##### Table of Contents





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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 March 31, 2000

OR



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

For the transition period from
               to

               .

Commission file number 0-28977



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VARSITYBOOKS.COM INC.

(Exact Name of Registrant as Specified in Its
Charter)


|                                   |  |                                                  
|---------------------------------- |  | -------------------------------------------------
|                                  
|                                  
|                                  
|                                  
|Delaware
	(State of Incorporation) |  | 54-1876848
	(IRS Employer
	Identification Number)

2020 K Street, N.W., 6th Floor

Washington, D.C. 20006


(Address of Principal Executive Offices) (Zip
Code)


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



---

Not Applicable

(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 [   ]  NO [X]

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 10, 2000, the registrant had 15,702,749 shares
of common stock outstanding.









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TABLE OF CONTENTS



|                              |                                                                                               |  |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|PART II. OTHER INFORMATION   
|                              | Item 1: Legal Proceedings                                                                    
|                              | Item 2: Changes in Securities and Use of Proceeds                                            
|                              | Item 3:Defaults Upon Senior Securities                                                       
|                              | Item 4:Submission of Matters to a Vote of Security Holders                                   
|                              | Item 5:Other Information                                                                     
|                              | Item 6:Exhibits and Reports on Form 8-K                                                      
|                              | SIGNATURE                                                                                    



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VARSITYBOOKS.COM INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the quarter ended March 31, 2000


INDEX

|                              |  |                                                                                                     |  |             |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|                              |  |                                                                                                     |  | Page Number
|                              |  |                                                                                                     |  |            
|                             
|                             
|                             
|                             
|PART I: FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|Item 1:                       |  | Financial Statements                                                                                |  |             |    | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements Of Operations for the Three
	Months Ended March 31, 1999 and 2000 |  |             | 3  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Balance Sheets as of December 31,
	1999 and March 31, 2000                   |  |             | 4  | 
|                             
|                             
|                             
|                             
|                              |  | Condensed Consolidated Statements of Cash Flows for the Three
	Months Ended March 31, 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              |  |             | 9  | 
|                             
|                             
|                             
|                             
|Item 3:                       |  | Quantitative and Qualitative Disclosures About Market Risk                                          |  |             | 14 | 
|                             
|                             
|                             
|                             
|PART II: OTHER INFORMATION   
|                             
|                             
|                             
|                             
|Item 1:                       |  | Legal Proceedings                                                                                   |  |             | 15 | 
|                             
|                             
|                             
|                             
|Item 2:                       |  | Changes in Securities and Use of Proceeds                                                           |  |             | 15 | 
|                             
|                             
|                             
|                             
|Item 3:                       |  | Defaults Upon Senior Securities                                                                     |  |             | 16 | 
|                             
|                             
|                             
|                             
|Item 4:                       |  | Submission Of Matters to a Vote of Security Holders                                                 |  |             | 16 | 
|                             
|                             
|                             
|                             
|Item 5:                       |  | Other Information                                                                                   |  |             | 16 | 
|                             
|                             
|                             
|                             
|Item 6:                       |  | Exhibits and Reports on Form 8-K                                                                    |  |             | 16 | 

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION







Item 1.  Financial Statements


VARSITYBOOKS.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)


(unaudited)


