking Statements

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

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

Readers are also urged to carefully review and consider the various disclosures
made by us that attempt to advise interested parties of the factors which
affect our business, including without limitation the disclosures made under
the caption Managements Discussion and Analysis of Financial Condition and
Results of Operations included herein and under the captions Managements
Discussion and Analysis of Financial Condition and Results of Operations and
Risk Factors included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2002 and other reports and filings made with the
Securities and Exchange Commission.





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Overview

We are a leading online retailer of textbooks and educational materials
targeting private middle and high schools, colleges and distance and continuing
education markets. Through eduPartners, our program serving schools and
organizations directly, we provide an opportunity for educational institutions
to maximize their resources and offer increased convenience and value to their
students by outsourcing to us the sale of new textbooks and other learning
materials. At these institutions we are endorsed as the schools official
bookstore and gain direct access and exposure to their students. Benefits of
this business model include significantly lower marketing and customer
acquisition costs than our historical college-focused retail book business,
greater sales visibility, higher margins and attractive sell-through or
penetration per school account.

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

During 2000, we began to focus resources on the growth and development of our
eduPartner program and it is the foundation of our business today. In the
quarter ending September 30, 2002, revenues from eduPartners accounted for
approximately 98% of total book related revenues, an increase from the 69%
share of total book related revenues eduPartners represented during the quarter
ending September 30, 2000. The number of eduPartners schools has grown from
approximately 20 schools during the 1999 Fall back-to-school season to over 130
schools in 2002, representing an 86% compounded annual growth rate over the
last three years. As of May 2003, we were the exclusive new textbook supplier
for approximately 200 educational institutions through our eduPartners program.

We expect eduPartners to remain the primary source of textbook revenues moving
forward. Net sales consist of sales of books and charges to customers for
outbound shipping and are net of allowances for returns, promotional discounts
and coupons. Revenues from sales of textbooks are recognized at the time
products are received by the customer.

We are able to reduce the overhead associated with textbook sales because we do
not maintain individual on-site stores and we outsource our ordering,
inventory, warehousing and fulfillment needs with Baker & Taylor, a leading
distributor of books, videos and music products. We fulfill most of our
textbook orders through Baker & Taylor with which we have a series of written
agreements, the original term of which expired on October 1, 2002. Consistent
with the terms of these agreements, each agreement automatically renewed for
one year as neither party notified the other of any intention not to renew 180
days prior to the initial expiration date. There is no automatic renewal
provision in these agreements beyond the current renewal period that expires on
October 1, 2003. The agreements are terminable upon up to 30 days notice by
either party in the event of a default.

We base our current and future expense levels on our operating plans and
estimates of future revenues. In view of the rapidly evolving nature of our
business and our limited operating history, we have limited experience
forecasting our revenues. Therefore we believe that period-to-period
comparisons of our financial results might not necessarily be meaningful and
you should not rely on them as an indication of future performance.

Recording the first profitable fiscal year in the history of our Company, the
year ended December 31, 2002 marked a significant milestone for the Company.
This was accomplished through a combination of revenue growth, margin
enhancement and cost reduction efforts initiated during 2000. We have
successfully lowered our overall expense structure and improved the margins of
our retail book business while growing revenues. As a result, we recorded the
first profitable fiscal quarter in our history during the three months ending
September 30, 2001 and our first profitable fiscal year during the year ended
December 31, 2002. We have also now recorded two consecutive fiscal years with
positive cash flow from operations.

Prior to the fiscal year ended December 31, 2002, we had incurred substantial
losses in every fiscal year since inception. For the year ended December 31,
2001, we incurred a loss from operations of approximately $2.8 million and
positive cash flows from operations of $0.4 million. For the year ended
December 31, 2000, we incurred a loss from operations of approximately $34.8
million and negative cash flows from operations of $27.5 million. For the year
ended December 31, 1999, we incurred a loss from operations of approximately
$31.9 million and negative cash flows from operations of $29.4 million. As of
December 31, 2001 and 2002 we had accumulated deficits of approximately $70.5
million and $69.8 million, respectively.

During the three months ending March 31, 2003 the Company reported a net loss
of approximately $0.4 million, down from a net loss of $0.5 million for the
same period in 2002. Cash used in operating activities during the three months
ending March 31, 2003 was approximately $0.9 million, up from approximately
$0.3 million for the three months ending March 31, 2002.

