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Registration No. 333-          

SECURITIES AND EXCHANGE COMMISSION

FORM S-1

VARSITYBOOKS.COM INC.

1050 Thomas Jefferson Street, N.W.

Eric J. Kuhn

Copies to:

     Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

     If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [   ]

     If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]          

     If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]          

     If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [   ]          

     If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [   ]

CALCULATION OF REGISTRATION FEE

(1)	Includes shares that the Underwriters have the option to purchase from the Company solely to cover over-allotments, if any.
(2)	Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of computing the amount of the registration fee.

     The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted.

	SUBJECT TO COMPLETION, DATED OCTOBER 14, 1999
	[VARSITYBOOKS.COM LOGO]
	Shares
	Common Stock

	VarsityBooks.com is offering           shares of its common stock and the selling stockholders are selling an additional            shares. This is our initial public offering and no public market currently exists for our shares. We have applied to have the shares we are offering approved for quotation on the Nasdaq National Market under the symbol “VSTY.” We anticipate that the initial public offering price will be between $          and $          per share.

	Investing in our common stock involves risks.
	See “Risk Factors” beginning on page 8.

      The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      VarsityBooks.com has granted the underwriters a 30-day option to purchase up to an additional            shares of common stock to cover over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on             , 1999.

Robertson Stephens

	Thomas Weisel Partners LLC

	Friedman Billings Ramsey

	DLJdirect Inc.

The date of this Prospectus is           , 1999

INSIDE FRONT COVER PAGE OF PROSPECTUS

Front Inside Cover:

      The upper part of the front inside cover contains two pictures. The top left side of the page contains a large picture of a student sitting on the steps of a school building reading a textbook. The top right half of the page contains a smaller picture that partially overlaps the picture on the left and portrays three students huddled around a computer in a student lounge.

      Centered beneath the two pictures is the VarsityBooks.com logo, followed by the company name. The logo is a large, red stylized “V,” and the company name, “VarsityBooks.com” is in black bold type. Beneath the company logo and name are two paragraphs of text which read as follows:

	VarsityBooks.com is a leading online retailer of new college textbooks and has established a platform for marketing products to the nation’s 15 million college students. Our customer base includes students in each of the 50 states attending colleges, universities, distance learning programs, and private high schools. VarsityBooks.com offers a convenient purchasing process and products at reduced prices.
	The combination of VarsityBooks.com’s student network of campus representatives, the expertise we are developing in marketing to college students, and our ability to bring together the fragmented college student market enable us to reach the college demographic. VarsityBooks.com is poised to offer an increased number of products and services and provide a marketing channel for other businesses that aim to reach this sought after demographic.

      At the very bottom of the page, the phrase “youronlinecollegebookstore” appears without spaces between the individual words. Every second word in this phrase is accented in red, bold lettering.

Gatefolds Left & Right:

      The background on which the images are set is a piece of white notebook paper. The VarsityBooks.com logo, a red stylized “V,” and company name are centered across the top of the left and right gatefolds.

      Immediately below the logo centered between the left and right gatefolds is the VarsityBooks.com homepage. The header for the homepage is the VarsityBooks.com logo, in red, followed by the company name. Immediately beneath the company name is the phrase “youronlinecollegebookstore.”

      On the left side of the web page is a blue box from which the visitor may select either to open a free membership account with the company or to request more information about the company.

      The right half of the homepage is divided into three sections. From the top section, visitors can locate their books either by selecting their school, or by searching for specific books. From the middle section on the right visitors can choose either to browse the textbooks by subject or to compare VarsityBooks.com prices to other sources. The bottom right section of the page enables the visitor to obtain information on how to become a campus representative or VarsityBooks.com affiliate.

      The left gatefold contains a section entitled “OurSchools.” Beneath the title appears the following text:

VarsityBooks.com collects and posts course booklist information for more than 300 colleges and universities nationwide, allowing students who attend a school for which we post booklists to conveniently access course booklist information directly from VarsityBooks.com’s Web site. Students who do not attend a school for which we post booklists can still access and purchase their books quickly by using the VarsityBooks.com search engine.

      Beneath the text, appears a screen from the VarsityBooks.com Web site. The Web page banner consists of the VarsityBooks.com logo, a red stylized “V,” and the company name. From the left section of the Web page, a visitor may either open an account, search for specific books, or obtain additional

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      Spread across the bottom of the left and right gatefolds is information about campus representatives. The campus representatives item begins on the left with a paragraph entitled “OurReps”. The paragraph reads as follows:

	Who knows a campus better than the students themselves? VarsityBooks.com has a carefully selected and trained network of campus student representatives promoting the company’s brand and product, enabling VarsityBooks.com to customize its marketing approach to the particular dynamics of each campus and reach students on a peer-to-peer basis.

      To the right of the text are four overlapping pictures. The first three pictures from left to right are of student representatives marketing to other students. The fourth picture, appearing to the right of these photos, portrays two student representatives at a VarsityBooks.com display table on campus.

      On the right gatefold is a paragraph describing the VarsityBooks.com partnership program. The paragraph reads as follows:

	The VarsityBooks.com partnership program provides schools nationwide with an answer to the inefficiencies associated with educational institutions independently running their bookstore. Through this program, VarsityBooks.com is endorsed as the exclusive new textbook retailer at its partnership schools.

      Above this paragraph, the VarsityBooks.com Web page appears from which the visitor may choose to open an account, to search for books, to obtain more information about the company or to view a school’s booklist.

Back Inside Cover:

      The back inside cover contains the VarsityBooks.com logo, a stylized red “V,” followed by the company name in large, black print. Immediately beneath the logo and name are the words “youronlinecollegebookstore.”

Back Cover:

      The back cover is a photograph of four students on a picnic table. Three students are seated at the table watching the fourth student, who is standing on top of the table with his arms extended. Below the photograph, the VarsityBooks.com logo, a stylized “V” in red, appears followed by the company name, and “youronlinecollegebookstore.”

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      You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. In this prospectus, “VarsityBooks.com,” “we,” “us,” “our,” “our Company,” and “the Company” refer to VarsityBooks.com Inc., a Delaware corporation, and its subsidiaries.

      Until           , 1999 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

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SUMMARY

      This summary highlights selected information contained elsewhere in this prospectus. This summary may not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including “Risk Factors” and the financial statements, before making an investment decision.

Our Company

      We are a leading online retailer of new college textbooks and have established a platform for marketing products and services to the nation’s 15 million college students. We have sold textbooks to students at over 2,400 colleges and universities in each of the 50 states. According to MediaMetrix, www.varsitybooks.com had over 645,000 unique visits in August 1999, which made us the most visited college-oriented Web site. Using the Internet, we are able to provide our customers with a convenient purchasing process and reduced prices. Our carefully selected and trained network of more than 1,000 campus student representatives promotes our brand and products, enabling us to customize our marketing to the particular dynamics of each campus and reach students on a peer-to-peer basis. We plan to use this network of student representatives and our student-focused Web site to increase the number of products and services we offer and provide a marketing opportunity for other businesses.

      The college student market is large and growing. Excluding tuition and room and board, college students spent over $105 billion in 1998 on products and services. Of this amount, the purchase of new textbooks represents most students’ single largest school-related expenditure. While textbooks are required, purchasing them through traditional retailers tends to be inconvenient and expensive. Based on statistics published by the National Association of College Stores, new textbook sales were over $5 billion in 1998.

      Online commerce provides a new opportunity to better serve and more efficiently reach the college student market. According to Student Monitor, 95% of college students used the Internet during the Spring 1999 semester and these students are increasingly purchasing products and services online. Their significant spending power, coupled with the belief that students are still forming their brand loyalties, makes college students an attractive market to businesses and advertisers. However, due to the limitations in reaching college students through traditional methods, few businesses have succeeded in effectively marketing to them in a convenient and cost-effective manner.

      We believe there is a significant market opportunity for an online retailer that offers students an enhanced shopping experience by providing textbooks and other student-oriented goods and services with a focus on cost-savings, convenience and customer service. We also believe an opportunity exists to more effectively reach college students by using our peer-to-peer marketing technique, which overcomes many of the difficulties in targeting this market.

      Our goal is to become the leading online retailer and the most effective marketing channel to college students. We are pursuing the following strategies:

	•	Aggressively Build Our Brand. We intend to establish VarsityBooks.com as the leading college-oriented brand and to continue to differentiate ourselves based on the reliability, quality and cost-savings of our products and services.
	•	Leverage and Grow Our Network of Student Representatives. We intend to use our network of campus student representatives to expand awareness of our current product offering, to introduce our new products and services and provide marketing services for other businesses.
	•	Add Booklist Schools. We intend to increase our customer base by expanding the number of schools for which we post the prescribed reading list for classes, or booklists.
	•	Extend the Breadth and Depth of Our Offerings. We intend to capitalize on our brand recognition, college marketing experience and extensive customer base to offer additional products and services geared to students’ needs and interests, such as entertainment products, apparel and school supplies.

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	•	Capitalize on Our Growing Customer Database. We intend to capitalize on our growing customer database to provide targeted product, service and promotional offerings by us as well as other businesses.
	•	Add Partnership Schools. We intend to expand our partnership program, through which we act as the exclusive new textbook supplier for traditional four-year and community colleges, private high schools that require students to purchase their textbooks, distance learning programs and continuing and professional education programs.

Our Address

      Our principal executive offices are located at 1050 Thomas Jefferson Street, N.W., Suite 525, Washington, D.C. 20007 and our telephone number is (202) 667-3400. Our Web site is located at www.varsitybooks.com. We do not intend the information contained on our Web site to be incorporated into this prospectus.

      Except as otherwise indicated, information in this prospectus is based on the following assumptions:

	•	The conversion of all outstanding shares of convertible preferred stock into           shares of common stock immediately prior to the closing of this offering.
	•	A           for           stock split of our common stock immediately prior to the effectiveness of this offering.
	•	No exercise of the underwriters’ over-allotment option.

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The Offering

      The number of shares to be outstanding after the offering is based on shares outstanding as of September 30, 1999 and excludes shares that may be issued upon exercise of the following options and warrants:

	•	shares of common stock issuable upon the exercise of stock options outstanding under our stock option plan at a weighted average exercise price of $     per share and           additional shares of common stock available for issuance under this plan as of September 30, 1999; and
	•	shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $          per share.

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Summary Consolidated Financial Data

      Below is our summary historical consolidated financial data. We derived the consolidated statement of operations and consolidated balance sheet data from our audited and unaudited consolidated financial statements. You should read this summary data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

The pro forma balance sheet data gives effect to:

	•	The issuance and sale of 2,708,326 shares of Series C preferred stock for proceeds of approximately $9.1 million made after August 31, 1999. This issuance was part of the issuance and sale of an aggregate of 8,928,571 shares of Series C preferred stock effective August 27, 1999 for aggregate proceeds of approximately $30.0 million.

The pro forma as adjusted balance sheet data gives effect to:

	•	The conversion of all our outstanding Series A, Series B and Series C preferred stock into           shares of common stock upon consummation of this offering; and
	•	The application of the net proceeds from the sale of           shares of common stock by us in the offering, assuming an initial public offering price of $     per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses, and the application of the net proceeds of this offering.

