<PAGE>   1

================================================================================
                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, 2001

                                      OR

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

     FOR THE TRANSITION PERIOD FROM ________ TO ________.

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

                         COMMISSION FILE NUMBER 0-28977

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

                               VARSITY GROUP INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                             54-1876848
    (STATE OF INCORPORATION)            IRS EMPLOYER (IDENTIFICATION NUMBER)

   1825 EYE ST., NW, SUITE 400                      20006
        WASHINGTON, D.C.                          (ZIP CODE)
 (ADDRESS OF PRINCIPAL EXECUTIVE
            OFFICES)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (202) 667-3400

             (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF
                          CHANGED, SINCE LAST REPORT.)

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

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

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

     As of April 20, 2001, the registrant had 16,384,770 shares of common stock
outstanding.

================================================================================

<PAGE>   2

                       VARSITY GROUP INC. AND SUBSIDIARIES

                          QUARTERLY REPORT ON FORM 10-Q
                      FOR THE QUARTER ENDED MARCH 31, 2001

                                      INDEX


<TABLE>
<CAPTION>
                                                                                    PAGE NUMBER
                                                                                    -----------
<S>       <C>                                                                         <C>
          PART I. FINANCIAL INFORMATION

Item 1.   Financial Statements

          Condensed consolidated statements of operations for the three months          3
          ended March 31, 2000 and 2001

          Condensed consolidated balance sheets as of December 31, 2000 and             4
          March 31, 2001

          Condensed consolidated statements of cash flows for the three months          5
          ended March 31, 2000 and 2001

          Notes to condensed consolidated financial statements                          6

Item 2.   Management's Discussion and Analysis of Financial Condition and               6
          Results of Operations

Item 3.   Quantitative and Qualitative Disclosures About Market Risk                   16

          PART II. OTHER INFORMATION

Item 1.   Legal Proceedings                                                            17

Item 2.   Changes in Securities                                                        17

Item 3.   Defaults Upon Senior Securities                                              17

Item 4.   Submission of Matters to a Vote of Security Holders                          17

Item 5.   Other Information                                                            17

Item 6.   Exhibits and Reports on Form 8-K                                             17
</TABLE>


                                       2
<PAGE>   3


                                     PART I.
                              FINANCIAL INFORMATION

ITEM 1:  FINANCIAL STATEMENTS
                               VARSITY GROUP INC.

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

<TABLE>
<CAPTION>
                                                                     THREE MONTHS
                                                                        ENDED
                                                                       MARCH 31,
                                                          ------------------------------------
                                                            2000                       2001
                                                          ---------                  ---------
<S>                                           <C>         <C>              <C>       <C>
Net sales:
 Books                                                    $  11,006                  $   1,135
 Shipping                                                       902                        139
 Marketing services                                             300                        247
                                                          ---------                  ---------
   Total net sales                                           12,208                      1,521
                                                          ---------                  ---------
Operating expenses:
 Cost of books-related party                                 10,444                      1,011
 Cost of shipping-related party                               1,182                         98
 Cost of marketing services                                     -                           25

 Marketing and sales:
   Non-cash charges                                             738                          8
   Other marketing and sales (including
    $63 and $682
    with related party for three and
    three months ended
    March 31, 2001 and 2000 respectively)       12,843       13,581           340          348
                                              --------    ---------        ------   ----------
 Product development:
   Non-cash charges                                (38)                        (4)
   Other product development                     2,087        2,049           136          132
                                              --------    ---------        ------   ----------
 General and administrative:
   Non-cash charges                              1,596                        271
   Other general and administrative              2,410        4,006         1,212        1,483
                                              --------    ---------        ------   ----------
                Total operating expenses                     31,262                      3,097
                                                          ---------                 ----------
Loss from operations                                        (19,054)                    (1,576)
Other income (expense), net:
   Interest income                                              228                        188
   Interest expense                                             (17)                        -
   Other income                                                  -                          58
                                                          ---------                 ----------
   Other income (expense), net                                  211                        246

Net loss                                                  $ (18,843)                $   (1,330)
                                                          ---------                 ----------
Net loss per share (basic and diluted):
   Net loss                                               $   (2.07)                $    (0.08)
                                                          ---------                 ----------
Weighted average shares:
   Basic and diluted                                      9,084,205                 16,154,996
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>   4

                               VARSITY GROUP INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                            DECEMBER 31, 2000    MARCH 31, 2001
                                                                            -----------------    --------------
                                                                                                   (UNAUDITED)
<S>                                                                                <C>              <C>
Current assets:
     Cash and cash equivalents                                                     $ 15,446         $ 15,609
     Restricted cash                                                                    264               --

     Short-term investments                                                             480              480
     Accounts receivable, net of allowance of doubtful accounts of $236 at
         December 31, 2000 and $162 at March 31, 2001                                 1,244              425

     Prepaid marketing                                                                    5               --

     Other                                                                              710              468
                                                                                   --------         --------
         Total current assets                                                        16,982
                                                                                                      18,149

Fixed assets, net                                                                     1,436            1,151

Other assets                                                                            396              343
                                                                                   --------         --------
         Total assets                                                              $ 19,981         $ 18,476
                                                                                   ========         ========

                                            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable                                                              $    910         $    422
     Accrued marketing expenses                                                          44               32
     Deferred revenue                                                                   201              251
     Other accrued expenses and other current liabilities                               301               80
     Lease liability                                                                    368               --
     Taxes payable                                                                      821              823

     Accrued employee compensation and benefits                                          91               34
                                                                                   --------         --------
         Total current liabilities                                                    2,736            1,642