|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |           |        |        | 
|------------------------------------------ | ------------------------------------------ | -------------------------------------------------------------------------------- | ------------------------------ | ------------------ | ----- | - | ------ | --------- | ----- | ----- | - | - | ------ | - | ------- | --------- | ------ | ------ | 
|                                           |                                            |                                                                                  |                                |                   
|                                           |                                            |                                                                                  |                                | Three Months Ended
|                                           |                                            |                                                                                  |                                | March 31,         
|                                           |                                            |                                                                                  |                                |                   
|                                           |                                            |                                                                                  |                                | 1999               |       |   |        | 2000     
|                                           |                                            |                                                                                  |                                |                    |       |   |        |          
|Net sales:                                 |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                          
|                                          
|                                          
|                                          
|                                           | Product                                    |                                                                                  |                                |                    |       |   | $      | 1,231     |       |       |   |   |        |   | $       | 11,306    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Shipping                                   |                                                                                  |                                |                    |       |   |        | 100       |       |       |   |   |        |   |         | 902       |       
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                           |                                            |                                                                                  | Total net sales                |                    |       |   |        |           |       | 1,331 |   |   |        |   |         |           |        | 12,208 | 
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Operating expenses:                        |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                          
|                                          
|                                          
|                                          
|                                           | Cost of product  related party            |                                                                                  |                                |                    |       |   |        | 1,161     |       |       |   |   |        |   |         | 10,444    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Cost of shipping  related party           |                                                                                  |                                |                    |       |   |        | 107       |       |       |   |   |        |   |         | 1,182     |       
|                                          
|                                          
|                                          
|                                          
|                                           | Equity transactions  related party        |                                                                                  |                                |                    |       |   |        | 169       |       |       |   |   |        |   |         |          |       
|                                          
|                                          
|                                          
|                                          
|                                           | Marketing and sales:                       |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |           |       
|                                          
|                                          
|                                          
|                                          
|                                           |                                            | Non-cash charges                                                                 |                                | $                  | 45    |   |        |           |       |       |   | $ | 738    |   |         |           |        |       
|                                          
|                                          
|                                          
|                                          
|                                           |                                            | Other marketing and sales (including $682 with related party at
	March 31, 2000) |                                |                    | 2,082 |   |        |           | 2,127 |       |   |   | 12,843 |   |         |           | 13,581 |       
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                           | Product development:                       |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |           |       
|                                          
|                                          
|                                          
|                                          
|                                           |                                            | Non-cash charges (benefit)                                                       |                                |                    | 7     |   |        |           |       |       |   |   | (38    | ) |         |           |        |       
|                                          
|                                          
|                                          
|                                          
|                                           |                                            | Other product development                                                        |                                |                    | 224   |   |        |           | 231   |       |   |   | 2,087  |   |         |           | 2,049  |       
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                           | General and administrative:                |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |           |       
|                                          
|                                          
|                                          
|                                          
|                                           |                                            | Non-cash charges                                                                 |                                |                    | 7     |   |        |           |       |       |   |   | 1,596  |   |         |           |        |       
|                                          
|                                          
|                                          
|                                          
|                                           |                                            | Other general and administrative                                                 |                                |                    | 486   |   |        |           | 493   |       |   |   | 2,410  |   |         |           | 4,006  |       
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                           |                                            |                                                                                  | Total operating expenses       |                    |       |   |        |           |       | 4,288 |   |   |        |   |         |           |        | 31,262 | 
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Loss from operations                       |                                            |                                                                                  |                                |                    |       |   | (2,957 | )         |       |       |   |   |        |   | (19,054 | )        
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Interest income (expense), net:            |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                          
|                                          
|                                          
|                                          
|                                           | Interest income                            |                                                                                  |                                |                    |       |   |        | 33        |       |       |   |   |        |   |         | 228       |       
|                                          
|                                          
|                                          
|                                          
|                                           | Interest expense                           |                                                                                  |                                |                    |       |   |        | (43       | )     |       |   |   |        |   |         | (17       | )     
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                           |                                            |                                                                                  | Interest income (expense), net |                    |       |   |        |           |       | (10   | ) |   |        |   |         |           |        | 211    | 
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Net loss                                   |                                            |                                                                                  |                                |                    |       |   | (2,967 | )         |       |       |   |   |        |   | (18,843 | )        
|                                          
|                                          
|                                          
|                                          
|Preferred stock dividends                  |                                            |                                                                                  |                                |                    |       |   | 72     |           |       |       |   |   |        |   |        |          
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Net loss applicable to common stockholders |                                            |                                                                                  |                                |                    |       | $ | (3,039 | )         |       |       |   |   |        | $ | (18,843 | )        
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Net loss per share (basic and diluted):    |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                          
|                                          
|                                          
|                                          
|                                           | Net loss                                   |                                                                                  |                                |                    |       |   | $      | (1.46     | )     |       |   |   |        |   | $       | (2.07     | )     
|                                          
|                                          
|                                          
|                                          
|                                           | Preferred stock dividends                  |                                                                                  |                                |                    |       |   |        | .03       |       |       |   |   |        |   |         |          |       
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                           | Net loss applicable to common stockholders |                                                                                  |                                |                    |       |   | $      | (1.49     | )     |       |   |   |        |   | $       | ( 2.07    | )     
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|Weighted average shares:                   |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          
|                                          
|                                          
|                                          
|                                          
|                                           | Basic and diluted                          |                                                                                  |                                |                    |       |   |        | 2,035,714 |       |       |   |   |        |   |         | 9,084,205 |       
|                                           |                                            |                                                                                  |                                |                    |       |   |        |           |       |       |   |   |        |   |         |          

See accompanying notes to condensed consolidated financial
statements.