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RISK FACTORS

      Any investment in shares of our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this prospectus, before you decide to buy our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial may become important factors that affect us in the future. If any of the following risks occur, our business could be materially harmed. In these circumstances, the market price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock.

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 college calendar and the seasonality of textbook sales, our peak selling periods are currently in August/September and January/February, when new semesters begin and students purchase textbooks. Accordingly, not only do we have a limited operating history upon which to evaluate an investment in our company, but only six of the fifteen months since we began generating revenues have been months in which college students usually buy 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 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 $2.4 million and had negative cash flows from operations of approximately $1.2 million. For the eight months ended August 31, 1999, we incurred a loss from operations of approximately $13.9 million and had negative cash flows from operations of approximately $9.1 million. As of August 31, 1999, we had an accumulated deficit of approximately $16.2 million. We expect to continue to lose money and generate negative cash flows from operations in the foreseeable future because we anticipate incurring significant expenses in connection with building our brand, improving our services and increasing our product offerings. We may find it necessary to accelerate expenditures relating to our marketing and sales efforts, or otherwise to increase our financial commitment to creating and maintaining brand awareness among college students, particularly during and immediately prior to our peak seasons. In addition, we may find it necessary to accelerate expenditures to further develop our Web site and information technology. If we accelerate these expenditures and our revenues do not increase proportionately, our rate of losses and negative cash flows would increase.

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

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	•	lack of consumer awareness of our online presence;
	•	pricing that does not meet consumer expectations;
	•	consumer concerns about the security of online transactions;
	•	shipping charges, which do not apply to shopping at traditional retail stores and are not charged by certain of our online competitors in certain circumstances;
	•	delivery time associated with online orders, as compared to the immediate receipt of products at traditional retail stores;
	•	product damage from shipping or shipments of the wrong products, which may result in a failure to establish trust in purchasing our products online;
	•	delays in responses to consumer inquiries or in deliveries to consumers; and
	•	difficulty in returning or exchanging orders.

      We rely on our student representatives as a marketing channel for www.varsitybooks.com. The employment of these representatives increases our expenses, which will make it more difficult for us to achieve profitability and positive cash flows. 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. Although we do not currently derive a substantial portion of our revenue from Internet advertising or from allowing other businesses to reach the college market through our network of student representatives, our business model depends in part on increasing the amount of such revenue.

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 college calendar and the corresponding demand for textbooks and educational materials. Sales in the textbook industry traditionally are significantly higher in the first and third calendar quarters of each year compared with the second and fourth calendar quarters. A part of our strategy is to offer additional products through our Web site. We cannot be sure that we will be able to generate significant sales of any product other than new textbooks or that such sales will not occur with textbook sales or in their own seasonal pattern and, as a result, we may continue to experience such fluctuations in operating results. 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:

	•	seasonal trends in the textbook industry and in the buying habits of college students;
	•	our ability to manage or influence inventory and fulfillment operations;
	•	the level of merchandise returns we experience;
	•	our ability to attract new customers, retain existing customers and maintain customer satisfaction;
	•	introduction of new products and services or enhancements, or a change in pricing policies, by us or our competitors, or a change in pricing policy by our sole fulfillment source;
	•	changes in the amount and timing of expenditures related to marketing, booklist operations, information technology and other operating expenses to support future growth;

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	•	technical difficulties or system downtime affecting the Internet generally or the operation of our Web site specifically;
	•	increasing consumer acceptance and use of the Internet and other online services for the purchase of consumer products;
	•	potential acquisitions or strategic alliances either by us or our competitors; and
	•	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 college 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 the 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 certain services and credits we receive from Baker & Taylor are currently based on certain 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. If this relationship is disrupted or does not continue for any reason 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, approximately 33% of the books we purchased from Baker & Taylor in 1998 were supplied by a single publisher. 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 within our goal of three business days. 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.

Failure to cost-effectively develop awareness of our brand name could harm our future success.

      We believe that continuing to build awareness of the “VarsityBooks.com” brand name is critical to achieving widespread acceptance of our business. We believe brand recognition could become more important as competition in the online textbook market increases. If we fail to successfully promote and maintain our brand, incur significant expenses in promoting our brand or fail to generate a corresponding increase in revenue as a result of our branding efforts, our business could be harmed. To maintain and

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We depend on our network of student representatives to generate awareness of our brand.

      We depend on our network of campus student representatives to create awareness of our brand and to drive traffic to our Web site. Our student representatives are generally not experienced marketing people and we anticipate turnover due to graduation and normal attrition. We cannot be certain that we will continue to be able to attract, train and retain qualified student representatives. Our sales at any institution may fluctuate from year-to-year based on the efforts of our student representatives on their particular campus. If our student representatives are unable to generate interest on their campuses, our sales at those institutions will likely neither materialize nor increase. Our student representatives at each campus must comply with the specific rules governing marketing on their individual campus. It is possible that these rules will restrict their ability to market our products and services or those of other businesses or that these rules will become more strict and thereby limit our marketing opportunities.

We face significant competition, and that competition may increase substantially because of the low barriers to market entry.

      The online commerce market, and in particular, the market for online textbook sales, is new, rapidly evolving and intensely competitive. We expect competition to intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new Web sites at a relatively low cost. We currently compete with a variety of other companies in the sale of textbooks, and if we are able to add other product or service offerings we will have additional competition in those markets. Our current and potential competition includes the following categories of companies:

	•	traditional new textbook retailers, such as campus bookstores;
	•	traditional used college textbook retailers, some of which have or are expected to begin online selling;
	•	Internet-based textbook retailers such as bigwords.com, ecampus.com (affiliated with Wallace’s Bookstores, Inc.), efollett.com (affiliated with The Follett Corporation), textbooks.com (affiliated with Barnes & Noble College Bookstores, Inc.) and The U Zone;
	•	Internet-based general booksellers such as Amazon.com, barnesandnoble.com and Borders.com;
	•	general purpose consumer online services such as America Online and Microsoft Network, each of which provides access to college student-related content and services;
	•	vendors of information, merchandise, products and services to college students distributed through other means, including retail stores, direct mail and on campus; and
	•	Web sites targeted to students generally or to students of a particular school, such as Web sites developed by CollegeClub, CommonPlaces and Student.Net Publishing.

      We are not able to reliably estimate the number of our direct competitors. Many of our current and potential competitors have longer general retail operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technological, operational and other resources than we do. Some of our competitors may be able to secure textbooks from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing, shipping policies or inventory availability policies and devote substantially more resources to Web site and systems development than we can. As competition increases, we may experience reduced operating

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We may not be able to obtain lists of the textbooks required for classes at our target schools.

      We obtain the prescribed reading for classes at colleges and universities and post these “booklists” on our Web site to enable customers to easily find the textbooks they will need and, if they choose, order their textbooks before classes start. We may not be able to obtain these booklists in the future or our competitors may obtain and post booklists. If we cannot obtain and post booklists in advance of the start of a semester, or if our competitors are able to do so, we will lose a significant competitive advantage and our business may be harmed.

We depend on several marketing strategies to attract users to our Web site.

      In addition to our student representatives, we rely on a variety of marketing and sales relationships to attract users to our Web site. We obtain and post the booklists for a growing number of college and university courses, enabling us to plan for anticipated demand. We also offer a partnership program, under which we partner with schools to be their exclusive new textbook retailer. In addition, we enter into agreements with other college-oriented Web sites to provide a link from their Web site to ours. We believe that these relationships result in increased traffic to our Web site, and we intend to enter into similar relationships with other entities, which we expect to generate increased traffic to our Web site. Our ability to generate revenues from online commerce may depend on the increased traffic, purchases, advertising and sponsorships that we expect to generate through these and other relationships. There can be no assurance that these relationships will be maintained beyond their initial terms or that additional third-party alliances will be available to us on acceptable terms or at all. Further, several of these entities compete with each other and they may seek a similar relationship with one of our competitors rather than us to differentiate themselves from their competitors. Our inability to enter into new, and to maintain any one or more of our existing, significant marketing alliances could harm our business.

Loss of any of our key management personnel could negatively impact 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, and Timothy J. Levy, our co-founder and Executive Vice President, Development. We have entered into employment agreements with both Mr. Kuhn and Mr. Levy. 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.

Our business and growth will suffer if we are unable to successfully hire and retain key personnel.

      Our future success depends on our ability to attract, train, motivate and retain highly skilled employees and student representatives. We may be unable to retain our key employees and student

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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. We currently anticipate that the net proceeds from this offering, together with available funds, will be sufficient to meet our anticipated needs for the next twelve months. We expect to continue to lose money and generate negative cash flows from operations in the foreseeable future. We may need to raise additional funds in the future to fund more aggressive marketing programs, to increase our booklist operations, to acquire or develop new technology, to increase our staff to meet operational demands 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:

	•	market and economic conditions;
	•	our financial condition and operating performance; and
	•	investor sentiment.

      These factors may make the timing, amount, terms and conditions of additional financing unattractive for us. If additional financing is not available when required or is not available on acceptable terms, we may be unable to:

	•	fund our expansion;
	•	successfully promote our brand name;
	•	expand our booklist operations;
	•	develop or enhance our products and services;
	•	develop or purchase new servers, software and other technology to enable us to process increased transactions and service increased traffic on our Web site;
	•	attract and retain the appropriate talent and a sufficient number of employees to handle our increasing operations; and
	•	take advantage of business opportunities or respond to competitive pressures.

Our inability to take any of these actions could reduce the value of your investment.

We may not be able to effectively manage our expanding operations.

      We are experiencing a period of rapid growth. To execute our business plan, we must continue to grow significantly. As of January 31, 1999, we had a total of 20 employees and approximately 300 student representatives and, as of September 30, 1999, we had a total of 97 employees and approximately 1,000 student representatives. We expect that we will continue to increase the number of our employees and student representatives for the foreseeable future. This growth has placed, and our anticipated future growth will continue to place, a significant strain on our management, training systems, resources and facilities. Our inability to expand and effectively integrate these areas could cause our expenses to grow and our revenues to increase more slowly than expected or decline and could otherwise harm our business.

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Expanding the breadth and depth of our product or service offerings is expensive and difficult, and we may receive no benefit from our expansions.

      We may choose to expand our operations by promoting new or complementary products, expanding the breadth and depth of products and services we currently offer or expanding our market presence through relationships with new schools and other third parties. We cannot be certain that any potential expansion would generate sufficient revenues to offset the costs involved. Moreover, we may pursue the acquisition of new or complementary businesses, products or technologies or other intellectual property rights, although we have no present understandings, commitments or agreements with respect to any such acquisitions or investments. Expansion of our products and services will require significant additional expenditures and could strain our management, financial and operational resources. For example, we may need to incur significant marketing expenses, develop relationships with new partners, manufacturers or distributors or comply with new regulations. We cannot be certain we will be able to expand our product and service offerings in a cost-effective or timely manner, and we cannot be certain that any such efforts would receive market acceptance or increase our overall market acceptance. The offering of new products and services that are not favorably received by our customers could damage our reputation and brand name. In addition, we may not be able to offer additional products or services. If we are able to do so, we may not be able to offer these products or services before our competition. For many of these products and services, there are already other traditional and online retailers offering these products and we may not be able to change our customers’ purchasing habits.