Long-term liabilities                                                                   131               --
                                                                                   --------         --------
         Total liabilities                                                            2,867            1,642
                                                                                   --------         --------
Stockholders' equity:
     Series A convertible preferred stock: $.0001 par value, 2,071,420
     shares authorized; 0 shares issued and outstanding                                  --               --
     Series B convertible preferred stock: $.0001 par value, 6,933,806
     shares authorized; 0 shares issued and outstanding                                  --               --
     Series C convertible preferred stock: $.0001 par value, 9,755,633
     shares authorized; 0 shares issued and outstanding                                  --               --
     Preferred stock: $.0001 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,
         16,152,218 and 16,434,770 shares issued and outstanding at December
         31, 2000 and March 31, 2001, respectively                                        2                2

     Additional paid-in capital                                                      87,287           87,318

     Warrant subscription receivable and other                                         (707)              --

     Notes Receivable from stockholders                                                (124)             (62)

     Deferred compensation                                                           (1,123)            (873)

     Accumulated deficit                                                            (68,221)         (69,551)
                                                                                   --------         --------
         Total stockholders' equity                                                  17,114           16,834
                                                                                   --------         --------
         Total liabilities and stockholders' equity                                $ 19,981           18,476
                                                                                   ========         ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.



                                       4
<PAGE>   5

                               VARSITY GROUP INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                          THREE MONTHS ENDED
                                                                                MARCH 31,
                                                                       -------------------------
                                                                          2000            2001
                                                                       --------         --------
<S>                                                                    <C>              <C>
Operating activities:
  Net loss                                                             $(18,843)        $ (1,330)
Adjustments to reconcile net loss to net cash used in operating
activities:
  Depreciation and amortization                                             245              285
  Bad debt expense                                                           --              (74)
  Gain on sale of fixed assets                                               --              (58)
  Non-cash compensation                                                   2,295              336
  Changes in operating assets and liabilities:
      Accounts receivable, net                                             (668)             893
      Prepaid marketing                                                   3,353                5
      Deferred charge                                                     1,024               --
      Other current assets                                                 (912)             242
      Accounts payable                                                      173             (488)
      Accrued marketing expenses                                         (1,106)             (12)
      Lease liability                                                        --             (368)
      Deferred revenue                                                       --               50
      Other accrued expenses and other current liabilities                 (865)            (221)
      Taxes payable                                                         291                2
      Accrued employee compensation and benefits                            556              (57)
      Other non-current liabilities                                          60             (131)
      Other non-current assets                                               --               53
                                                                       --------         --------
          Net cash used in operating activities                         (14,397)            (873)
                                                                       --------         --------
Investing activities:
  Additions to fixed assets                                                (804)              --
  Proceeds from sale of fixed assets                                         --               58
                                                                       --------         --------

          Net cash used in investing activities                            (804)              58
                                                                       --------         --------

Financing activities:
  Proceeds from issuance of common stock                                 35,881               --
  Proceeds from exercise of stock options                                    --                7
  Proceeds from notes payable                                             2,500               --
  Repayment of notes payable                                             (2,500)              --
  Proceeds from warrant subscription receivable                              --              707
                                                                       --------         --------
          Net cash provided by financing activities                      35,881              714
                                                                       --------         --------

Net increase in cash and cash equivalents                                20,680             (101)
Cash and cash equivalents at beginning of period                          7,813           15,710
Cash and cash equivalents at end of period                             $ 28,493         $ 15,609
                                                                       ========         ========
Supplemental disclosure of cash flow information:
  Cash paid for income taxes and interest                              $     17         $     16
                                                                       ========         ========
  Warrant subscription receivable and other                               2,601         $     --
                                                                       ========         ========
  Deferred charge from issuance of warrants                            $     92         $     --
                                                                       ========         ========
</TABLE>


           See accompanying notes to consolidated financial statements


                                       5
<PAGE>   6

                       VARSITY GROUP INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1: DESCRIPTION OF OPERATIONS

      Varsity Group Inc., a leading online retailer of new textbooks and a
provider of marketing services for businesses interested in reaching the college
and private middle and high school markets, was incorporated on December 16,
1997 and launched its Website in August 1998, at which time the Company began
generating revenues. In August 1999, the Company established two wholly owned
subsidiaries, CollegeImpact.com, Inc. and VarsityBooks.com, LLC (formerly
CollegeOps.com LLC), to assist in the overall management of its marketing and
retailing activities, respectively.

      In February 2000, we issued 4,000,000 shares of Common Stock at an initial
public offering price of $10.00 per share. In March 2000, we sold an additional
35,000 shares pursuant to the exercise of the underwriters' over-allotment
option at $10.00 per share. Total net proceeds were approximately $35.9 million.

NOTE 2: BASIS OF PRESENTATION

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

      Certain information and footnote disclosure normally included in the
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The interim financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000. Operating results for the interim periods
are not necessarily indicative of results for an entire year.

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

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FORWARD LOOKING STATEMENTS

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

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

      Readers are also urged to carefully review and consider the various
disclosures made by us that attempt to advise interested parties of the factors
which affect our business, including without limitation the disclosures made
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein and under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Risk Factors" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 and other reports and filings made with the Securities
and Exchange Commission.


OVERVIEW

     We are a leading online retailer of new textbooks and we provide marketing
services to other businesses interested in reaching the nation's 15 million
college students and 2.5 million private middle and secondary school 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:

     |X|  developing our business model;

     |X|  establishing, negotiating and consummating a relationship with our
          supplier, Baker & Taylor;

     |X|  initial planning and development of our Web site;


                                       6
<PAGE>   7

     |X|  developing our information systems infrastructure;

     |X|  developing our marketing plans; and

     |X|  establishing finance and administrative functions.

We began to generate sales when we launched our Web site in August 1998. To
date, our revenues have consisted primarily of sales of new textbooks. In
January 1999 we created eduPartners, whereby we become the exclusive provider of
new books and learning materials to a variety of learning institutions. This
program is a cost-effective model that enables us to increase the number of
customers to our Web site and generate book sales.