3



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##### Table of Contents



VARSITYBOOKS.COM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)


|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |         |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------------- | ------ |  | ----- | ------- | ------ | 
|                                     |                                                                                                                                                                                                                   | December 31, 1999                          |       | March 31, 2000
|                                     |                                                                                                                                                                                                                   |                                            |       |               
|                                     |                                                                                                                                                                                                                   |                                            |       | (unaudited)   
|                                    
|                                    
|                                    
|                                    
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                      |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                                                                                                                         |                                            | $     | 7,813          |        |  | $     | 28,493  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Short-term investments                                                                                                                                                                                            |                                            |       | 480            |        |  |       | 480     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable (including $94 and $191 with related party at
	 December 31, 1999 and March 31, 2000, respectively),
	net of allowance for doubtful accounts of $100 at
	December 31, 1999 and March 31, 2000 |                                            |       | 626            |        |  |       | 1,295   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid marketing                                                                                                                                                                                                 |                                            |       | 4,625          |        |  |       | 1,272   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred charge                                                                                                                                                                                                   |                                            |       | 1,024          |        |  |       |        |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other                                                                                                                                                                                                             |                                            |       | 517            |        |  |       | 1,513   |       
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                     |                                                                                                                                                                                                                   | Total current assets                       |       |                | 15,085 |  |       |         | 33,053 | 
|                                    
|                                    
|                                    
|                                    
|Fixed assets, net                    |                                                                                                                                                                                                                   |                                            | 2,040 |                |        |  | 2,598 |        
|                                    
|                                    
|                                    
|                                    
|Other assets                         |                                                                                                                                                                                                                   |                                            | 937   |                |        |  | 837   |        
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                     |                                                                                                                                                                                                                   | Total assets                               |       | $              | 18,062 |  |       | $       | 36,488 | 
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                 |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                                                                                                                  |                                            | $     | 1,482          |        |  | $     | 1,655   |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued marketing expenses                                                                                                                                                                                        |                                            |       | 1,511          |        |  |       | 404     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Other accrued expenses and other current liabilities                                                                                                                                                              |                                            |       | 1,610          |        |  |       | 745     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Taxes payable                                                                                                                                                                                                     |                                            |       | 607            |        |  |       | 898     |       
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued employee compensation and benefits                                                                                                                                                                        |                                            |       | 712            |        |  |       | 1,268   |       
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                     |                                                                                                                                                                                                                   | Total current liabilities                  |       |                | 5,922  |  |       |         | 4,970  | 
|                                    
|                                    
|                                    
|                                    
|Long-term liabilities                |                                                                                                                                                                                                                   |                                            | 93    |                |        |  | 153   |        
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                     |                                                                                                                                                                                                                   | Total liabilities                          |       |                | 6,015  |  |       |         | 5,123  | 
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|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 15,695,843 shares issued and
	outstanding at December 31, 1999 and March 31, 2000,
	respectively                      |                                            |       |               |        |  |       | 2       |       
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                                                                                                                                        |                                            |       | 53,707         |        |  |       | 94,753  |       
|                                    
|                                    
|                                    
|                                    
|                                     | Warrant subscription receivable and other                                                                                                                                                                         |                                            |       |               |        |  |       | (2,552  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Notes receivable from stockholders                                                                                                                                                                                |                                            |       | (124           | )      |  |       | (124    | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred compensation                                                                                                                                                                                             |                                            |       | (7,341         | )      |  |       | (7,674  | )     
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                                                                                                                                                                                               |                                            |       | (34,197        | )      |  |       | (53,040 | )     
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                     |                                                                                                                                                                                                                   | Total stockholders equity                 |       |                | 12,047 |  |       |         | 31,365 | 
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        
|                                     |                                                                                                                                                                                                                   | Total liabilities and stockholders equity |       | $              | 18,062 |  |       | $       | 36,488 | 
|                                     |                                                                                                                                                                                                                   |                                            |       |                |        |  |       |        

See accompanying notes to condensed consolidated financial
statements.