We will only be able to execute 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:

	•	the Internet infrastructure may be unable to support increased demand or its performance and reliability may decline as usage grows;
	•	the inability of Web sites to provide security and authentication of confidential information contained in transmissions over the Internet;
	•	the quality of Internet products and services may not continue to generate user interest;
	•	online commerce is at an early stage and buyers may be unwilling to shift their traditional purchasing to online purchasing;
	•	increased government regulation or taxation of online commerce, at the state or federal level, may adversely affect the viability of online commerce;
	•	insufficient availability of telecommunication services or changes in telecommunication services may result in slower response times; and
	•	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

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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 which is owned, maintained and serviced by Frontier GlobalCenter, Inc. We rely on Frontier GlobalCenter to ensure our communication 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 periods of August/September and January/February, 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.

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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 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 could lose revenues and incur significant costs if our systems or material third-party systems are not Year 2000 compliant.

      Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies may need to be upgraded to comply with such “Year 2000” requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although we have conducted testing and we believe that our systems are Year 2000 compliant, there can be no assurance that our computer systems contain all necessary date code changes, or that, in the year 2000, our computer systems will be compatible with third-party software that may be integrated or used in conjunction with our computer systems. The failure of our internal systems could disrupt our business.

      Year 2000 problems could limit or impede our ability to offer products and services and to run our Web site, resulting in lower revenues and reducing the value of your investment. Additionally, we cannot assure you that the computer systems necessary to run and maintain any of the Web sites which direct customers to our online textbook store, or the computer systems of our key supplier, Baker & Taylor, will be year 2000 compliant. If we experience any year 2000 problems, either due to failure of our own systems or those of our affiliates, vendors, consultants or customers, the failure is likely to occur during one of our peak sales periods (January/February 2000),which could harm our business and reputation and cause us to lose a significant and disproportionate amount of revenues.

We may become subject to burdensome government regulations and legal uncertainties affecting the Internet which 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 network and limit the growth of our revenues. In addition to

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	•	sales and other taxes;
	•	user privacy;
	•	pricing controls;
	•	characteristics and quality of products and services;
	•	consumer protection;
	•	libel and defamation;
	•	copyright, trademark and patent infringement; and
	•	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.

      If we are unable to secure the rights 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. To date, we have not been successful in our efforts to secure a federal registration for VarsityBooks.com. Even if we are able to secure federal trademark registration for this mark, federal trademark laws only provide us with limited protection.

      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 is uncertain and still evolving. The laws of other countries in which we may market our services in the future are uncertain and 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. The proceedings also could involve a high degree of risk.

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. The acquisition and maintenance of domain names generally is regulated by governmental agencies and their designees. The regulation of domain names in the United States and in foreign countries is expected to change in the near future. Such changes in the United States are expected to include a transition from the current system to a system which is controlled by a non-profit corporation and the creation of additional top-level domains. Requirements for holding domain names will

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Certain states may impose a new sales tax on our business.

      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 sale and use taxes and/or pay taxes from previous sales. As of the date of this prospectus, we have not received assessments from any state. We currently collect and forward sales tax on all shipments to Illinois and the District of Columbia. The Supreme Court decision also established that Congress has the power to enact legislation which 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. We anticipate that any legislative change, if adopted, would be applied on a prospective basis. 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.

After this offering, our executive officers, directors and existing stockholders, whose interests may differ from other stockholders, will have the ability to exercise significant control over us.

      Our executive officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately      % of our common stock following this offering. These stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors, the approval of significant corporate transactions and the power to prevent or cause a change of control. The interests of these stockholders may differ from the interests of our other stockholders.

Our stock price may experience extreme price and volume fluctuations, and investors in our stock may not be able to resell their shares at or above the offering price.

      Before this offering, there has not been a public market for our common stock and an active public market for our common stock may not develop or be sustained after this offering. We cannot predict the extent to which investors’ interest in us will lead to the development of a trading market or how liquid the market might become. If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market, but will be negotiated between us and the underwriters. The price of the common stock that will prevail in the market after the offering may be higher or lower than the price you pay. The stock market in general and the market prices of shares in newly public technology companies, particularly those such as ours that offer Internet-based products and services, have been extremely volatile and have experienced fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies’ stocks are at or near historical highs and reflect price to earnings ratios substantially above historical levels. We cannot be certain that these trading prices or price to earnings ratios will be sustained. The market

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	•	quarterly variations in our results of operations;
	•	adverse business developments;
	•	changes in financial estimates by securities analysts;
	•	investor perception of us and online retailing services in general;
	•	announcements by our competitors of new products and services; and
	•	general economic conditions both in the United States and in foreign countries.

      Fluctuations in our common stock’s price may affect our visibility and credibility in our market. In the event of fluctuations in the market price of our common stock, you may be unable to resell your shares at or above the offering price.

If our stock price is volatile, we may become subject to securities litigation which is expensive and could result in a diversion of resources.

      Securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Litigation brought against us could result in substantial costs to us in defending against the lawsuit and a diversion of management’s attention that could cause our business to be harmed.

Future sales of our common stock after this offering may negatively affect our stock price.

      Following the offering, we will have a large number of shares of common stock outstanding and available for resale beginning at various points in time in the future. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market following this offering, or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Our management will have broad discretion over the use of the net proceeds to us and you may not agree with how they choose to utilize those funds.

      We have no current specific plans for the use of the net proceeds to us from this offering. We intend generally to use the net proceeds to us from this offering for working capital and general corporate purposes, including sales and marketing activities, information technology, booklist operations, development of new product and service offerings and acquisitions. We have not yet determined the actual expected expenditures and thus cannot estimate the amounts to be used for each specified purpose. The actual amounts and timing of these expenditures will vary significantly depending on a number of factors, including, but not limited to, the amount of cash generated by our operations and the market response to the introduction of any new product or service offerings. Depending on future developments and circumstances, we may use some of the proceeds for uses other than those described above. Our management will therefore have significant flexibility in applying the net proceeds of this offering. If the net proceeds are not used in a manner beneficial to us, our business could be harmed.

It may be difficult for a third party to acquire our company and this could depress our stock price.

      Delaware corporate law and our sixth amended and restated certificate of incorporation and our by-laws contain provisions that could have the effect of delaying, deferring or preventing a change in control of VarsityBooks.com or a change of our management that stockholders may consider favorable or beneficial. These provisions could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. These provisions could also limit the price

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	•	authorize the issuance of “blank check” preferred stock, which is preferred stock that can be created and issued by the Board of Directors without prior stockholder approval, with rights senior to those of common stock;
	•	provide for a staggered Board of Directors, so that it would take three successive annual meetings to replace all directors;
	•	prohibit stockholder action by written consent; and
	•	establish advance notice requirements for submitting nominations for election to the Board of Directors and for proposing matters that can be acted upon by stockholders at a meeting.

You will suffer immediate and substantial dilution of the value of your investment.

      Investors purchasing shares in this offering will incur immediate and substantial dilution in their investments. The initial public offering price per share will exceed our pro forma net tangible book value per share by $          . To the extent outstanding options and warrants to purchase common stock are exercised, your investment will be further diluted.

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FORWARD-LOOKING STATEMENTS

      This prospectus contains forward-looking statements relating to our operations that are based on management’s current expectations, estimates and projections about our company and the online commerce industry. Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “anticipates” and variations of these words and similar expressions are used to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. We undertake no obligation, and do not intend, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A number of important factors could cause actual results to differ materially from those indicated by such forward-looking statements. Such factors include those set forth under the heading “Risk Factors.”

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USE OF PROCEEDS

      We estimate the net proceeds to us from the sale of the shares of common stock in this offering will be approximately $          , or $          if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $           per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. We will not realize any proceeds from the sale of shares of common stock by the selling stockholders.

      We intend to use the net proceeds to us of this offering for working capital and general corporate purposes, including

	•	increasing our sales and marketing efforts;
	•	enhancing our information technology;
	•	increasing our booklist operations staff;
	•	introducing new products and services; and
	•	acquiring complementary technology, businesses or intellectual property rights.

      Although we may use a portion of the net proceeds to invest in or acquire complementary technology or businesses or to acquire intellectual property rights, we have no current plans in this regard.

      Except as indicated, we cannot specify with certainty the particular uses for the net proceeds to be received from the offering or the amount to be used specifically with respect to any use. Accordingly, our management will have broad discretion in using the net proceeds.

      Pending their use, we plan to invest the net proceeds predominantly in short-term, interest-bearing, investment grade securities.

DIVIDEND POLICY

      We have not paid any cash dividends on our common stock since our inception and do not intend to pay any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings, if any, for use in the operation and expansion of our business.

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CAPITALIZATION

      The following table sets forth the capitalization of VarsityBooks.com as of August 31, 1999 on an actual, pro forma and pro forma as adjusted basis. The pro forma capitalization gives effect to:

	•	The issuance and sale of 2,708,326 shares of Series C preferred stock for proceeds of approximately $9.1 million made after August  31, 1999. This issuance was made as part of the issuance and sale of an aggregate of 8,928,571 shares of Series C preferred stock effective August 27, 1999 for aggregate proceeds of approximately $30.0 million.

      The pro forma as adjusted, capitalization gives effect to:

	•	the filing of our Sixth Amended and Restated Certificate of Incorporation; and
	•	the conversion of all of our outstanding shares of Series A, Series B and Series C preferred stock into shares of common stock upon consummation of the offering and our sale of           shares of common stock in the offering and receipt and application of the estimated net proceeds from the offering, at an assumed initial public offering price of $     per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

      This information should be read in conjunction with our financial statements and the related notes appearing elsewhere in this prospectus.

      This table excludes the following shares:

	•	shares of common stock issuable upon the exercise of stock options outstanding under our employee stock option plan at a weighted average exercise price of $     per share and           additional shares of common stock available for issuance under our stock option plan; and
	•	shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $     per share.

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DILUTION

      Our pro forma net tangible book value as of August 31, 1999 was approximately $          , or $     per share, as adjusted to give effect to our pro forma capitalization and the assumed automatic conversion of all of the outstanding shares of convertible preferred stock into            shares of our common stock upon consummation of this offering. Pro forma net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities divided by            shares of common stock outstanding.

      Dilution per share to new investors represents the difference between the amount per share paid by purchasers of our common stock in this offering and the pro forma net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of           shares of common stock by us in this offering at an assumed initial public offering price of $     per share and the receipt and application of the net proceeds, after deduction of estimated underwriting discounts and commissions and the payment of the estimated offering expenses, our pro forma net tangible book value as of August 31, 1999, would have been approximately $          , or $     per share. This represents an immediate dilution in pro forma net tangible book value of $     per share to purchasers of common stock in this offering and an immediate increase in pro forma net tangible book value of $     per share to existing stockholders, as illustrated in the following table:

      The following table summarizes on a pro forma as adjusted basis as of August 31, 1999, the number of shares of common stock purchased from us, the total consideration paid or to be paid, and the average price per share paid or to be paid to us by existing stockholders and by new investors at an assumed initial offering price of $     per share:

      The foregoing table and calculation assumes no exercise of stock options or warrants outstanding as of August 31, 1999. As of August 31, 1999, there were options outstanding to purchase an aggregate of            shares of common stock at a weighted average exercise price of $     per share. In addition, as of August 31, 1999, there were warrants outstanding to purchase an aggregate of            shares of common stock at a weighted average exercise price of $          . To the extent that any of these outstanding options or warrants are exercised, there will be further dilution to new investors.