We also generate revenue from online marketing agreements, as well as offline
marketing service agreements for which we use College Impact, our student
representative network. During the fourth quarter of fiscal 1999, we began
generating revenues from marketing programs. We have signed marketing services
agreements with a number of public and private companies, including AT&T
Wireless Services, Inc., Palm, Inc., Papa John's International, Inc. and Ben &
Jerry's Homemade, Inc. We continue to develop marketing services agreements with
businesses that are seeking to reach the college and private middle and high
school markets.

In addition, we have continued to successfully lower the overall expenses of our
retail book business through various means, including the imposition of
increased retail pricing. We base our current and future expense levels on our
operating plans and estimates of future revenues. In view of the rapidly
evolving nature of our business and our limited operating history, we have
little experience forecasting our revenues. Therefore, we believe that
period-to-period comparisons of our financial results might not necessarily be
meaningful and you should not rely on them as indication of future performance.
If we cannot achieve and sustain profitability or positive cash flow from
operations, we may be unable to meet our working capital requirements or to
obtain additional financing, which would adversely affect our business and may
cause us to discontinue operations.

We have incurred losses and negative cash flows from operations in every fiscal
period since our inception. For the year ended December 31, 1998, we incurred a
loss from operations of approximately $2.7 million and negative cash flows from
operations of $1.2 million. For the year ended December 31, 1999, we incurred a
loss from operations of approximately $31.9 million and negative cash flows from
operations of $29.4 million. For the year ended December 31, 2000, we incurred a
loss from operations of approximately $34.6 million and negative cash flows from
operations of $27.5 million. As of December 31, 1998, 1999 and 2000 we had
accumulated deficits of approximately $2.7 million, $34.2 million and $68.2
million, respectively. Net loss for the quarter ended March 31, 2001 was $1.3
million compared to a net loss of $18.8 million for the quarter ended March 31
2000. We expect that operating losses and negative cash flows will continue
until at least the second half of 2001. As part of the increased emphasis on
eduPartners, we anticipate that costs and expenses related to brand development,
marketing and other promotional activities associated with our traditional
retail book business will continue to decrease from historical levels. Although,
in the short-term, this has and will continue to result in decreased revenues
from the sales of new textbooks, we believe, in the aggregate, that this has and
will continue to reduce the losses and negative cash flows from our sales of new
textbooks.


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.


                                       7
<PAGE>   8


                             PERCENTAGE OF TOTAL NET
                                      SALES

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED
                                                    MARCH 31,
                                              ---------------------
                                               2000           2001
                                              ------         ------
<S>                                           <C>           <C>
Net sales:
    Books                                       90.2%          74.6 %
    Shipping                                     7.4            9.1
    Marketing services                           2.4           16.3
                                              ------         ------
       Total net sales                         100.0          100.0
                                              ------         ------
Operating expenses:

    Cost of books-related party                 85.6           66.5
    Cost of shipping-related
      party                                      9.7            6.4
    Equity transactions-related party           --             --
    Cost of marketing services                  --              1.6
    Marketing and sales:                       111.2           22.9
    Product development:                        16.8            8.7
    General and administrative:                 32.8           97.5
                                              ------         ------
           Total operating expenses            256.1          203.6
                                              ------         ------
Loss from operations                          (156.1)        (103.6)
Other income, net                                1.7           16.2
                                              ------         ------
Net loss                                      (154.4)%        (87.4)%
                                              ======         ======
</TABLE>




                        THREE MONTHS ENDED MARCH 31, 2001
                                   COMPARED TO
                        THREE MONTHS ENDED MARCH 31, 2000

NET SALES

      Net sales decreased to $1.5 million for the three months ended March 31,
2001 from $12.2 million for the three months ended March 31, 2000. This decrease
was primarily attributable to the Company's focus on eduPartners, a seasonal
business centered around the back-to-school months of July, August and
September. Marketing services sales totaled $0.25 million for the three months
ended March 31, 2001, a minimal decrease from the $0.3 million recognized in the
same period in 2000.

OPERATING EXPENSES

     Cost of Books - Related Party (Baker & Taylor). Cost of books - related
party consists of the cost of books sold to customers. Cost of books-related
party decreased to $1.0 million for the three months ended March 30, 2001 from
$10.4 million for the three months ended March 31, 2000. This decrease was
primarily attributable to our decreased sales volume.

     Cost of Shipping - Related Party (Baker & Taylor). Cost of shipping -
related party consists of outbound shipping. Cost of shipping decreased to $0.98
million for the three months ended March 31, 2001 from $1.2 million for the
three months ended March 31, 2000. This decrease was primarily attributable to
our decreased sales volume. Also for the three months ended March 31, 2001,
shipping revenue exceeded cost of shipping - related party by $41,000 or 42%.
For the three months ended March 31, 2000, cost of shipping - related party
exceeded shipping revenue by approximately $0.3 million, or 31.0%. This
transition to shipping profitability was primarily attributable to an increase
in the shipping rates charged to our customers that was instituted in the third
quarter of 2000.

     Cost of Marketing Services. Cost of marketing services includes personnel
costs associated with the implementation of our on campus marketing programs and
other directly identifiable costs associated with our online advertising and on
campus


                                       8
<PAGE>   9

promotions. Cost of marketing services totaled $25,000 for the three
months ended March 31, 2001. There were no costs of marketing services for the
three months ended March 31, 2000.

     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 management of our nationwide network of student representatives. Marketing
and sales expense decreased to $0.3 million for the three months ended March 31,
2001 from $13.6 million for the three months ended March 31, 2000. This decrease
was primarily attributable to decreased marketing with respect to the national
college-focused retail book business and decreased personnel and related
expenses. Included in marketing and sales is $8,000 and $0.7 million of non-cash
charges for the three months ended March 31, 2001 and 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
decreased to $0.1 million for the three months ended March 31, 2001 from $2.0
million for the three months ended March 31, 2000. This decrease was primarily
attributable to decreased web development, consulting and personnel costs
between periods.