Based upon our current cost structure and recent growth levels of the
eduPartners program, we believe we are positioned to improve upon the financial
performance of 2002. We intend to continue to increase spending on the
development of eduPartners





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##### 



and relationships with other related businesses. Failure to generate sufficient
revenues, raise additional capital or, if necessary, reduce discretionary
spending could harm our results of operations and financial condition.

Three Months Ended March 31, 2003
compared to
Three Months Ended March 31, 2002

Net Sales

Net sales increased to $1.2 million for the three months ended March 31, 2003
from $0.8 million for the three months ended March 31, 2002. This increase was
primarily attributable to the Companys success building revenues within the
eduPartners program. Revenues from our eduPartners program increased to over
$1.1 million for the three months ending March 31, 2003 from approximately $0.6
million for the same period in 2002. We did not record any marketing services
revenue during the three months ended March 31, 2003, a decrease from the
$14,000 recognized in the same period in 2002. No new significant marketing
services contracts were signed during the three months ending March 31, 2003.

Operating Expenses

Cost of Books  Related Party (Baker & Taylor).Cost of books  related party
consists of the cost of books sold to customers. Cost of books-related party
increased to approximately $0.8 million for the three months ended March 31,
2003 from $0.5 million for the three months ended March 31, 2002. This increase
was primarily attributable to our increased sales volume.

Cost of Shipping  Related Party (Baker & Taylor).Cost of shipping  related
party consists of outbound shipping to the customer. Cost of shipping increased
to approximately $0.1 million for the three months ended March 31, 2003 from
approximately $46,000 for the three months ended March 31, 2002. This increase
was primarily attributable to our increased sales volume.

Marketing and Sales Marketing and sales expense consists primarily of
advertising and promotional expenditures, credit card processing fees and
payroll and related expenses for personnel engaged in the marketing and
expansion of eduPartners. Marketing and sales expense increased to $0.4 million
for the three months ended March 31, 2003, from approximately $0.3 million for
the three months ended March 31, 2002. This increase was primarily
attributable to higher costs associated with sales and marketing fees related
to our agreement with Baker & Taylor and higher sales staffing levels and
related expense.

Certain marketing and sales expenses associated with our agreement with Baker &
Taylor are the product of the classification of services such as website
content and customer database management as marketing and sales expense and we
expect these costs will increase in absolute dollars as we expand our business.

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 approximately $55,000 for the three months ended March 31, 2003
from $35,000 for the three months ended March 31, 2002. This decrease was
primarily attributable to increased web development, consulting and personnel
costs between periods.

General and Administrative General and administrative expense consists of
payroll and related expenses for executive and administrative personnel such as
the amortization of deferred compensation, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expense increased to $0.4 million for the three months ended
March 31, 2003 from $0.3 million for the three months ended March 31, 2002.
This increase was primarily attributable to increased personnel, rent and
professional services expenses between periods.

Non-Cash Compensation Non-cash compensation expense consists of expenses
related to the granting of employee options and restricted stock grants
measured based on the intrinsic value of the stock option or grant. Non-cash
compensation expense decreased to approximately $69,000 for the three months
ended March 31, 2003 from $0.1 million for the three months ended March 31,
2002. This decrease was primarily attributable to lower amortized compensation
expense for options issued before the Companys initial public offering.
Non-cash compensation expense is amortized based upon an accelerated expense
schedule, resulting in higher than average expenses in the early years and
lower than average expenses in the later years.

Other income, net

Other income, net consists primarily of interest income on our cash and cash
equivalents and investments and gains or losses associated with the disposal of
fixed assets. Other income was $74,000 for the three months ended March 31,
2003 compared to $57,000 for the three months ended March 31, 2002. Interest
income increased largely due to higher cash balances under management between
periods.





---



##### 



Income Taxes

As of March 31, 2003, we had net operating loss carryforwards for federal
income tax purposes of approximately $61.5 million, which expire beginning in
2018. We have provided a full valuation allowance on the resulting deferred tax
asset because of uncertainty regarding its realizability. For the three months
ended March 31, 2003, no income tax expense was recognized because the
reduction in the deferred tax asset related to net operating losses was offset
by a related reduction in the valuation allowance.