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SELECTED CONSOLIDATED FINANCIAL DATA

      The consolidated statement of operations data for the year ended December 31, 1998 and the consolidated balance sheet data as of December 31, 1998 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the eight months ended August 31, 1998 and 1999, and the consolidated balance sheet data as of August 31, 1999, are derived from our unaudited consolidated financial statements for such periods and as of such date, which are included in this prospectus. We have prepared this unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for such periods. When you read this selected financial data, it is important that you also read the historical consolidated financial statements and related notes included in this prospectus, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Historical results are not necessarily indicative of future results, and results for any interim period are not necessarily indicative of results for a full year.

      The pro forma balance sheet data gives effect to the issuance and sale of 2,708,326 shares of Series C preferred stock for proceeds of approximately $9.1 million made after August 31, 1999 and the application of net proceeds thereof. These issuances were made as part of the issuance and sale of an aggregate of 8,928,571 shares of Series C preferred stock effective August 27, 1999 for aggregate proceeds of approximately $30.0 million.

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      The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this prospectus.

Overview

      We are a leading online retailer of new college textbooks and have established a platform for marketing products and services to 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, improving the efficiency of our order and fulfillment process, recruiting and training employees, 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.

      We began to generate sales once we launched our Web site in August 1998, at which time we posted the booklists for five schools. For the Fall 1999 semester, we increased the booklists we posted to over 210,000 courses at over 300 different targeted colleges and universities. In addition, we launched partnership programs with 13 different partner institutions.

      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 banner advertisements and co-marketing programs, pursuant to which we have arrangements to sell textbooks through other college-oriented 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. We anticipate that in the third quarter of fiscal 1999, we will begin generating revenues from co-marketing programs for which we will use our student representative network to market to students on behalf of other businesses.

      We have incurred substantial 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 $2.4 million and negative cash flows from operations of $1.2 million. For the eight months ended August 31, 1999, we incurred a loss from operations of approximately $13.9 million and negative cash flows from operations of $9.1 million. As of December 31, 1998 and August 31, 1999, we had accumulated deficits of approximately $2.4 million and $16.2 million, respectively. We expect operating losses and negative cash flows to continue for the foreseeable future. We anticipate our net losses will increase significantly from current levels because we expect to incur additional costs and expenses related

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      We granted options to purchase           shares for the period ended December 31, 1998 and options to purchase           shares for the eight months ended August 31, 1999 that have been deemed to be compensatory. As a result, we recorded deferred compensation of $354,000 during the year ended December 31, 1998 and $3.4 million during the eight months ended August 31, 1999. Additionally, effective August 1, 1999, we sold           shares of our common stock at a price of approximately $      per share to each of Mr. Kuhn and Mr. Levy. The shares vest at a rate of 40% upon the completion of one year of service and the remaining 60% vest at the end of the second year. Also, effective August 24, 1999, Mr. Kuhn was granted an option to purchase      shares of our common stock at an exercise price of approximately $     per share. The option vests in equal monthly installments over each of the next 48 months assuming Mr. Kuhn remains employed by us. We have deemed that the fair value of the underlying stock for both the sale of common stock and option grants is in excess of the related sales or exercise price. As a result, we recorded deferred compensation of $3.5 million during August 1999. Amortization of deferred compensation was $174,000 for the eight months ended August 31, 1999 related to these transactions and is included in non-cash compensation in the accompanying consolidated statements of operations. Non-cash compensation is being charged to operations over the vesting period of the underlying shares and options.

      The deferred compensation is being amortized as follows:

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      The following table sets forth the results of our operations for the year ended December 31, 1998 and the eight months ended August 31, 1998 and 1999:

      Our fiscal year runs from January 1 through December 31. We did not execute any transactions from December 16, 1997 (inception) through December 31, 1997. We commenced offering books for sale on our Web site in August 1998, and, accordingly, the calendar year ended December 31, 1998 only includes a period of five months during which we generated net sales. Similarly, we generated net sales for one month during the eight months ended August 31, 1998 as compared to all eight months during the period ended August 31, 1999.

Eight Months Ended August 31, 1999 Compared with Eight Months Ended August 31, 1998

  Net Sales

      Net sales increased to approximately $5.1 million for the eight months ended August 31, 1999 from $42,000 for the eight months ended August 31, 1998, as a result of the significant growth in orders primarily from our expanding customer base as well as the commencement of our partnership program.

  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 $4.5 million for the eight months ended August 31, 1999 from $37,000 for the eight months ended August 31, 1998. This increase was primarily attributable to our increased sales volume.

      Shipping and Handling-Related Party (Baker & Taylor). Shipping and handling-related party consists of outbound shipping and handling costs. Shipping and handling increased to $408,000 for the eight months ended August 31, 1999 from $3,000 in the eight months ended August 31, 1998. This increase was primarily attributable to our increased sales volume.

      As discussed further in “Certain Transactions — Transactions with Baker & Taylor,” effective October 1, 1999 we have amended the documents governing our relationship with Baker & Taylor. The amendment provides for assignment of separate values to the separate services provided by Baker & Taylor: supply of books, shipping and handling services and other services, including Web site

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      On a prospective basis, these agreements will serve to reduce Cost of Product — Related Party (Baker & Taylor) as a percentage of revenue and increase Marketing and Sales — Related Party (Baker & Taylor) as a percentage of revenue.

      Equity Transactions-Related Party (Baker & Taylor). Equity transactions-related party consists of the fair value of warrants and the amortization of the excess of the fair value over the cost of common stock issued to Baker & Taylor. During 1998, we issued warrants to purchase up to                 and                 shares of our common stock at exercise prices of $           and $           per share, respectively. An additional warrant to purchase up to                 shares of our common stock at an exercise price of $           per share was issued to Baker & Taylor in 1999. We estimated the fair value of the warrants on the date of grant using an established option pricing model (see note 3 to the accompanying consolidated financial statements). On July 10, 1998, we sold                 shares of our common stock to Baker & Taylor at a price of $           per share. We subsequently determined that the fair value of the common stock was in excess of the exercise price and sales price (fair value per share was derived by reference to the preferred stock value since inception — see note 3 to the accompanying consolidated financial statements). We amortized the excess of the fair value of the common stock over its cost, which is approximately $643,000, over the initial twelve month service period of our agreement with Baker & Taylor which began July 1998. In connection with these transactions, we recorded an expense of $490,000 for the eight months ended August 31, 1999, an increase from the $172,000 we recorded for such transactions for the eight months ended August 31, 1998.

      Marketing and Sales. Marketing and sales expense consists primarily of advertising and promotional expenditures and payroll and related expenses for personnel engaged in marketing, including the expenses associated with the continued development of our nationwide network of student representatives. Marketing and sales expense increased to $8.8 million for the eight months ended August 31, 1999 from $99,000 for the eight months ended August 31, 1998. Advertising expense increased to $5.4 million in the eight months ended August 31, 1999 from $76,000 for the eight months ended August 31, 1998. 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 our partnership program.

      Product Development. Product development expense consists of payroll and related expenses for development and systems personnel and consultants. Product development expense increased to $1.9 million for the eight months ended August 31, 1999 from $185,000 for the eight months ended August 31, 1998. This increase was primarily attributable to increased staffing and other costs related to feature and functionality enhancements to our Web site.

      General and Administrative. General and administrative expense consists of payroll and related expenses for executive and administrative personnel, facilities expenses, professional services expenses, travel and other general corporate expenses. General and administrative expense increased to approximately $1.8 million for the eight months ended August 31, 1999 from $109,000 for the eight months ended August 31, 1998. This increase was primarily attributable to the hiring of additional personnel and increased professional services expenses.

      Non-cash Compensation. Non-cash compensation expense consists of the amortization of deferred compensation. Non-cash compensation expense increased to approximately $1.0 million during the eight month period ended August 31, 1999 from $53,000 for the eight months ended August 31, 1998.

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  Other Income (Expense)

      Other income or expense consists of interest income on our cash and cash equivalents and investments, interest expense attributable to our convertible notes payable and other income or expense items. Other income was $84,000 for the eight months ended August 31, 1999 compared to other income of $800 for the eight months ended August 31, 1998. This increase was primarily attributable to interest income on higher average cash and cash equivalent balances during the eight months ended August 31, 1999.

  Income Taxes

      As of December 31, 1998, we had net operating loss carryforwards for federal income tax purposes of $1.7 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. Changes in the ownership of our common stock, as defined in the Internal Revenue Code of 1986, as amended, may restrict the utilization of such carryforwards. See note 10 to our consolidated financial statements.

Year Ended December 31, 1998

      Net sales were $132,000 for the year ended December 31, 1998 primarily as a result of the growth in orders from our expanding customer base. Cost of product-related party was $115,000 and shipping and handling-related party was $10,000 as a result of our increased sales volume. Equity transactions-related party of $477,000 relates to expense recognized in connection with warrants and common stock issued to Baker & Taylor as described above. Marketing and sales expense was $536,000 as a result of our online and offline advertising as well as personnel and related expenses. Product development expense was $627,000 as a result of staffing and other costs related to feature and functionality enhancements to our web site. General and administrative expense was $562,000 as a result of the hiring of personnel and professional services expenses. Non-cash compensation was $177,000 as a result of the amortization of deferred compensation.

Seasonality

      We have experienced significant seasonality in our results of operations. Due to the college calendar and the seasonal nature of the textbook industry, our peak selling periods are currently August/September and January/February, when college students return to school and new semesters begin. Part of our strategy includes offering additional products and services through our Web site. While these products and services may not have the same seasonal selling periods as textbook sales, purchases of these products and services may occur primarily with customer purchases of textbooks. In addition, the net sales generated from these products and services may be significantly less than those generated from our sales of textbooks. As a result, we may continue to experience fluctuations in quarterly operating results.

Liquidity and Capital Resources

      Since inception, we have financed our operations primarily through private sales of our convertible preferred stock. On August 6, 1998 and December 3, 1998, we issued an aggregate of 2,071,420 shares of Series A preferred stock at a purchase price of $0.70 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 this offering, shares of our Series A, B and C preferred stock will be converted into shares of our common stock on a           basis.

      In August 1999, we loaned $62,000 to each of our founders, Eric J. Kuhn and Timothy J. Levy, to each purchase           shares of our common stock.

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      As of August 31, 1999, we had $20.8 million of cash and cash equivalents. As of that date, our principal commitments consisted of obligations outstanding under operating leases, accounts payable and accrued liabilities. Although we have no material commitments for capital expenditures, we anticipate a substantial increase in our capital expenditures and lease commitments consistent with anticipated growth in operations, infrastructure and personnel.