     General and Administrative. General and administrative expense consists of
payroll and related expenses for executive and administrative personnel such as
the amortization of deferred compensation, facilities expenses, professional
services expenses, travel and other general corporate expenses. General and
administrative expense decreased to $1.5 million for the three months ended
March 31, 2001 from $4.0 million for the three months ended March 31, 2000. This
decrease was primarily attributable to decreased personnel and professional
services expenses between years. Included in general and administrative expenses
is less than $0.3 million and $1.6 million of non-cash charges for the three
months ended March 30, 2001 and 2000, respectively. Non-cash charges decreased
primarily as a result of a reduction in the number of employees.


   OTHER INCOME (EXPENSE), NET.

         Other income (expense), net consists primarily of interest income on
our cash and cash equivalents and investments and gains or losses associated
with the disposal of fixed assets. Other income was $246,000 for the three
months ended March 31, 2001 compared to $211,000 for the three months ended
March 31, 2000. This increase is primarily attributable to interest income on
higher average cash, cash equivalent and short-term investment balances during
the three months ended March 31, 2001 and the sale of assets.

   INCOME TAXES.

As of March 31, 2001, we had net operating loss carryforwards for federal income
tax purposes of approximately $56 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

As of March 31, 2001, we had $15.6 million of cash and cash equivalents. As of
that date, our principal commitments consisted of obligations outstanding,
accounts payable and accrued liabilities. Although we have no material
commitments for capital expenditures, we may experience increases in our capital
expenditures and lease commitments consistent with anticipated growth in
operations, infrastructure and personnel.

As of March 31, 2001, there were no prepaid marketing expenses compared to
$5,000 at December 31, 2000. This decrease was primarily attributable to the
decrease in marketing expenditures and the Company's focus on eduPartners, a
seasonal business centered around the back-to-school months of July, August and
September.

Net cash used in operating activities was $0.9 million for the three months
ended March 31, 2001, and $14.4 million for the three months ended March 31,
2000 consisting primarily of net losses adjusted for changes in accounts
receivable, accounts payable and accrued expenses.

Net cash gained from investing activities was $58,000 for the three months ended
March 31, 2001 compared to net cash used in investing activities of $804,000 the
three months ended March 31, 2000. Net cash gained from investing activities was
the product of proceeds from the sale of fixed assets.

                                       9
<PAGE>   10

Net cash provided by financing activities was $0.7 million for the three months
ended March 31, 2001 and $35.9 million the three months ended March 31, 2000.
Net cash provided by financing activities during the three months ending March
31, 2001, consisted primarily of net proceeds of $0.7 million from warrant
subscription receivables.

We expect that operating losses and negative cash flows will continue until at
least the second half of 2001. As part of the increased emphasis on eduPartners,
we anticipate that costs and expenses related to brand development, marketing
and other promotional activities associated with our traditional retail book
business will continue to decrease from recent levels. Although this is more
likely to result in decreased revenues from the sales of new textbooks than
would be the case if we continued to spend at or above our historical levels, we
believe, in the aggregate, that this will reduce the losses and negative cash
flows from our sales of new textbooks. We intend to increase spending on the
development of eduPartners and relationships with other businesses. We believe
that we can capture additional revenues, on which we expect to recognize higher
gross margins, by increasing the number of businesses for whom we provide
marketing services. Our failure to generate sufficient revenues, raise
additional capital or, if necessary, reduce discretionary spending could harm
our results of operations and financial condition.

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

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

This quarterly report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated by such forward looking statements as a result of such
factors, including those set forth below.

WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO EVALUATE AN INVESTMENT IN OUR
COMPANY.

We were founded in December 1997 and began selling textbooks on our Web site in
August 1998. Due to the seasonality of textbook sales, our peak selling periods
are currently in July/August/September, when the new academic year begins and
students purchase the majority of their textbooks. As a new company, we face
risks and uncertainties relating to our ability to successfully implement our
strategy. You must consider the risks and uncertainties that an early stage
company like ours faces. If we are unsuccessful in addressing these risks and
uncertainties or are unable to execute our strategy, our business would be
harmed.


WE HAVE NOT BEEN PROFITABLE, HAVE GENERATED NEGATIVE CASH FLOWS AND WE EXPECT
OUR LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE.

We have never been profitable. We base current and future expense levels on our
operating plans and our estimates of future revenues. If our revenues do not
materialize or if revenues grow at a slower rate than we anticipate, or if our
spending levels exceed our expectations or cannot be adjusted to reflect slower
revenue growth, we may not achieve profitability or positive cash flows. For the
year ended December 31, 1998, we incurred a loss from operations of
approximately $2.7 million and had negative cash flows from operations of
approximately $1.2 million. For the year ended December 31, 1999, we incurred a
loss from operations of approximately $31.9 million and had negative cash flows
from operations of approximately $29.4 million. For the year ended December 31,
2000, we incurred a loss from operations of approximately $34.6 million and had
negative cash flows from operations of approximately $27.5 million. As of
December 31, 1999 and 2000 we had an accumulated deficit of approximately $34.2
million and $68.2 million, respectively. Net loss for the quarter ended March
31, 2001 was $1.3 million compared to a net loss of $18.8 million for the
quarter ended March 31 2000. Basic and diluted net loss per share was $.08 for
the quarter ended March 31, 2001 (on 16.2 million shares, basic and diluted)
compared to a basic and diluted net loss of $2.07 per share (on 13.6 million
shares, basic and diluted) for the quarter ended March 31 2000.

We expect that operating losses and negative cash flows will continue until at
least the second half of 2001. As part of the increased emphasis on eduPartners,
we anticipate that costs and expenses related to brand development, marketing
and other promotional activities associated with our traditional retail book
business will continue to decrease from recent levels. Although this has and may
continue 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 historical levels, we
believe, in the aggregate, that this will continue to reduce the losses and
negative cash flows from our sales of new textbooks. We believe that we can
capture additional revenues, on which we expect to recognize higher gross
margins, by increasing the number of businesses for whom we provide marketing
services. Our failure to generate sufficient revenues, raise additional capital
or, if necessary, reduce discretionary spending could harm our results of
operations and financial condition.