4



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##### Table of Contents



VARSITYBOOKS.COM INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


(unaudited)


|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |         |       |        |         |  
|--------------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------------------------------------------------- | -------------------------------------------------------------------- | --- | --- | ------ | ------- | ----- | ------ | ------- | -
|                                                                      |                                                                              |                                                                                        
|                                                                      |                                                                              | Three Months Ended                                                                     
|                                                                      |                                                                              | March 31,                                                                              
|                                                                      |                                                                              |                                                                                        
|                                                                      |                                                                              | 1999                                                                                    |                                                      | 2000                                                                
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                     
|Operating activities:                                                 |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Net loss                                                                     |                                                                                         | $                                                    | (2,967                                                               | )   |     | $      | (18,843 | )    
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Adjustments to reconcile net loss to net cash used in operating
	activities: |                                                                                         |                                                      |                                                                      |     |     |        |         |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              | Depreciation and amortization                                                           |                                                      |                                                                      | 11  |     |        |         | 245   |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              | Non-cash charges                                                                        |                                                      |                                                                      | 58  |     |        |         | 2,295 |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              | Amortization of discount on convertible notes payable                                   |                                                      |                                                                      | 12  |     |        |         |      |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              | Equity transactions with related party and interest expense
	related to warrants issued |                                                      |                                                                      | 201 |     |        |         |      |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              | Changes in operating assets and liabilities:                                            |                                                      |                                                                      |     |     |        |         |       |       
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Accounts receivable, net                             |                                                                      |     | (51 | )      |         |       | (668   | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Prepaid marketing                                    |                                                                      |     |    |        |         |       | 3,353  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Deferred charges                                     |                                                                      |     |    |        |         |       | 1,024  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Other current assets                                 |                                                                      |     | 164 |        |         |       | (912   | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Accounts payable                                     |                                                                      |     | 56  |        |         |       | 173    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Accrued marketing expenses                           |                                                                      |     |    |        |         |       | (1,106 | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Other accrued expenses and other current liabilities |                                                                      |     | (1  | )      |         |       | (865   | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Taxes payable                                        |                                                                      |     | 77  |        |         |       | 291    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Accrued employee compensation and benefits           |                                                                      |     | 9   |        |         |       | 556    |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                              |                                                                                         | Other non-current liabilities                        |                                                                      |     |    |        |         |       | 60     |        
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                      |                                                                              |                                                                                         |                                                      | Net cash used in operating activities                                |     |     | (2,431 | )       |       |        | (14,397 | )
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|Investing activities:                                                 |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Additions to fixed assets                                                    |                                                                                         |                                                      | (49                                                                  | )   |     |        | (804    | )    
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                      |                                                                              |                                                                                         |                                                      | Net cash used in investing activities                                |     |     | (49    | )       |       |        | (804    | )
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|Financing activities:                                                 |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Net proceeds from issuance of preferred stock                                |                                                                                         |                                                      | 8,483                                                                |     |     |        |        |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Net proceeds from issuance of common stock                                   |                                                                                         |                                                      |                                                                     |     |     |        | 35,881  |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Proceeds from note payable                                                   |                                                                                         |                                                      |                                                                     |     |     |        | 2,500   |      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Repayment of note payable                                                    |                                                                                         |                                                      |                                                                     |     |     |        | (2,500  | )    
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                      |                                                                              |                                                                                         |                                                      | Net cash provided by financing activities                            |     |     | 8,483  |         |       |        | 35,881  |  
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|Net increase in cash and cash equivalents                             |                                                                              |                                                                                         | 6,003                                                |                                                                      |     |     | 20,680 |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Cash and cash equivalents at beginning of period                      |                                                                              |                                                                                         | 1,481                                                |                                                                      |     |     | 7,813  |        
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|Cash and cash equivalents at end of period                            |                                                                              | $                                                                                       | 7,484                                                |                                                                      |     | $   | 28,493 |        
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|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                            |     | $   |       |         |       | $      | 2,601   |  
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        
|                                                                      |                                                                              |                                                                                         |                                                      | Deferred charge from issuance of warrants                            |     | $   |       |         |       | $      | 92      |  
|                                                                      |                                                                              |                                                                                         |                                                      |                                                                      |     |     |        |        

See accompanying notes to condensed consolidated financial
statements.

5



---



##### Table of Contents



VARSITYBOOKS.COM INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


Note 1:  Description of Operations

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 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
March 31, 2000, approximately $5.3 million had been
used for working capital purposes. The balance of approximately
$28.1 million was invested in cash and cash equivalents at
March 31, 2000.

Note 2:  Basis of Presentation

The condensed consolidated financial statements of
VarsityBooks.com 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 disclosures 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 a revolving credit
 agreement with Imperial 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 (9.0% at March 31, 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 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 March 31, 2000 with the exception of a letter
of credit in the amount of $0.2 million.

6



---



##### Table of Contents



VARSITYBOOKS.COM INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)


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
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 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 partnership
school referrals Sallie Mae delivers during that period. The
Company believes 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 March 31, 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
$50,000 was recorded as of March 31, 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
March 31, 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 second quarter of 2000.