      Net cash used in operating activities was $9.1 million for the eight months ended August 31, 1999, and $175,000 for the eight months ended August 31, 1998, consisting primarily of net losses adjusted for changes in accounts receivable, accounts payable and accrued expenses.

      Net cash used in investing activities was $1.0 million for the eight months ended August 31, 1999, and $709,000 for the eight months ended August 31, 1998, consisting primarily of purchases of computer equipment, fixtures and furniture, as well as an investment in United States government debt securities.

      Net cash provided by financing activities was $29.5 million for the eight months ended August 31, 1999, and $1.2 million for the eight months ended August 31, 1998. Net cash provided by financing activities during the eight months ended August 31, 1999 consisted primarily of net proceeds of $29.4 million from the issuance of preferred stock.

      We currently anticipate that the net proceeds of this offering, together with our available funds, will be sufficient to meet our anticipated needs for working capital and capital expenditures through the next 12 months. 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. 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. There can be no assurance that this capital will be available in amounts or on terms acceptable to us, if at all.

Quantitative and Qualitative Disclosures About Market Risk

      Substantially all of our cash equivalents are at fixed interest rates, and therefore the fair value of these instruments is affected by changes in market interest rates. However, as of August 31, 1999, all of our cash equivalents mature within three months. As of August 31, 1999, we believe the reported amounts of cash equivalents to be reasonable approximations of their fair values. As a result, we believe that the market risk arising from our holdings of financial instruments is minimal.

Year 2000 Compliance

      Many currently installed computer systems and software products are coded to accept or recognize only two-digit entries in the date code field. These systems and software products will need to accept four-digit entries to distinguish 21^st century dates from 20^th century dates. As a result, computer systems and software used by many companies and governmental agencies may need to be upgraded to comply with such year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities.

      State of Readiness. We have made a preliminary assessment of the year 2000 readiness of our information technology, or IT, systems, including the hardware and software that enable us to provide and deliver our products and services. Our year 2000 readiness plan consists of:

	•	quality assurance testing of our internally developed proprietary software;
	•	contacting third-party vendors and licensors of material software and services that are both directly and indirectly related to the delivery of our products and services;
	•	assessing our repair and replacement requirements; and
	•	creating contingency plans in the event of year 2000 failures.

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      We will perform a year 2000 simulation on our software during the fourth quarter of 1999 to test system readiness. Because our proprietary systems have been developed within the last 18 months, we expect we will find no anomalous behavior in our systems. We have been informed by the majority of our material software component vendors and our Internet service provider that the products we use are currently year 2000 compliant. We are in the process of following up with the remaining vendors to receive this information. We purchased all of our software and hardware within the past two years, and therefore we do not have legacy systems that have been identified to have year 2000 issues. We have applied all known vendor patches for relevant software of which we have been notified to comply with vendor defined year 2000 standards.

      We are currently assessing our non-IT systems, such as telephone, heating, ventilating and air conditioning and electronic entry systems, and plan to seek assurance of year 2000 compliance from providers of material non-IT systems. Until testing is complete and we contact these vendors and providers, we will not be able to completely evaluate whether our IT systems or non-IT systems will need to be revised or replaced.

      Costs. To date we have not incurred any material incremental costs in identifying or evaluating year 2000 compliance issues. Based on our assessment to date, we do not anticipate that incremental costs associated with remediating our non-compliant IT systems or non-IT systems, if any, will be material. We expect that our existing employees or consultants will perform any significant work pertaining to year 2000 compliance.

      Risks. We are not currently aware of any year 2000 compliance problems relating to our technology or our IT or non-IT systems that would have a material adverse effect on our business, results of operations or financial condition. However, we may discover year 2000 compliance problems in our technology that will require substantial revisions. In addition, we may need to revise or replace third party software, hardware or services incorporated into our material IT and non-IT systems, all of which could be time consuming and expensive. If we fail to fix our technology or fail to fix or replace third-party software, hardware or services on a timely basis, the result could be lost revenues, increased operating costs, the loss of customers and other business interruptions, any of which could have a material adverse effect on our business, results of operations and financial condition. Moreover, the failure to adequately address year 2000 compliance issues in our technology and our IT and non-IT systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time consuming to defend. In addition, we cannot be assured that governmental agencies, utility companies, Internet access companies, third-party service providers such as Baker & Taylor, and others outside our control will be year 2000 compliant. The failure by such entities to be year 2000 compliant could result in a systemic failure beyond our control, such as a prolonged Internet, telecommunications or electrical failure, which could also prevent us from delivering our products and services to our customers, decrease the use of the Internet or prevent users from accessing our Web sites of companies with whom we have entered into business alliances, which could have a material adverse effect on our business, results of operations and financial condition.

      Contingency Plan. As discussed above, we are engaged in an ongoing year 2000 assessment and are developing contingency plans in case of year 2000 disruptions. We will take into account the results of our year 2000 simulation testing and the responses received from third party vendors and service providers in determining the nature and extent of any contingency plans. We believe that we will complete our system tests and contingency plan by October 31, 1999.

Recent Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income. SFAS No. 133 is effective for our fiscal year ending December 31, 2001. We do not expect that the adoption of SFAS No. 133 will have a material impact on our consolidated financial statements.

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BUSINESS

General

      We are a leading online retailer of new college textbooks and have established a platform for marketing goods and services to the nation’s 15 million college students. We have sold textbooks to students at over 2,400 colleges and universities in each of the 50 states. According to MediaMetrix, an online market research firm, www.varsitybooks.com had over 645,000 unique visits in August 1999, which made us the most visited college-oriented Web site. Our brand is built on saving students time and money while providing a high level of customer service. Our carefully selected and trained network of student representatives promotes our products and brand on college campuses, enabling us to customize our marketing to the particular dynamics of each campus and reach students on a peer-to-peer basis. We plan to use this network of student representatives, the expertise we are developing in marketing to college students and our ability to aggregate the fragmented college student market through our student-focused Web site to increase the number of products and services we offer and to provide a marketing channel for other businesses.

Industry Background

      The college student market is large and growing. As of Spring 1999, there were approximately 15 million full-time and part-time undergraduate and graduate students at more than 3,600 colleges and universities in the United States. College enrollment is expected to increase to approximately 16 million students by 2008. According to Student Monitor L.L.C., a nationally syndicated market research company, excluding tuition, room and board, college students spent over $105 billion in 1998 on goods and services.

      The college market is unique both in the diverse interests and the particular needs of college students, who represent a broad cross-section of socio-economic and cultural backgrounds. These students have a wide variety of curricular and extracurricular interests, and their purchasing patterns are similarly varied. Nonetheless, students have certain common needs. For instance, most students must buy expensive school-related goods and services, such as textbooks and school supplies. In fact, new textbooks are most students’ single largest school-related expenditure after tuition and room and board. Based on statistics published by the National Association of College Stores, new textbook sales were approximately $5 billion in 1998.

      Purchasing new textbooks through traditional retailers tends to be expensive and inconvenient. The new textbook market is presently dominated by campus bookstores, with most schools either operating their own bookstore or contracting these services to a third party. With few bookstores on or near each campus, most campus bookstores face little competition and thus do not have an incentive to address the inefficiencies of the traditional new textbook market. Campus bookstores typically have significant overhead, in part because they bear the cost of warehousing the wide variety of titles needed each semester. In addition, campus bookstores have little purchasing power because they are required to purchase relatively small quantities of many different titles to satisfy the needs of their students. These factors limit their ability to offer reduced prices to their customers. The majority of campus bookstores are operated by educational institutions as an ancillary service. For smaller schools, running a bookstore typically means a diversion of necessary resources with little, if any, financial return. Regardless of the size of the school, campus bookstores are crowded at the beginning of each semester, forcing students to endure long lines and frequent out-of-stock inventory problems.

      Online commerce provides a new opportunity to better serve and more efficiently reach the college student market. College students are among the most active users of the Internet and are increasingly purchasing goods and services online. According to Student Monitor, during the Spring 1999 semester, 95% of college students used the Internet, spending an average of seven hours a week online. The majority of these students accessed the Internet one or more times daily and, during a one year period ending in the Spring of 1999, approximately 26% of these students made online purchases, up from a cumulative total of 10% through December 31, 1997. Online commerce complements students’ lifestyles, generally providing them the convenience of twenty-four hour shopping and a lower cost alternative for their

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      College students’ spending power, as exhibited by the $105 billion they spent in 1998 on items such as entertainment, music and apparel, coupled with the belief that students are still forming their brand loyalties, make college students an attractive market to businesses and advertisers. However, few businesses have succeeded in offering students a unified marketplace to meet their varied needs in a convenient and cost-effective manner. Students are geographically dispersed and frequently change their addresses, which makes them difficult to target with traditional direct marketing. While national and regional media campaigns build brand recognition, they are not a cost-effective method of targeting college students. Although students do watch television and read newspapers and magazines, we believe they tend to be more influenced by the opinions and actions of their peers than by traditional media advertising.

      We believe an opportunity exists to better serve and market to college students, particularly given the inefficiencies of the traditional textbook industry and the inherent difficulties in reaching these students. Students have many demands on their time and typically have a limited budget. We believe there is a significant market opportunity for an online store that offers students an enhanced shopping experience by providing textbooks and other student-oriented goods and services with a focus on cost savings, convenience and customer service. We also believe an opportunity exists to more effectively target college students by creating a defined, peer-to-peer marketing channel to overcome the inherent difficulties in reaching this market.

The VarsityBooks.com Solution

      As a leading online retailer of college textbooks, we are becoming a trusted online marketplace for students. We selected textbooks as our initial product offering because they are an expensive purchase that students are required to make each semester. By addressing inefficiencies in the textbook market and providing increased convenience and low prices to students, we are building our brand and attracting college students to our Web site. We have also established a platform for marketing goods and services to college students.