                                       10
<PAGE>   11

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


WE MAY NOT BE ABLE TO OBTAIN SUFFICIENT FUNDS TO GROW OUR BUSINESS AND ANY
ADDITIONAL FINANCING MAY BE ON TERMS ADVERSE TO YOUR INTERESTS.

We intend to continue to grow our business. While we currently anticipate that
our available funds will be sufficient to meet our anticipated needs for the
next twelve months. We may continue to lose money and generate negative cash
flows from operations for the foreseeable future. We may need to raise
additional funds in the future to fund to acquire or develop new technology, to
increase our staff to meet operational demands, to introduce new products or
services or to acquire complementary businesses or services or intellectual
property rights. Any required additional financing may be unavailable on terms
favorable to us or at all. If we raise additional funds by issuing equity
securities, you may experience significant dilution of your ownership interest
and such securities may have rights senior to those of the holders of our common
stock. Obtaining additional financing will be subject to a number of factors,
including:

      o    market and economic conditions;

      o    our financial condition and operating performance; and

      o    investor sentiment.

These factors may make the timing, amount, terms and conditions of additional
financing unattractive for us. Currently, companies that are considered
primarily on-line retailers are not perceived well by the market. If additional
financing is not available when required or is not available on acceptable
terms, we may be unable to:

     o    fund our expansion;

     o    successfully promote our brand name;

     o    develop or enhance our products and services;

     o    develop or purchase new servers, software and other technology to
          enable us to process increased transactions and service increased
          traffic on our Web site;

     o    attract and retain the appropriate talent and a sufficient number of
          employees to handle our increasing operations; and

     o    take advantage of business opportunities or respond to competitive
          pressures.


OUR BUSINESS AND REVENUE MODEL IS UNPROVEN.

Our ability to generate significant revenues and profits from the sale of
textbooks and other products and services we may offer in the future is
uncertain. To be successful, we must attract and retain a significant number of
customers to our Web site at a reasonable cost. Any significant shortfall in the
expected number of purchases occurring through our Web site will negatively
affect our financial results by increasing or prolonging operating losses and
negative cash flows. Conversion of customers from traditional shopping methods
to electronic shopping may not occur as rapidly as we expect, if at all.
Therefore, we may not achieve the customer traffic we believe is necessary to
become successful. Specific factors that could prevent widespread customer
acceptance of our business and our ability to increase retail revenues include:

     o    lack of consumer awareness of our online presence;

     o    pricing that does not meet consumer expectations;

     o    consumer concerns about the security of online transactions;

     o    shipping charges, which do not apply to shopping at traditional retail
          stores and are not always charged by some of our online competitors;

     o    delivery time associated with online orders, as compared to the
          immediate receipt of products at traditional retail stores;

     o    product damage from shipping or shipments of the wrong products, which
          may result in a failure to establish trust in purchasing our products
          online;

     o    delays in responses to consumer inquiries or in deliveries to
          consumers; and

     o    difficulty in returning or exchanging orders.

WE MAY NOT BE ABLE TO RETAIN EXISTING EDUPARTNERS MEMBER SCHOOLS OR SIGN-UP NEW
EDUPARTNERS MEMBER SCHOOLS.


                                       11
<PAGE>   12

In addition, our ability to generate revenues through the sale of online
advertising and the use of our network of student representatives by other
businesses to market their goods and services will depend, in part, on our
ability to reach students with demographic characteristics attractive to
advertisers and other businesses.


WE MAY NOT BE ABLE TO ATTRACT BUSINESSES INTERESTED IN USING OUR SERVICES TO
MARKET TO COLLEGE, PRIVATE HIGH SCHOOL MIDDLE SCHOOL, DISTANCE LEARNING AND
CONTINUING EDUCATION STUDENTS.

Although we do not currently derive a substantial portion of our revenues from
allowing other businesses to reach the college, private high school and middle
school markets, our business model depends in part on increasing the amount of
such revenue. We cannot be certain we will be able to attract businesses
interested in using our marketing services. If we cannot attract these
businesses, our business could be harmed.


YOU SHOULD NOT RELY ON OUR QUARTERLY OPERATING RESULTS AS AN INDICATION OF OUR
FUTURE RESULTS BECAUSE THEY ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS.

Our quarterly operating results may fluctuate significantly in the future due to
a variety of factors that could affect our revenues or our expenses in any
particular quarter. We expect to experience seasonality in our business related
to the academic calendar and the corresponding demand for textbooks and
educational materials. Sales in our eduPartners business are significantly
higher in the third calendar quarter of each year compared with the first,
second and fourth calendar quarters. Fluctuations in our quarterly operating
results could cause our stock price to decline. You should not rely on
sequential quarter-to-quarter comparisons of our results of operations as an
indication of future performance. Factors that may affect our quarterly results
include:

     o    seasonal trends in the textbook industry and in the buying habits of
          students;

     o    our ability to manage or influence inventory and fulfillment
          operations;

     o    the level of merchandise returns we experience;

     o    our ability to attract new customers, retain existing customers and
          maintain customer satisfaction;

     o    introduction of enhancements or a change in pricing policies, by us or
          our competitors, or a change in pricing policy by our sole fulfillment
          source;

     o    changes in the amount and timing of expenditures related to marketing,
          information technology and other operating expenses to support future
          growth;

     o    technical difficulties or system downtime affecting the Internet
          generally or the operation of our Web site specifically;

     o    increasing consumer acceptance and use of the Internet for the
          purchase of consumer products;

     o    potential acquisitions or strategic alliances either by us or our
          competitors; and

     o    general economic conditions and economic conditions specific to the
          Internet, online commerce and the book industry.