Note 5:  Stock-Based Compensation

On October 2, 1998, the Company adopted the 1998 Stock Plan,
 under which incentive stock options, non-qualified stock options
 or stock rights, or any combination thereof may be granted to
the Companys employees. The board of directors, or a
Committee appointed by the board, administers the Plan and

7



---



##### Table of Contents



VARSITYBOOKS.COM INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(unaudited)




Note 5:  Stock-Based
Compensation  (Continued)


determines the individuals to whom options will be granted, the
number of options granted, the exercise price and vesting
schedule. Options are exercisable at prices established at the
date of grant and have a term of ten years. Generally, options
vest over a 4 year period (25% at the end of 12 months and  
 1/36 per month thereafter until fully vested). Vested options
held at the date of termination may be exercised within three
months. The board of directors may terminate the Plan at anytime.

Stock option activity was as follows:

|                               |                             |                |       |          |   |          |   |            |  |  |      |       | 
|------------------------------ | --------------------------- | -------------- | ----- | -------- | - | -------- | - | ---------- |  |  | ---- | ----- | 
|                               |                             |                |       |          |   | Weighted
|                               |                             | Number of      |       |          |   | Average 
|                               |                             | Stock          |       | Exercise |   | Exercise
|                               |                             | Options        |       | Price    |   | Price   
|                               |                             |                |       |          |   |         
|                               |                             | (in thousands) |       |          |   |         
|                              
|                              
|                              
|                              
|Outstanding, December 31, 1997 |                             |                |      |          |   |          |  |            |  |  |     |      
|                              
|                              
|                              
|                              
|                               | Granted                     |                |       | 179      |   |          | $ | 0.20-$0.30 |  |  | $    | 0.21  | 
|                              
|                              
|                              
|                              
|                               | Exercised                   |                |       |         |   |          |   |           |  |  |      |      | 
|                              
|                              
|                              
|                              
|                               | Cancelled                   |                |       |         |   |          |   |           |  |  |      |      | 
|                               |                             |                |       |          |   |          |   |            |  |  |      |      
|Outstanding, December 31, 1998 |                             |                | 179   |          |   |          |  |            |  |  | 0.21 |      
|                              
|                              
|                              
|                              
|                               | Granted                     |                |       | 2,112    |   |          |   | 0.20-10.00 |  |  |      | 4.82  | 
|                              
|                              
|                              
|                              
|                               | Exercised                   |                |       | (124     | ) |          |   | 0.20-6.04  |  |  |      | 0.31  | 
|                              
|                              
|                              
|                              
|                               | Cancelled                   |                |       | (315     | ) |          |   | 0.20-10.00 |  |  |      | 1.17  | 
|                               |                             |                |       |          |   |          |   |            |  |  |      |      
|Outstanding, December 31, 1999 |                             |                | 1,852 |          |   |          |  |            |  |  | 5.30 |      
|                              
|                              
|                              
|                              
|                               | Granted                     |                |       | 587      |   |          |   | 10.00      |  |  |      | 10.00 | 
|                              
|                              
|                              
|                              
|                               | Exercised                   |                |       | (36      | ) |          |   | 0.20-6.04  |  |  |      | 0.30  | 
|                              
|                              
|                              
|                              
|                               | Cancelled                   |                |       | (171     | ) |          |   | 0.30-10.00 |  |  |      | 3.87  | 
|                               |                             |                |       |          |   |          |   |            |  |  |      |      
|                               | Outstanding, March 31, 2000 |                |       | 2,232    |   |          |   |            |  |  |      | 6.73  | 
|                               |                             |                |       |          |   |          |   |            |  |  |      |      

The Company has reserved an additional 1.6 million shares of
 its common stock for future option grants. There are
4.0 million shares authorized under the Companys Stock
 Option Plan.

The following table summarizes information about options at
March 31, 2000.