      Our solution is comprised of:

	•	Network of Student Representatives. As of September 30, 1999, we had a network which has grown to more than 1,000 student representatives on the campuses of over 250 colleges, universities and graduate schools, which enroll approximately 3.5 million of the 15 million college students nationwide. As enrolled students at their respective schools, our representatives provide us feedback on their peers’ needs and lifestyles, allowing us to customize our marketing approach to the particular dynamics of each campus. Student representatives reach our potential customers wherever students gather—in classrooms, student organizations, dormitories and fraternities and sororities. We believe using our student representative network, combined with our marketing campaigns, more effectively builds brand awareness and drives more traffic to our Web site than a traditional national or regional marketing campaign would alone.
	•	Convenience and Availability. Through our easy-to-use Web site, a customer can search our database of over 350,000 different titles twenty-four hours a day, seven days a week. Our customers can avoid the overcrowding and long lines characteristic of peak season shopping at campus bookstores. To date, we have sold books to students at over 2,400 colleges and universities. To provide maximum convenience, in the Fall 1999 semester we posted booklists for over 210,000 courses from over 300 colleges and universities. These booklists enable students to view the prescribed reading list for their courses and then order the appropriate books directly from us. We plan to provide this convenience to an increasing number of students each year by regularly seeking and posting booklists for additional schools. If we have not posted a specific school’s booklist, our customers can still search for the books they need by author, title, keyword, publisher or ISBN number (a unique industry identification number). Our information on textbook availability is

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		updated regularly throughout the day, giving our customers accurate information and assuring availability prior to ordering.
	•	Cost Savings and Customer Service. We provide students with a reliable, cost-saving alternative to the traditional campus shopping experience. We significantly reduce the overhead associated with textbook sales because we do not maintain individual stores and we outsource our ordering, inventory, warehousing and fulfillment needs through our relationship with Baker & Taylor, a leading distributor of books, videos and music products. We pass these savings on to our customers by offering discounted prices. In addition to providing new textbooks at reduced prices, we are committed to providing top quality customer service. Our customer service center is available by telephone and e-mail twenty-four hours a day, seven days a week, and we increase our service center staffing during our peak periods to ensure a timely response to our customers’ questions. In addition, we provide tracking numbers to our customers, which enable them to follow the delivery process of their orders on our Web site.
	•	Marketing Channel to College Students. We use the combination of our advertising and our student representatives to drive traffic to our Web site, enabling us to aggregate the fragmented student market. As our customers conduct transactions on our Web site, we collect their contact information as well as data on their majors and schools. We also retain their transactional histories. Using this database of student demographics, together with our student representative network and our experience selling to college students, we can market on a peer-to-peer basis and target specific groups of students. In addition to serving our own marketing needs, we have begun to make our student representatives and our Web site available to other businesses to reach this large, demographically attractive, yet fragmented, market.
	•	Partnership Program. We provide an opportunity for schools to maximize their limited resources and offer increased convenience and reduced prices to their students by outsourcing new textbook sales to us. We believe that for many schools, including traditional four-year colleges as well as community colleges, private high schools and distance learning programs, the expense and inconvenience of maintaining a bookstore exceeds the schools’ financial return. In addition to maximizing their limited resources, we offer our partnership schools a percentage of the revenue generated by their students on our Web site.

Strategy

      Our goal is to become the leading online college retailer and the most effective marketing channel to college students. Our success in selling textbooks online has allowed us to compile our customers’ demographics and build a growing customer base that will enable us to sell additional goods and services directly to the student market. Our network of campus representatives allows us to market directly to students, both on our own behalf and on behalf of advertisers and other businesses. In pursuing our goal, we use the following strategies:

	•	Aggressively Build Our Brand. We intend to establish VarsityBooks.com as the leading college-oriented brand through a variety of marketing and promotional techniques, including the use of our student representative network and a comprehensive national media campaign featuring radio, print, e-mail and online advertisements. Based on statistics published by Media Metrix, we were the most visited college-oriented Web site in August 1999 and continue to differentiate ourselves based on the reliability, quality and cost-efficiency of our products and services. In addition to focusing on college students, we intend to extend our reach to high school students, primarily through expanding our partnership program, and graduate students, as well as continue to aggressively market to professors, teaching assistants, dorm resident assistants and parents who influence our ultimate target audience, college students.
	•	Leverage and Grow Our Network of Student Representatives. We believe that our network of student representatives is a significant competitive advantage. We intend to use our carefully selected, trained and growing network of student representatives to expand awareness of our current

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	•	Add Booklist Schools. We intend to increase our nationwide presence by expanding the number of schools for which we post booklists. We believe that the added convenience of purchasing textbooks through the use of booklists increases our sales at booklist schools and our customer base. By increasing our customer base we believe we increase our ability to successfully introduce our new product and service offerings.
	•	Extend the Breadth and Depth of Our Offerings. We intend to capitalize on our brand recognition, college marketing experience and extensive customer base to offer additional products and services. Among the products we are considering offering are music and entertainment products, apparel and school supplies and equipment. In addition, we plan, among other things, to increase our payment options, develop a loyalty program and begin offering services geared to students’ needs and interests, such as online entertainment ticketing, travel and financial services.
	•	Capitalize on Our Growing Customer Database. We intend to capitalize on our growing customer database to provide targeted product, service and promotional offerings, both by us and other businesses. We plan to use our customer information and transactional histories to assist us in planning our product and service line expansions. As we broaden our product and service offerings, we will learn more about our customers and will be in a position to become an infomediary, serving both students and the companies that seek to reach them. We believe that by tailoring the marketing of our products and services, we will increase sales through our Web site.
	•	Add Partnership Schools. We intend to expand our partnership program to further extend our reach into traditional four-year and community colleges, private high schools that require students to purchase their textbooks, distance learning programs and continuing and professional education programs. We work closely with all participating schools in our partnership program, providing them with dedicated customer service and support. Through these relationships, we are endorsed as the exclusive new textbook retailer at our partnership schools. As a result, we gain direct access to their students, enabling us to build brand awareness and market our other products and services.

The VarsityBooks.com Experience

      Our Web site, www.varsitybooks.com, offers several benefits to students including convenience, ease of use and depth of product selection. Key aspects of our Web site include:

	•	Finding Books. When logging on to our Web site, visitors are presented with several shopping options, including:

		Searching by School. Students can use our customized map to locate their school. Once they find their school, if they attend one of over 300 schools for which we post booklists, they can link from a list of departments to a list of classes organized by professor and to the specific booklists for the particular courses they are taking. Alternatively, students can search directly by professor or course name. Our customers have the option of placing all the textbooks for a particular class in their shopping cart with a single click or selecting only those titles that interest them.
		Searching for Books. If we have not posted a specific school’s booklist, our customers can still easily search for the books they need by author, title, keyword, publisher or ISBN number. Our Web site offers additional book verification for many selections, including pictures of jacket art, editor’s name, volume number, table of contents and other identifying characteristics.

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		Browsing. Visitors to our Web site may browse our available selections of over 1,500 subject matter categories, such as business and finance, dance and theatre, social sciences and humanities, natural sciences and classic literature. In addition, visitors can also browse pages specifically dedicated to law, business and medical school textbooks, study aids and student travel materials.

	•	Ordering and Delivery. When our customers are ready to place an order, they can proceed through our shopping cart function directly to our checkout page. We presently accept American Express, Discover, Mastercard and Visa as payment for our products, and we plan to expand the payment options we accept. At our partnership schools, we also accept personal checks and debit student accounts. During the ordering process, we ask our customers for basic information about themselves, which we maintain in our customer database. Once a customer places an order, he or she immediately receives an e-mail that includes a unique order number and confirms that the order has been received and processed. We do not accept orders for out- of-stock items. However, through our BookPager option, students can request that we notify them by e-mail for up to 21 days if the desired book becomes available. After the order is shipped, the customer receives a second e-mail that includes a UPS tracking number and a link to a page on our Web site where they can follow their order through the delivery process. We use UPS Second Day Air to take advantage of UPS’s guaranteed delivery and to ensure our customers will receive their orders within three business days. For faster delivery, our customers may choose to pay for UPS overnight service.
	•	Customer Service. We are committed to delivering superior customer service. Our customers can easily access our customer service center at any time during their visits to our Web site. The customer service page of our Web site offers answers to frequently asked questions and enables our customers to ask their own questions through e-mail. We also have a toll-free number that is staffed twenty-four hours a day, seven days a week. We increase our service center staffing during our peak periods to ensure a fast response time to our customers’ queries. We also maintain separate toll-free numbers dedicated to our partnership schools.
	•	Membership. Anyone who visits our Web site can open a free membership account with VarsityBooks.com by providing basic school-related and other information including shipping and billing addresses. Members can store the products they are considering in their shopping cart until they are ready to make a purchase. Each time they sign on, they have the opportunity to review their shopping cart and determine which items they want to buy. We store their shipping and billing addresses to facilitate easy ordering every time they return to our Web site. We also allow them to view their past purchases and print receipts for their own records. We provide our members with regular newsletters and marketing material via e-mail.

Marketing

      Our goal is to be the leading online college retailer and most effective marketing channel to college students. As such, we believe it is critical that college students are exposed to our Web site, www.varsitybooks.com. Our marketing strategy is designed to increase awareness of the VarsityBooks.com brand name, increase customer traffic to our Web site, build strong brand loyalty, acquire more customers, maximize repeat customers and develop incremental revenue opportunities. We advertise our Web site through our campus student representatives and through a comprehensive national media plan featuring radio, print, e-mail and online banner advertisements. In addition to targeting college students, we market to professors, teaching assistants, dorm resident assistants and parents to have them encourage students to visit our Web site.

      The effectiveness of our marketing methods to date is evident in the increasing recognition of our brand and use of our Web site. According to MediaMetrix, www.varsitybooks.com had over 645,000

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      •  Campus Student Representatives. To penetrate the difficult-to-reach college student market, we have created a network of campus student representatives, employing approximately 1,000 as of September 30, 1999. A portion of our full time staff is dedicated to selecting, training, managing and monitoring our growing network of student representatives. We actively scout college campuses to determine names of student leaders on campus. We then recruit and rigorously screen these students for our lead student representative positions. For the Fall 1999 semester, this active recruiting led to our hiring 300 lead student representatives, approximately 250 of whom participated in our three-day intensive training session in Washington, D.C. We intend to make this a semi-annual training session for our lead representatives, during which we will teach them about our company, marketing techniques and how to select a campus representative team. Our lead student representatives are responsible for hiring and managing a campus team consisting of up to fifteen student representatives. We provide each lead student representative with a comprehensive marketing kit that they use to market directly to classrooms, student organizations and dormitories, depending on what they consider to be the best method for their campus. We pay our representatives an hourly wage and offer sales-based commissions. We also grant stock options to our lead representatives.

      •  Offline Advertising and Public Relations. We combine the active marketing of our campus student representatives with a comprehensive media campaign to emphasize our brand and ensure our reach is broad enough to raise awareness among key student influencers such as parents. We engage in a coordinated program of print advertising in college, specialized and general circulation newspapers and magazines as well as a radio advertising campaign in certain targeted markets. We increase our marketing in the period before classes start and through the prime book buying season. As a result of our own public relations activities, as well as unsolicited invitations, we have been featured in a variety of television shows, newspaper and magazine articles and radio programs including CNN, The New York Times, U.S. News and World Report (America’s Best Colleges Edition) and National Public Radio.

      •  Online Advertising. We place advertisements on other high-profile and high-traffic college-oriented Web sites. These advertisements usually take the form of banners that encourage readers to click through directly to www.varsitybooks.com. In addition, we obtain lists of e-mail addresses of college students who have consented to receive relevant information and send e-mails to these students directing them to our Web site.

      •  Awareness Program. We market to college students before the beginning of each school year through awareness programs which target incoming students. We send our student representative teams to freshman orientations, and advertise on the radio at major student summer destinations to reach students on the way back to school.

      •  Affiliate Programs. We offer student organizations, such as fraternities, sororities and other clubs, a fundraising opportunity through our affiliate program. Organizations can work with us to market our brand by creating links from their Web site to ours and through direct marketing. We track the customers who reach our Web site through affiliate lines and we pay our affiliates a sales-based commission.