As a result of the seasonal fluctuations and because the online sale of
textbooks and online selling in general is new and it is difficult to predict
consumer demand, it is possible that in some future periods our results of
operations may be below the expectations of public market analysts and
investors. In that event, it is likely that the price of our stock would
decline.


WE RELY ON ONE SUPPLIER TO MEET OUR FULFILLMENT DEMANDS.

We depend on Baker & Taylor, Inc. as our current sole supplier of the textbooks
we offer. Our relationship with Baker & Taylor is critical to our success. If we
were unable to rely on them for inventory maintenance and shipping services, our
business would be materially harmed.

We do not warehouse any of our own inventory, so we rely on Baker & Taylor to
maintain an adequate inventory and rapidly fill our customers' orders. We are
able to sell textbooks at reduced prices in part because we do not maintain our
own inventory. Prices we pay for promotional, customer service and database
management services and credits that we receive from Baker & Taylor are
currently based on volume and average cost requirements. Failure to meet these
benchmarks could increase our costs. If they do not maintain sufficient
inventory, or if they are unable to deliver the specific books our customers
order or deliver these books in a timely fashion, we would not be able to meet
our obligations to our customers, our revenues would decrease and we would
likely experience a reduction in the value of our brand. Baker & Taylor fills
orders for a number of textbook retailers. Baker & Taylor has advised us that it
fills all the orders it receives on a first-come, first-served basis without
providing preferential treatment for us or any of our competitors. If other
Baker & Taylor customer orders depleted Baker & Taylor's inventory, and Baker &
Taylor was unable to quickly replenish its inventory, our orders would not be
processed or filled in a timely manner. If our relationship with Baker & Taylor
is disrupted or does not continue for any reason



                                       12
<PAGE>   13

and we are unable to establish a comparable vendor relationship or open our own
warehouse before the Baker & Taylor relationship discontinues, we would not be
able to fulfill our customers' orders. We cannot be certain that we would be
able to establish new vendor relationships to ensure acquisition and
distribution of textbooks in a timely and efficient manner or on acceptable
commercial terms. In such event, we may determine that we need to maintain
inventory, establish warehouse facilities and provide distribution services,
which would require us to change our business model. In addition, a single
publisher supplied approximately 22% of the books we purchased from Baker &
Taylor in 2000. If Baker & Taylor's relationship with this publisher is
disrupted or discontinued, our business would be harmed.

We benefit from the shipping discounts offered to Baker & Taylor by United
Parcel Service and we rely on UPS and other third party carriers for all
shipments to and from Baker & Taylor. If Baker & Taylor's relationship with UPS
is discontinued or disrupted for any reason, we cannot be certain we would be
able to affordably obtain comparable delivery services and might not be able to
deliver textbooks to our customers in a timely manner. In addition, because we
rely on third party carriers to ship products to and from the single Baker &
Taylor warehouse that our fulfillment is currently conducted from, we are
subject to the risks, including employee strikes and inclement weather, that may
prevent such third parties from meeting our fulfillment and delivery needs.
Failure to deliver products to our customers in a timely and accurate manner
would harm our reputation, our brand and our business.


LOSS OF ANY OF OUR KEY MANAGEMENT PERSONNEL OR THE INABILITY OF OUR KEY
MANAGEMENT PERSONNEL TO WORK TOGETHER EFFECTIVELY OR SUCCESSFULLY MANAGE OUR
GROWTH COULD NEGATIVELY AFFECT OUR BUSINESS.

Our future success depends to a significant extent on the continued service and
coordination of our management team, particularly Eric J. Kuhn, our co-founder,
Chief Executive Officer, President and Chairman of the Board. We have entered
into an agreement with Mr. Kuhn that provides, among other things, that he be
compensated in the event he is terminated without cause. We have not entered
into similar agreements with any other personnel. Nonetheless, the loss or
departure of any of our executive officers or key employees could harm our
ability to implement our business plan. We do not maintain key person insurance
on any member of our management team. In addition, a number of members of our
management team have joined us within the last year. These individuals have not
previously worked together and are becoming integrated into our management team.
They may not be able to work together effectively or successfully manage our
growth, resulting in adverse consequences to our business.

WE WILL ONLY BE ABLE TO EXECUTE THE ONLINE RETAIL ASPECT OF OUR BUSINESS MODEL
IF USE OF THE INTERNET AND ONLINE COMMERCE GROWS.

Our business would be adversely affected if Internet usage does not continue to
grow. Internet usage may be inhibited for any of the following reasons:

     o    the Internet infrastructure may be unable to support increased demand
          or its performance and reliability may decline as usage grows;

     o    the inability of Web sites to provide security and authentication of
          confidential information contained in transmissions over the Internet;

     o    the quality of Internet products and services may not continue to
          generate user interest;

     o    online commerce is at an early stage and buyers may be unwilling to
          shift their traditional purchasing to online purchasing;

     o    increased government regulation or taxation of online commerce, at the
          state or federal level, may adversely affect the viability of online
          commerce;

     o    insufficient availability of telecommunication services or changes in
          telecommunication services may result in slower response times; and

     o    Web sites may not have the ability to respond to privacy concerns of
          potential users, including concerns related to the placement by Web
          sites of information on a user's hard drive without the user's
          knowledge or consent.


IF WE ARE UNABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS CONTINUE
TO EVOLVE, OUR SERVICES AND PRODUCTS COULD BECOME LESS DESIRABLE.