|          |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |     |  |  |   |       | 
|--------- |  | ------------------- | ----- | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | --- |  |  | - | ----- | 
|          |  |                     |       |                    
|          |  | Options Outstanding |       | Options Exercisable
|          |  |                     |       |                    
|Range of  |  |                     |       | Weighted Avg.       |  | Weighted       |      |                |  | Weighted      
|Exercise  |  | Number              |       | Remaining           |  | Avg.           |      | Number         |  | Avg.          
|Price     |  | Outstanding         |       | Contractual Life    |  | Exercise Price |      | Outstanding    |  | Exercise Price
|          |  |                     |       |                     |  |                |      |                |  |               
|          |  | (in thousands)      |       | (years)             |  |                |      | (in thousands) |  |               
|$.20-$.30 |  |                     | 663   |                     |  |                | 9.10 |                |  | $              | 0.29  |  |  |  | 69  |  |  | $ | 0.29  | 
|$6.04     |  |                     | 166   |                     |  |                | 9.46 |                |  |                | 6.04  |  |  |  | 14  |  |  |   | 6.04  | 
|$8.00     |  |                     | 109   |                     |  |                | 9.54 |                |  |                | 8.00  |  |  |  |    |  |  |   | 8.00  | 
|$10.00    |  |                     | 1,294 |                     |  |                | 9.74 |                |  |                | 10.00 |  |  |  | 24  |  |  |   | 10.00 | 
|          |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |     |  |  |   |       | 
|          |  |                     | 2,232 |                     |  |                | 9.52 |                |  |                | 6.73  |  |  |  | 107 |  |  |   | 3.20  | 
|          |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |     |  |  |   |       | 

8



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##### Table of Contents






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, 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-10K 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 service
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 sale 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.

9



---



##### Table of Contents



During the fourth quarter of fiscal 1999, we began generating
revenues from marketing programs for which we used our student
representative network to market to students on behalf of other
businesses. In May 2000, we announced a shift in our business to
focus on expanding our higher margin marketing services business.
 In addition, as part of this shift, we intend to lower the
overall operating expenses of our book retail 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 three month period
ended March 31, 2000, we incurred a loss from operations of
$19.1 million and negative cash flows from operations of
$14.4 million. As of December 31, 1999 and
March 31, 2000, we had accumulated deficits of
$34.2 million and $53.0 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 Ended      
|                               |                                     | March 31,               
|                               |                                     |                         
|                               |                                     | 1999                     |        | 2000 
|                               |                                     |                          |        |      
|Net Sales:                     |                                     |                          |        |       |       |  |        |      
|                              
|                              
|                              
|                              
|                               | Product                             |                          |        | 92.5  | %     |  |        | 92.6  | %    
|                              
|                              
|                              
|                              
|                               | Shipping                            |                          |        | 7.5   |       |  |        | 7.4   |      
|                               |                                     |                          |        |       |       |  |        |      
|                               |                                     | Total net sales          |        |       | 100.0 |  |        |       | 100.0 | 
|                               |                                     |                          |        |       |       |  |        |      
|Operating expenses:            |                                     |                          |        |       |       |  |        |      
|                              
|                              
|                              
|                              
|                               | Cost of product  related party     |                          |        | 87.2  |       |  |        | 85.6  |      
|                              
|                              
|                              
|                              
|                               | Cost of shipping  related party    |                          |        | 8.1   |       |  |        | 9.7   |      
|                              
|                              
|                              
|                              
|                               | Equity transactions  related party |                          |        | 12.7  |       |  |        |      |      
|                              
|                              
|                              
|                              
|                               | Marketing and sales                 |                          |        | 159.8 |       |  |        | 111.2 |      
|                              
|                              
|                              
|                              
|                               | Product development                 |                          |        | 17.4  |       |  |        | 16.8  |      
|                              
|                              
|                              
|                              
|                               | General and administrative          |                          |        | 37.0  |       |  |        | 32.8  |      
|                               |                                     |                          |        |       |       |  |        |      
|                               |                                     | Total operating expenses |        |       | 322.2 |  |        |       | 256.1 | 
|                               |                                     |                          |        |       |       |  |        |      
|Loss from operations           |                                     |                          | (222.2 | )     |       |  | (156.1 | )    
|                              
|                              
|                              
|                              
|Interest income (expense), net |                                     |                          | (0.7   | )     |       |  | 1.7    |      
|                               |                                     |                          |        |       |       |  |        |      
|Net loss                       |                                     |                          | (222.9 | )%    |       |  | (154.4 | )%   
|                               |                                     |                          |        |       |       |  |        |      

Three Months Ended March 31, 2000

compared to


Three Months Ended March 31, 1999


Net Sales

Net sales increased to $12.2 million for the three months
ended March 31, 2000 from $1.3 million for three months
 ended March 31, 1999, as a result of the significant growth
 in orders primarily from our expanding customer base. In
addition, marketing services sales increased to $0.3 million
 for the three months ended March 31, 2000. There were no
marketing services sales during the three months ended
March 31, 1999.

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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
$10.4 million for the three months ended March 31, 2000
 from $1.2 million for the three months ended March 31,
 1999. This increase was primarily attributable to our increased
sales volume. We expect that cost of product-related party will
continue to increase as we expand our customer base.