Partnership Program

      We are the exclusive new textbook supplier for 13 institutions. At these institutions, which include smaller, traditional four-year colleges, private high schools, distance learning programs and continuing and professional education programs, we work directly with our partners to market our services to their students. By partnering with private high schools, we reach students early, enabling us to extend our brand and establish a customer relationship with students prior to their attending college. Distance learning programs, in particular, represent a growing market that the traditional campus bookstore cannot efficiently serve. According to International Data Corporation, over 50% of college students have indicated an interest in distance learning. As a result, IDC estimates that over 84% of higher education institutions will offer

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      Our exclusive relationships generally are for a period of up to four years and automatically renew on a year-to-year basis. For each school which has an intranet, we create and maintain a “virtual” bookstore directly on their site. When students click on the school’s “virtual” bookstore, they link directly to a co-branded Web site. Our partner schools receive a share of the revenues their students generate. By taking advantage of the convenience and cost-savings of this program, our partner schools provide a valuable service to their students.

Alliances and Relationships

      We have arrangements with a number of college-oriented Web sites and other organizations to provide a link to www.varsitybooks.com. We believe this enhances our marketing efforts and allows us to capitalize on the recognition of other noncompeting Web sites:

	•	Campus Pipeline. We are the exclusive online retailer of textbooks for Campus Pipeline, Inc. Campus Pipeline is the creator of a leading Web-based enterprise information portal for colleges and universities. Campus Pipeline is fully integrated with its member schools’ systems so that students will be able to register for classes, access transcripts and, through our relationship, purchase textbooks from www.varsitybooks.com.
	•	edu.com. We are currently the only online retailer of textbooks for edu.com, a Web site that offers discounts on hardware, software and other products exclusively to students. edu.com verifies that its customers are enrolled at a higher education institution before selling any products. Once students are members of edu.com, they can initiate a textbook search by author, title, ISBN number or keyword directly on the edu.com Web site. Once a search is initiated, the student is linked to a VarsityBooks.com page to continue the shopping and ordering process.
	•	Book Tech. We have a partnership with Book Tech, Inc., a leading custom publisher of digitally printed and copywritten material. Under the agreement, Book Tech provides co-branded course packets, which we offer on our Web site.
	•	CollegeClub.com. We are a featured bookseller on the CollegeClub.com Web site. CollegeClub.com is an interactive student forum that lists job offerings and offers message boards, chat rooms, games, horoscopes and student related shopping. CollegeClub members are linked from the CollegeClub site directly to our Web page to order books from us.
	•	FastWeb. We are a featured bookseller on the FastWeb site. FastWeb provides students with information on colleges and scholarships and offers general student information and links to shopping sites, including www.varsitybooks.com.
	•	Kaplan Educational Centers. We have a relationship with Kaplan Educational Centers, under which Kaplan allows us to distribute flyers and market our services in their learning centers. Kaplan is one of the leading educational and career service companies.

      As we add other product and service offerings, we plan to enter into similar arrangements to support our growth.

Fulfillment

      We fulfill all of our textbook orders through Baker & Taylor, a leading distributor of books, videos and music products. Information on availability of book titles is automatically updated on our Web site on an hourly basis from 8:00 a.m. to 10:00 p.m. eastern standard time based on a direct feed from Baker & Taylor, ensuring our customers receive accurate in-stock inventory information. Orders placed on our Web site are automatically transmitted to Baker & Taylor within twenty minutes of their receipt. At the Baker & Taylor warehouse currently used for fulfillment, the order is processed, packaged in a VarsityBooks.com branded box and shipped directly to our customers via UPS so that it arrives within

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Technology

      We use an array of site management, search, customer interaction, transaction-processing and fulfillment services and systems using a combination of proprietary technologies and commercially available, licensed technologies. Our strategy is to license commercially available technology whenever possible rather than seek internally developed solutions.

      Our technology environment is designed to provide:

	•	a satisfying customer experience;
	•	consistent system availability and good performance;
	•	high security for all transactions, particularly, our customers’ commerce transactions;
	•	scalability for continued growth; and
	•	the collection, maintenance and security of valuable information.

      We currently use a Microsoft Windows NT operating system platform and multiple Compaq application servers that house our Web server and search engine applications. These servers are able to handle applications including accepting and validating customer orders, handling multiple shipment methods and accepting, authorizing and charging customer credit cards. In addition, our system maintains ongoing automated e-mail communications with customers throughout the ordering process. These systems entirely automate many routine communications, facilitate management of customer e-mail inquiries and allow customers to, on a self-service basis, check order status and order history, change their personal information and check subscriptions to personal notification services.

      We manage user requests and other traffic using load balancing devices that work across the entire complement of our hardware. This strategy of balancing traffic allows all customers and site users to enjoy favorable response times and other performance measures, regardless of traffic fluctuations. Frontier/ Global Center, located in Herndon, Virginia, hosts two separate server environments and acts as our Internet service provider. A group of in-house systems administrators and network engineers and Frontier/ Global personnel monitor and operate our Web site, network operations and transaction-processing systems.

      We use the Microsoft suite of tools for our development environment, including Site Server Commerce, InterDev and SQL SVR for the database engine. Additionally, we have separate database servers that capture and retain transaction “logs” of all activity that occurs on the site. These log databases can, among other things, trace a transaction from its inception to its completion. Our separate recording database generates and delivers reports and interfaces for our marketing, operations and financial systems.

      We employ SSL data encryption technology to protect credit card data while it is passed from the customer through the site during a purchase transaction. This prevents outside parties from intercepting the customer’s credit card data during transaction processing.

Competition

      Both the e-commerce market and online textbook business are highly competitive. Since the introduction of e-commerce to the Internet, the number of e-commerce Web sites competing for customers’ attention has increased rapidly, and the market for online textbook sales is relatively new, intensely competitive and rapidly changing. We expect future competition to intensify given the relative

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	•	traditional new textbook retailers, such as campus bookstores;
	•	traditional used college textbook retailers, some of which have or are expected to begin online selling;
	•	Internet-based textbook retailers such as bigwords.com, ecampus.com (affiliated with Wallace’s Bookstores, Inc.), efollett.com (affiliated with The Follett Corporation), textbooks.com (affiliated with Barnes & Noble College Bookstores, Inc.) and The U Zone;
	•	Internet-based general booksellers such as Amazon.com, barnesandnoble.com and Borders.com;
	•	general purpose consumer online services such as America Online and Microsoft Network, each of which provides access to student-related content and services;
	•	vendors of college student information, merchandise, products and services distributed through other means, including retail stores, direct mail and schools; and
	•	Web sites targeted to students generally or to students of a particular school, such as Web sites developed by College Club, CommonPlaces and Student.Net Publishing.

      Part of our strategy is to offer additional products and services. For many of these products and services, there are already other traditional and online retailers offering these products.

      We believe that the principal competitive factors in attracting and retaining student customers are:

	•	convenience;
	•	discount pricing;
	•	selection of available products;
	•	customer service;
	•	quality of content and navigability tools;
	•	brand recognition; and
	•	reliability and speed of fulfillment.

      Our success will depend heavily upon our ability to provide a compelling and satisfying shopping experience and advertising environment, as well as our continued ability to attract and retain experienced personnel.

Intellectual Property

      We regard our copyrights, service marks, trademarks, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success. We rely on trademark and copyright law, trade secret protection and confidentiality and license agreements with our employees, customers, independent contractors, sponsors and others to protect our proprietary rights. We have applied to register VarsityBooks.com as a trademark with the United States Patent and Trademark Office. The application was initially denied and we have revised and resubmitted our application to address the issues raised in the denial.

      We may be required to obtain licenses from others to refine, develop, market and deliver new products and services. There can be no assurance that we will be able to obtain any such license on commercially reasonable terms or at all, or that rights granted pursuant to any licenses will be valid and enforceable.

      Domain names are the user’s Internet “address.” Domain names have been the subject of significant trademark litigation in the United States. Domain names derive value from the individual’s ability to

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Government Regulation

      Internet Regulation in General. There are an increasing number of laws and regulations pertaining to the Internet. In addition, a number of legislative and regulatory proposals are under consideration by federal, state, local and foreign governments and agencies. Laws or regulations may be adopted relating to issues such as to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services. Moreover, it may take years to determine whether and how existing laws such as those governing intellectual property ownership and infringement, privacy, libel, copyright, trade mark, trade secret, obscenity, personal privacy, taxation and the regulation of the sale of other specified goods and services apply to the Internet. The requirement that we comply with any new legislation or regulation, or any unanticipated application or interpretation of existing laws, may decrease the growth in the use of the Internet, which could in turn decrease the demand for our Internet-based services, increase our cost of doing business or otherwise materially harm our business.

      Privacy Concerns. Federal, state and foreign governments have enacted or may enact laws or consider regulations regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites, with particular emphasis on access by minors. Such regulations may include requirements that companies establish certain procedures to:

	•	give adequate notice to consumers regarding information collection and disclosure practices;
	•	provide consumers with the ability to have personal identifying information deleted from a company’s data;
	•	provide consumers with access to their personal information and with the ability to rectify inaccurate information;
	•	clearly identify affiliations or a lack thereof with third parties that may collect information or sponsor activities on a company’s Web site;
	•	obtain express parental consent prior to collecting and using personal identifying information obtained from children; and
	•	the Federal Children’s Online Privacy Act.

      Such regulation may also include enforcement and redress provisions. While we have implemented programs designed to enhance the protection of the privacy of our users, including children, there can be no assurance that such programs will conform with applicable laws or regulations. Moreover, even in the absence of such regulations, the Federal Trade Commission has begun investigations into the privacy practices of companies that collect information on the Internet. One such investigation has resulted in a consent decree pursuant to which an Internet company agreed to establish programs to implement the privacy safeguards described above. We may become subject to such an investigation, or the FTC’s regulatory and enforcement efforts may adversely affect the ability to collect demographic and personal information from users, which could have an adverse effect on the our ability to provide highly targeted opportunities for advertisers and e-commerce marketers. Any such developments could harm our business.

      It is also possible that “cookies” may become subject to laws limiting or prohibiting their use. The term “cookies” refers to information keyed to a specific server, file pathway or directory location that is stored on a user’s hard drive, possibly without the user’s knowledge, and which is used to track

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      We currently obtain and retain personal information about our Web site users with their consent. We have a stringent privacy policy covering this information. However, if third persons were able to penetrate our network security and gain access to, or otherwise misappropriate, our users’ personal information, we could be subject to liability. Such liability could include claims for misuses of personal information, such as for unauthorized marketing purposes or unauthorized use of credit cards. These claims could result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant financial resources.

      Data Protection. Legislation pending in Congress, if passed, would afford broader rights to owners of databases of information, such as stock quotes and sports scores. Such protection already exists in the European Union. If enacted, this legislation could result in an increase in the price of services that provide data to Web sites. In addition, such legislation could create potential liability for unauthorized use of such data.