Liquidity and Capital Resources

As of March 31, 2003, we had $17.7 million of cash, cash equivalents and short
term investments. As of that date, our principal commitments consisted of
obligations outstanding, accounts payable and accrued liabilities. Although we
have no material commitments for capital expenditures, we may experience
increases in our capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.

Net cash used in operating activities was $0.9 million for the three months
ended March 31, 2003 compared to $0.3 million net cash used in operations for
the three months ended March 31, 2002. This increase was largely attributable
to changes in accounts payable and accrued expenses.

Net cash used in investing activities was $1.5 million for the three months
ended March 31, 2003 compared to net cash used in investing activities of $3.0
million for the three months ended March 31, 2002. This decrease was largely
to smaller purchases of high-grade short-term investments during the period.

Net cash provided by financing activities was $0.2 million for the three months
ended March 31, 2003 and $12,000 for the three months ended March 31, 2002. Net
cash provided by financing activities during the three months ending March 31,
2003 and March 31, 2002 consisted primarily of net proceeds from the exercise
of employee stock options.

We intend to increase spending on the development of eduPartners and
relationships with other businesses. Our failure to generate sufficient
revenues, raise additional capital or, if necessary, reduce discretionary
spending could harm our results of operations and financial condition.

Based upon our current and expected cost structure and recent growth levels
within the eduPartners program, we believe we are positioned to improve upon
the financial performance of 2002. However, we intend to increase spending on
the development of eduPartners and relationships with other related businesses.
Failure to generate sufficient revenues or, if necessary, reduce discretionary
spending could harm our results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is subject to interest rate risk on its cash and cash equivalents,
short-term investments and credit facility. If market rates were to increase
immediately and uniformly by 10% from the level at March 31, 2003, the change
to the Companys interest sensitive assets and liabilities would have an
immaterial effect on the Companys financial position, results of operations
and cash flows over the next fiscal year.

PART II.
OTHER INFORMATION

|        |  |                                                                   
|------- |  | ------------------------------------------------------------------
|Item 1: |  | Legal Proceedings
Not Applicable                                  
|       
|Item 2: |  | Changes in Securities
Not Applicable                              
|       
|Item 3: |  | Defaults Upon Senior Securities
Not Applicable                    
|       
|Item 4: |  | Submission of Matters to a Vote of Security Holders
Not Applicable





---



##### 



|        |  |                                       
|------- |  | --------------------------------------
|Item 5: |  | Other Information
Not Applicable      
|       
|Item 6: |  | Exhibits and Reports on Form 8-K      
|       
|        |  | (a)   Exhibits
        None           
|       
|        |  | (b)   Reports on Form 8-K
        None

SIGNATURES

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

Date:  May 14, 2003

| |  |                                                                                                                     
| |  | --------------------------------------------------------------------------------------------------------------------
| |  | Varsity Group Inc.
By:                 /s/ JACK M BENSONJack M Benson
                       Chief Financial Officer





---



##### 



CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Eric J. Kuhn, certify that:



| |    |                                                                       
| | -- | ----------------------------------------------------------------------
| | 1. | I have reviewed this annual report on Form 10-Q of Varsity Group
Inc.;



| |    |                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;



| |    |                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;



| |    |                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:



| |    |                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;



| |    |                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and



| |    |                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) | Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and



| |    |                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

|                   |  |    |  |                                                    
|------------------ |  | -- |  | ---------------------------------------------------
|Date: May 14, 2003 |  | By |  | /s/ Eric J.KuhnEric J. Kuhn
Chief Executive Officer





---



##### 



CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Jack M. Benson, certify that:



| |    |                                                                       
| | -- | ----------------------------------------------------------------------
| | 1. | I have reviewed this annual report on Form 10-Q of Varsity Group
Inc.;



| |    |                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;



| |    |                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in
all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this annual report;



| |    |                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. | The registrants other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:



| |    |                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;



| |    |                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and



| |    |                                                                                                                                                                     
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) | Presented in this annual report our conclusions about
the effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrants auditors and
the audit committee of the registrants board of directors (or persons
performing the equivalent function):



| |    |                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors
any material weaknesses in internal controls; and



| |    |                                                                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

|                   |  |    |  |                                                       
|------------------ |  | -- |  | ------------------------------------------------------
|Date: May 14, 2003 |  | By |  | /s/ Jack M BensonJack M Benson
Chief Financial Officer