Cost of Shipping-Related Party (Baker & Taylor).Cost
of shipping-related party consists of outbound shipping. Cost of
shipping increased to $1.2 million for the three months
ended March 31, 2000 from approximately $0.1 million
for the three months ended March 31, 1999. This increase was
 primarily attributable to our increased sales volume. Also for
the three months ended March 31, 2000, cost of
shipping-related party exceeded shipping revenue by
$0.3 million or 31.0%. 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. We expect that cost of shipping-related party
 will continue to exceed shipping revenue and will increase as we
 expand our customer base.

Effective October 1, 1999 we amended the documents governing
 our relationship with Baker & Taylor. The amendment provides
 for assignment of separate values to the separate services
provided by Baker and Taylor: supply of books, shipping and other
 services, including Web site content and customer database
management. Such assignment is based on the relative fair value
of each element as determined by Baker & Taylor. Effective
with the amendment of our agreement with Baker & Taylor on
October 1, 1999, we have included in cost of
product-related party in our statement of operations the
cost of purchased books from Baker & Taylor, we included in
shipping-related party the cost of shipping charges
from Baker & Taylor and we included in marketing and
sales the cost of other services charged from Baker and
Taylor.

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
$0.2 million for the three months ended March 31, 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 $13.6 million for the three months ended
March 31, 2000 from $2.1 million for the three months
ended March 31, 1999. This increase was primarily
attributable to the expansion of our online and offline
advertising, increased personnel and related expenses and the
continued expansion of our network of student representatives and
 partnership program. Included in marketing and sales is
advertising expense. Advertising expense increased to
$6.5 million for the three months ended March 31, 2000
from $1.5 million for the three months ended March 31,
1999. Advertising expense increased as we continued our efforts
to increase our customer base. Also included in marketing and
sales is $0.7 million and less than $0.1 million of
non-cash charges for the three months ended March 31, 2000
and 1999, respectively. Non-cash charges consist of the
amortization of deferred compensation and charges related to
warrants issued under the AOL/ICQ, Inc. and Sallie Mae
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
$2.0 million for the three months ended March 31, 2000
from $0.2 million for the three months ended March 31,
1999. This increase was primarily attributable to increased
staffing and other costs related to the maintenance and content
of our Web site.

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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 $4.0 million for the
 three months ended March 31, 2000 from $0.5 million
for the three months ended December 31, 1999. This increase
was primarily attributable to the hiring of additional personnel
and increased professional services expenses. Included in general
 and administrative expenses is $1.6 million and less than
$0.1 million of non-cash charges for the three months ended
March 31, 2000 and 1999, respectively. Non-cash charges
increased primarily as a result of additional options grants and
the accelerated vesting of shares of our former Executive Vice
President of Development.

Interest Income (expense), net

Interest income (expense), net consists of interest income on our
 cash and cash equivalents and investments, and interest expense
attributable to our convertible notes payable at March 31,
1999 and credit facility at March 31, 2000. Interest income,
 net was $0.2 million for the three months ended
March 31, 2000 compared to interest expense, net of less
than $0.1 million for the three months ended March 31,
1999. This change was primarily attributable to interest income
on higher average cash, cash equivalent and short-term investment
 balances during the three months ended March 31, 2000.

Income Taxes

As of March 31, 2000 we had net operating loss carryforwards
 for federal income tax purposes of $46.2 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

Since inception, we have financed our operations primarily
through private sales of 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
granted to AOL when we entered into the product promotion
agreement with Sallie Mae, with an exercise price of $10 per
share. Of the aggregate of 528,738 shares subject to purchase
under these warrants, 176,245 are immediately exercisable and the
 remaining 352,493 shares will vest over the next three years
based on ICQs performance under our interactive marketing
agreement.

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

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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 March 31, 2000,
approximately $5.3 million had been used for working capital
 purposes. The balance of approximately $28.1 million was
invested in cash and cash equivalents at March 31, 2000.

As of March 31, 2000, prepaid marketing expenses were
$1.3 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 costs 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 $14.4 million for
the three months ended March 31, 2000, compared to
$2.4 million for the three months ended March 31, 1999,
 consisting primarily of net losses adjusted for changes in
accounts receivable, accounts payable and accrued expenses.

Net cash used in investing activities was $0.8 million for
the three months ended March 31, 2000, and less than
$0.1 million for the three months ended March 31, 1999,
consisting primarily of purchases of computer equipment and
furniture and fixtures totaling $0.5 million and
$0.1 million at March 31, 2000 and 1999, respectively.
Also, for the three months ended March 31, 2000, the Company
 capitalized $0.3 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 $35.9 million
for the three months ended March 31, 2000 and
$8.5 million for the three months ended March 31, 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 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 (9.0% at March 31, 2000) plus 1.0% until the closing
of our 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 our
assets. Under the terms of the credit facility, as amended, we
must maintain 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 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 March 31, 2000 with the exception of a letter
of credit in the amount of $0.2 million.