A key element of our strategy is to generate a high volume of traffic to, and
use of, our Web site. Accordingly, the satisfactory performance, reliability and
availability of our Web site, transaction-processing systems and network
infrastructure are critical to our reputation and our ability to attract and
retain customers and maintain adequate customer service levels. An unanticipated
dramatic increase in the volume of traffic on our Web site or the number of
orders placed by our customers may force us to expand and upgrade our
technology, transaction-processing systems and network infrastructure. There can
be no assurance that we will be able to accurately project the rate or timing of
increases, if any, in the use of our Web site or timely


                                       13
<PAGE>   14

expand and upgrade our systems and infrastructure to accommodate such increases.
To be successful, we must adapt to our rapidly changing market by continually
enhancing the technologies used in our Internet products and services and
introducing new technology to address the changing needs of our business and
customers. If we are unable, for technical, legal, financial or other reasons,
to adapt in a timely manner in response to changing market conditions or
business and customer requirements, our business could be harmed.


AS AN INTERNET-BASED RETAILER, WE DEPEND HEAVILY ON OUR INFORMATION TECHNOLOGY
INFRASTRUCTURE AND OUR OPERATIONS COULD BE JEOPARDIZED BY ANY SYSTEM FAILURE OR
INADEQUACY.

Our operations are dependent on our ability to maintain our computer and
communications software and equipment in effective working order and to protect
our systems against damage from fire, natural disaster, power loss,
communications failure or similar events. In addition, the growth of our
customer base may strain or exceed the capacity of our computer and
communications systems and lead to degradations in performance or systems
failure. Our success, in particular our ability to successfully receive and
fulfill orders and provide high-quality customer service, largely depends on the
efficient and uninterrupted operation of our computer and communications
hardware systems. We use an internally developed system for our Web site, search
engine and substantially all aspects of transaction processing, including order
management, cash and credit card processing, purchasing, inventory management
and shipping.

Substantially all of our computer and communications hardware and software
systems are located at a single facility in Herndon, Virginia. That facility is
owned, maintained and serviced by GlobalCenter Inc. Although we own and maintain
our hardware and software systems, including the software which is central to
the sales, ordering and shipping processes, we rely on GlobalCenter Inc. to
ensure our computer and communications hardware and software operate efficiently
and continuously. We do not presently have fully redundant systems or a formal
disaster recovery plan and do not carry sufficient business interruption
insurance to compensate for losses that may occur. Despite our implementation of
network security measures, our servers are vulnerable to computer viruses,
physical or electronic break-ins, fire, flood, power loss, telecommunications
failure, break-ins, earthquake and similar disruptions, which could lead to
interruptions, delays, loss of data or the inability to accept and fulfill
customer orders. Any damage, failure or delay that causes interruptions in our
system operations could have a material adverse effect on our business.

In addition to our offsite software and hardware related to our Web site, at our
headquarters we maintain a local area network, or LAN, which we use for our
financial reporting systems, customer service operations, monitoring of our
customer orders, e-mails and other internal processes. Any loss of service or
other failure of this LAN, regardless of the availability of our Web site, would
significantly impair our ability to service our customers and monitor and
fulfill customer orders, which could have a material adverse effect on our
business.

The failure of either our Web site or our LAN or any other systems interruptions
that results in unavailability of our Web site or reduced order fulfillment
performance, especially during our peak sales period of July/August/September,
could result in negative publicity or could reduce the volume of goods sold and
attractiveness of our Web site and would seriously impair our ability to service
our customers' orders, all of which could negatively affect our revenues.
Because our servers are located at a third-party's facility and because some of
the reasons for a systems interruption may be outside of our control, we also
may not be able to exercise sufficient control to remedy the problem quickly or
at all. Regardless of whether we or a third-party controls or creates system
failure, the occurrence of system failure could adversely affect our reputation,
seriously harm our business and cause us to lose a significant and
disproportionate amount of revenues.


CONCERNS ABOUT SECURITY ON THE INTERNET MAY REDUCE THE USE OF OUR WEB SITE AND
IMPEDE OUR GROWTH.

A significant barrier to confidential communications over the Internet has been
the need for security. We rely on SSL encryption technology to prevent the
misappropriation of customer credit card data during the transaction process.
Under current credit card practices, a merchant is liable for fraudulent credit
card transactions where, as is the case with the transactions we process, that
merchant does not obtain a cardholder's signature. A failure to adequately
control fraudulent credit card transactions could reduce our collections and
harm our business. Internet usage could decline if any well-publicized
compromise of security occurred. Our site could be particularly affected by any
such breach because our online commerce model requires the entry of confidential
customer ordering, purchasing and delivery data over the Internet, and we
maintain a database of this historical customer information. Until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet as a medium for commerce. We cannot be certain that advances in
computer capabilities, new discoveries in the field of cryptography or other
developments will not result in the compromise or breach of the algorithms we
use to protect content and transactions on our Web site or proprietary
information in our databases. Anyone who is able to circumvent our security
measures could


                                       14
<PAGE>   15

misappropriate proprietary, confidential customer or company information or
cause interruptions in our operations. We may incur significant costs to protect
against the threat of such security breaches or to alleviate problems caused by
these breaches.

WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATIONS AND LEGAL
UNCERTAINTIES AFFECTING THE INTERNET THAT COULD ADVERSELY AFFECT OUR BUSINESS.

To date, governmental regulations have not materially restricted use of the
Internet in our markets. However, the legal and regulatory environment that
pertains to the Internet is uncertain and may change. Uncertainty and new
regulations could increase our costs of doing business and prevent us from
delivering our products and services over the Internet. The growth of the
Internet may also be significantly slowed. This could delay growth in demand for
our online services and limit the growth of our revenues. In addition to new
laws and regulations being adopted, existing laws may be applied to the
Internet. New and existing laws may cover issues, which include:

     o    sales and other taxes;

     o    user privacy;

     o    pricing controls;

     o    characteristics and quality of products and services;

     o    consumer protection;

     o    libel and defamation;

     o    copyright, trademark and patent infringement; and

     o    other claims based on the nature and content of Internet materials.


WE MAY BE UNABLE TO OBTAIN A UNITED STATES TRADEMARK REGISTRATION FOR OUR BRAND
OR TO PROTECT OUR OTHER PROPRIETARY INTELLECTUAL PROPERTY RIGHTS.

Our application to register the mark VarsityBooks.com has been approved for
publication by the Trademark Office. After the application is published, it will
be open to opposition by third parties for a period of 30 days. If we are unable
to secure the right to use the VarsityBooks.com mark and related derivative
marks, a key element of our strategy of promoting "VarsityBooks.com" as our
brand could be disrupted and, as a result, the value of your investment could be
reduced. Even if we are able to secure federal trademark registration for the
mark VarsityBooks.com, federal trademark laws only provide us with limited
protection because, for example, we would be unable to prevent the use of an
unregistered similar mark by a prior user or to prevent the use of a similar
name in our markets or similar mark for products and services we would like to
offer.

The unauthorized reproduction or other misappropriation of our proprietary
technology could enable third parties to benefit from our technology and brand
name without paying us for them. If this were to occur, our revenues and the
value of your investment could be reduced. The steps we have taken to protect
our proprietary rights may not be adequate to deter misappropriation of
proprietary information. We may not be able to detect unauthorized use of our
proprietary information or take appropriate steps to enforce our intellectual
property rights. In addition, the validity, enforceability and scope of
protection of intellectual property in Internet-related industries are uncertain
and still evolving. The laws of other countries in which we may market our
services in the future may afford little or no effective protection of our
intellectual property. If we resort to legal proceedings to enforce our
intellectual property rights, the proceedings could be burdensome and expensive.


DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE TIME
CONSUMING AND EXPENSIVE AND, IF WE ARE NOT SUCCESSFUL, COULD SUBJECT US TO
SIGNIFICANT DAMAGES AND DISRUPT OUR BUSINESS.

We cannot be certain that our products do not or will not infringe valid
patents, copyrights or other intellectual property rights held by third parties.
We expect that infringement claims in our markets will increase in number as
more participants enter the market. We may be subject to legal proceedings and
claims from time to time relating to the intellectual property of others in the
ordinary course of our business. We may incur substantial expenses in defending
against these third-party infringement claims, regardless of their merit.
Successful infringement claims against us may result in substantial monetary
liability or may materially disrupt the conduct of our business.


AS INTERNET TECHNOLOGY AND REGULATION ADVANCES, WE MAY NOT BE ABLE TO PROTECT
OUR DOMAIN NAMES.

We currently hold various Web domain names relating to our brand, including the
"VarsityBooks.com" domain name. Governmental agencies and their designees
generally regulate the acquisition and maintenance of domain names. The
regulation of domain names in the generic category of domain names (i.e., .com,
 .net and .org) is now controlled by a non-profit corporation, which may create
additional top-level domains. Requirements for holding domain names have also
been


                                       15
<PAGE>   16

affected. As a result, there can be no assurance that we will be able to acquire
or maintain relevant domain names. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights. Any
such inability could harm our business.


SOME STATES MAY IMPOSE A NEW SALES TAX ON OUR BUSINESS, AND IF WE ARE REQUIRED
TO COLLECT SALES TAX IN ADDITIONAL JURISDICTIONS, WE MAY BE SUBJECT TO LIABILITY
FOR PAST SALES AND OUR FUTURE SALES MAY DECREASE.

A 1992 Supreme Court decision confirmed that the commerce clause of the United
States Constitution prevents a state from requiring the collection of its sales
and use tax by a mail-order company unless such company has a physical presence
in the state. However there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. We
attempt to conduct our operations consistent with our interpretation of the
applicable legal standard, but there can be no assurance that such compliance
will not be challenged. In recent challenges, various states have sought to
require companies to begin collection of sales and use taxes and/or pay taxes
from previous sales. We currently collect and forward sales tax on all shipments
to Illinois and the District of Columbia. As of the date of this report two
additional states have contacted us regarding activity in their state. One of
these states has determined the Company has no sales tax liability for the audit
period. The other state has notified us of an assessment for sales tax liability
for which we have submitted a petition for redetermination. The Supreme Court
decision also established that Congress has the power to enact legislation that
would permit states to require collection of sales and use taxes by mail-order
companies. Congress has from time to time considered proposals for such
legislation. While there is no case law on the issue, we believe that this
analysis could also apply to our online business. Recently, several states and
local jurisdictions have expressed an interest in taxing e-commerce companies
who do not have any contacts with their jurisdictions other than selling
products online to customers in such jurisdictions. The Internet Tax Freedom Act
imposed a moratorium on new taxes or levies on e-commerce for a three-year
period due to expire in October 2001. However, there is a possibility that
Congress may not renew this legislation. Any such taxes could have an adverse
effect on online commerce, including our business.




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, 2001, 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.


                                       16
<PAGE>   17

                                    PART II.

                                OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS

         Not Applicable


ITEM 2:  CHANGES IN SECURITIES

         Not Applicable

ITEM 3:  DEFAULTS UPON SENIOR SECURITIES

         Not Applicable

ITEM 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not Applicable

ITEM 5:  OTHER INFORMATION

         Not Applicable


ITEM 6:  EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits

          (i)   Restricted Stock Agreement dated as of January 29, 2001 by and
                between Varsity Group Inc. and Eric Kuhn

          (ii)  Restricted Stock Agreement dated as of March 22, 2001 by and
                between Varsity Group Inc. and Eric Kuhn

          (iii) Restricted Stock Agreement dated as of March 22, 2001 by and
                between Varsity Group Inc. and Amy Buckley

          (iv)  Restricted Stock Agreement dated as of March 22, 2001 by and
                between Varsity Group Inc. and Jack Benson


    (b) Reports on Form 8-K

        None


                                       17
<PAGE>   18

                                   SIGNATURES

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


Date: May ____, 2001
                                                Varsity Group Inc.

                                                By:    /s/ ERIC J. KUHN
                                                   ------------------------
                                                        Eric J. Kuhn
                                                  Chairman, Chief Executive
                                                    Officer and President



                                       18