We expect that operating losses and negative cash flows will
continue until at least the second half of 2001. As part of the
shift in our focus to concentrate on increasing the number of
companies for whom we provide higher margin marketing services,
we anticipate that costs and expenses related to brand
development, marketing and other promotional activities
associated with our book retail business will decrease from
current levels. Although this is 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, this shift 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

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We currently anticipate that the net proceeds of our initial
public offering, together with funds available under the
revolving credit facility, will be sufficient to meet our
anticipated needs for working capital and capital expenditures
into the first 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 March 31, 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.

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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 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 believes these claims to be without merit. The
Companys Web site and its advertising truthfully state that
 it offers college textbooks at up to 40% off suggested price.
The Company also believes that the industry data it uses to
determine the suggested price from which it calculates discounts
is appropriate. The Company has filed a motion to dismiss these
claims and is awaiting a ruling on its motion.

Management does not believe this lawsuit, even if adversely
decided, will have a material effect on the results of operations
 or financial condition of the Company.




Item 2:  Changes in Securities and Use of
Proceeds

Our Registration Statement on Form S-1 (File No. 333-89049)
was declared effective by the SEC on February 15, 2000. A
total of 4,075,000 shares of our common stock was registered with
 the SEC, 4,000,000 of which were registered on behalf of the
Company and 75,000 of which were registered on behalf of the
selling stockholders. The offering commenced on February 15,
 2000, and all 4,075,000 shares of common stock were sold for an
aggregate registered offering price of $40,750,000 through a
syndicate of underwriters, consisting of FleetBoston Robertson
Stephens Inc., Thomas Weisel Partners LLC, Friedman, Billings,
Ramsey & Co., Inc. and DLJdirect Inc. The sale of all
of the registered shares closed on February 17, 2000.

In March 2000, we sold an additional 35,000 shares of common
stock pursuant to the exercise of the underwriters
over-allotment option for an aggregate purchase price of
$350,000. All of the additional shares of common stock were sold
on behalf of the Company.

From the effective date of the initial public offering to
March 31, 2000, we paid the underwriters underwriting
discounts and commissions totaling $2.8 million in
connection with the offering. In addition, we incurred additional
 expenses of approximately $1.7 million in connection with
the offering, which, when added to the underwriting discounts and
 commissions paid by us amounts to total expenses of
$4.5 million. Thus the net offering proceeds to us (after
deducting underwriting discounts and commissions and estimated
offering expenses) were approximately $35.9 million. No
offering expenses were made directly or indirectly to any
directors or officers of the Company, or any of their associates,
 persons owning ten percent (10%) or more of any class of equity
securities of the Company, or to any other of our affiliates.

As of March 31, 2000, we had used the estimated aggregate
net proceeds of $35.9 million that we had received from our
initial public offering as follows:

|                                                    |  |   |      |        
|--------------------------------------------------- |  | - | ---- | -------
|                                                   
|                                                   
|                                                   
|                                                   
|Repayment of indebtedness:                          |  | $ | 2.5  |        
|                                                   
|                                                   
|                                                   
|                                                   
|Working capital:                                    |  | $ | 5.3  | million
|                                                   
|                                                   
|                                                   
|                                                   
|Temporary investments in cash and cash equivalents: |  | $ | 28.1 | million

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Item 3:     Defaults Upon Senior
 Securities






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






Item 5:     Other Information






Item 6:     Exhibits and Reports
 on Form 8-K

| |  |                         |                                             |                                                                                                                                             
| |  | ----------------------- | ------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | (a) Exhibits           
| |  |                         | 11-Computation of Earnings Per Common Share
| |  |                         | 27-Financial Data Schedule                 
| |  | (b) Reports on Form 8-K
| |  |                         |                                             | On March 6, 2000, the Company filed a Current Report on
	Form 8-K which reported its fourth quarter and year-end
	results for calendar 1999.

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SIGNATURE

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.



| |                                                           
| | ----------------------------------------------------------
| | VarsityBooks.com Inc.                                     
|
| | Signed: /s/ RICHARD HOZIK                                 
| | _________________________________________ 
	 Richard Hozik
| | Senior Vice President, Treasurer                          
| | And Chief Financial Officer                               



17