      Internet Taxation. A number of legislative proposals have been made at the federal, state and local level, and by foreign governments, that would impose additional taxes on the sale of goods and services over the Internet and certain states have taken measures to tax Internet-related activities. Although Congress recently placed a three-year moratorium, due to expire in October 2001, on state and local taxes on Internet access or on discriminatory taxes on e-commerce, existing state or local laws were expressly excepted from this moratorium. Further, once this moratorium is lifted, some type of federal or state taxes may be imposed upon Internet commerce. Such legislation or other attempts at regulating commerce over the Internet may substantially impair the growth of commerce on the Internet and, as a result, adversely affect our opportunity to derive financial benefit from such activities.

      Jurisdiction. Due to the global reach of the Internet, it is possible that, although our transmissions over the Internet originate primarily in the Commonwealth of Virginia, the governments of other states and foreign countries might attempt to regulate Internet activity and our transmissions or take action against us for violations of their laws.

Employees

      As of September 30, 1999, we had 97 full-time employees and approximately 1,000 student representatives, including 284 lead student representatives. Each semester our lead student representatives hire up to 15 representatives each to work on their campus teams. We also hire temporary employees, particularly at the beginning of each school semester, and contract service providers as necessary. As we continue to grow and introduce additional products and services, we expect to hire additional employees, particularly in sales and marketing, online product development and booklist operations. None of our employees is represented by a labor union or is the subject of a collective bargaining agreement. We believe that relations with our employees are good.

Facilities

      Our headquarters are at 1050 Thomas Jefferson Street in Washington, D.C. At this headquarters site, we presently lease an aggregate of approximately 9,600 square feet. Our current lease for this facility expires in March 2001. We believe that our current facility is inadequate for our present needs. On September 7, 1999, we executed a lease for approximately 34,000 square feet for our new headquarters in Washington, D.C. We presently intend that we will occupy that space during October 1999. We believe this space will be sufficient for our needs for approximately twelve months.

Legal Proceedings

      We are not a party to any material litigation, and to our knowledge no material litigation is threatened against us.

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MANAGEMENT

Directors, Executive Officers and Key Employees

      The following table presents information about each of our directors, executive officers and key employees.

Executive Officers and Directors

Key Employees

(1)  Member of the compensation and stock option committee.

(2)  Member of the audit committee.

Executive Officers and Directors

      Eric J. Kuhn co-founded VarsityBooks.com and has served as our Chief Executive Officer and Chairman of the Board since our inception. He has also served as our President since June 1999. From August 1997 to April 1998, Mr. Kuhn practiced law at Greenberg Traurig Hoffman Lippoff Rosen and Quentel P.A. in Miami, Florida, and from September 1996 to July 1997, practiced law at Kaye, Scholer, Fierman, Hays & Handler L.L.P. in New York, New York. Mr. Kuhn serves on the Board of Directors of the Electronic Commerce Forum, a public/private organization representing the interests of the emerging electronic commerce industry. Mr. Kuhn received a B.A. with honors from Haverford College in 1993 and a J.D. with honors from The George Washington University Law School in 1996.

      Timothy J. Levy co-founded VarsityBooks.com and has served as a Director since our inception. He has served as our Executive Vice President, Development since June 1999. From December 1997 to June 1999, Mr. Levy served as our President. From September 1997 to April 1998, Mr. Levy practiced law at Arent Fox Kintner Plotkin & Kahn, P.L.L.C. in Washington, D.C. From August 1996 to August 1997, Mr. Levy served as a judicial clerk for the Hon. William A. Dreier, Presiding Judge, Appellate Division of New Jersey. Mr. Levy serves on the Board of Directors of the Electronic Commerce Forum, a public/private organization representing the interests of the emerging electronic commerce industry.

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      Richard Hozik has served as our Senior Vice President and Chief Financial Officer since June 1999. From November 1995 through May 1999, Mr. Hozik served as Senior Vice President and Chief Financial Officer of LCC International, Inc., a publicly-traded radio frequency engineering and wireless telecommunications consulting company. From October 1992 through October 1995, Mr. Hozik served as Senior Vice President and Chief Financial Officer of the J.E. Robert Companies, a privately held real estate investment and management company. Mr. Hozik is a Certified Public Accountant and received a B.S. in Accounting from the University of Maryland in 1973.

      Jonathan N. Grayer has served as a Director since April 1999. Since July 1994, Mr. Grayer has served as the President and Chief Executive Officer of Kaplan Educational Centers, a provider of educational and career services. Mr. Grayer received an A.B. from Harvard College in 1986 and an M.B.A. from Harvard Business School in 1990.

      Allen L. Morgan has served as a Director since February 1999. Since January 1999, Mr. Morgan has been a General Partner of the Mayfield Fund, a venture capital fund. From May 1997 to December 1998, Mr. Morgan was a partner in the corporate department of Latham & Watkins in Menlo Park, California. From November 1982 to May 1997, Mr. Morgan was a partner in the corporate department of Wilson, Sonsini, Goodrich & Rosati in Menlo Park, California. He received an A.B. from Dartmouth College in 1976, a B.A. and M.A. from Oxford University in 1978 and 1983, respectively, and a J.D. from the University of Virginia in 1981.

      Andrew J. Oleszczuk has served as a Director since September 1999. Since August 1998, Mr. Oleszczuk has been the President of Tribune Ventures, a venture capital fund. From November 1993 to July 1998, Mr. Oleszczuk served as Vice President of Development at the Tribune Company. Mr. Oleszczuk received a B.A. from Northwestern University in 1978 and an M.B.A. from the Wharton Graduate School of Business in 1980.

      Gene Riechers has served as a Director since February 1999. Since 1996, Mr. Riechers has served as the Managing Director of FBR Technology Venture Partners L.P., a venture capital fund. From December 1995 to December 1996, Mr. Riechers served as the Chief Financial Officer of CyberCash, Inc., an Internet payment systems company. From September 1993 to December 1995, he served as Chief Financial Officer and Vice President, Business Development of Online Resources & Communications Corp. Mr. Riechers also serves as a director of LifeMinders.com, Inc. Mr. Riechers received a B.S. from Pennsylvania State University in 1977 and an M.B.A. from Loyola College in 1984.

      James S. Ulsamer has served as a Director since July 1998. Mr. Ulsamer has served as President of Baker & Taylor Retail, a division of Baker & Taylor Corporation, a distributor of books, music and videos, since July 1999 and as Executive Vice President of Baker & Taylor since June 1994. From June 1994 to July 1999, he also served as President of Baker & Taylor Books. Mr. Ulsamer earned a B.A. in Economics from Rutgers University in 1972.

Key Employees

      Maryann Bastnagel has served as our Senior Vice President and Chief Information Officer since May 1999. From June 1997 to May 1999, Ms. Bastnagel served as the Senior Vice President of Travel Services International, Inc., a distributor of specialized leisure travel services. From February 1989 to June 1997, Ms. Bastnagel served as the Vice President of Business Technology Strategy of Marriott International. Ms. Bastnagel received a B.A. and a B.S. from the University of Maryland at College Park in 1979 and 1985, respectively. She also received an M.S. from Johns Hopkins University in 1989.

      Paul Salyards has served as our Senior Vice President and Chief Marketing Officer since June 1999. From April 1997 until December 1998, Mr. Salyards served as Vice President of Marketing of Kellogg Canada, Inc. From March 1994 to March 1997 Mr. Salyards served in a variety of capacities at Kellogg,

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      Andrew E. Green has served as our Vice President of Operations and Business Development since October 1998. From September 1996 to October 1998, Mr. Green practiced law in the Cyberlaw and Communications groups at Wiley, Rein & Fielding in Washington, D.C. Mr. Green received a B.A. from the University of California, Berkeley in 1991 and a J.D. with honors from The George Washington University Law School in 1996.

Board of Directors

      Our Board of Directors is divided into three classes, designated as Class I, Class II and Class III. Members of each class hold office for staggered three-year terms. At each annual meeting of our stockholders commencing in 2000, the successors to the directors whose terms expire at that meeting will be elected to serve until the third annual meeting after their election or until their successors have been elected and qualified. Messrs. Oleszczuk and Ulsamer are Class I directors whose terms expire at the 2000 annual meeting of the stockholders. Messrs. Grayer, Levy and Morgan are Class II directors whose terms expire at the 2001 annual meeting of the stockholders. Messrs. Kuhn and Riechers are Class III directors whose terms expire at the 2002 annual meeting of stockholders. With respect to each class, a director’s term will be subject to the election and qualification of their successors, or their earlier death, resignation or removal. This classification of our Board of Directors, when taken in conjunction with other provisions of our sixth amended and restated certificate of incorporation, may delay or prevent a change in control of our company.

Board Committees

      Our Board of Directors has established an audit committee and a compensation and stock option committee.

      The audit committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the recommendation of our independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, the performance of our independent auditors and our accounting practices. The audit committee consists of Messrs. Grayer, Morgan and Riechers.

      The compensation and stock option committee determines the salaries and benefits for our employees, consultants, directors and other individuals compensated by our company. In addition, the compensation and stock option committee administers our stock option plan. The compensation and stock option committee consists of Messrs. Morgan, Oleszczuk and Riechers.

Director Compensation

      Except for reimbursement for reasonable travel expenses relating to attendance at board meetings and the granting of stock options, directors are not compensated for their services as directors. Our directors are eligible to participate in our stock option plan. As of September 30, 1999, we had granted an option to purchase  shares to Mr. Kuhn at an exercise price of $     per share and an option to purchase  shares to Mr. Ulsamer at an exercise price of $     per share. As of September 30, 1999, Mr. Grayer held            shares of stock subject to repurchase by us under certain circumstances.

Compensation Committee Interlocks and Insider Participation

      No interlocking relationship exists between our Board of Directors or compensation committee and the Board of Directors or compensation committee of any other company, nor have any such interlocking relationships existed in the past.

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Executive Compensation

      The following table sets forth information concerning all compensation we paid our Chief Executive Officer during the year ended December 31, 1998. We did not pay any executive over $100,000 in 1998.

Summary Compensation Table

Option Grants During Fiscal 1998

      Mr. Kuhn was not granted any options or stock appreciation rights in 1998. In August 1999, we granted Mr. Kuhn an option to purchase            shares of our common stock at an exercise price of approximately $ per share. This option vests ratably each month from the date of grant for four years.

Option Exercises and Fiscal Year-End Option Values

      Mr. Kuhn did not exercise any options to purchase securities during 1998 and did not hold any such options as of December 31, 1998.

Agreements Regarding Employment

      We have entered into agreements with Mr. Kuhn and Mr. Levy.

      Compensation. The compensation of Messrs. Kuhn and Levy is determined by the Board of Directors provided that, according to their respective employee agreements, Mr. Kuhn will receive a salary of not less than $160,000 per year and Mr. Levy will receive a salary of not less than $150,000 per year. Effective August 1, 1999 the Board of Directors has determined that Mr. Kuhn will receive an annual salary of $160,000 and Mr. Levy will receive an annual salary of $150,000. In addition, Messrs. Kuhn and Levy are eligible for cash performance bonuses of up to 25% of their base salary.

      Stock Option Grants. The Board of Directors may grant stock options to Messrs. Kuhn and Levy.

      Termination of Agreements. Messrs. Kuhn’s and Levy’s employment agreements may be terminated with or without cause by either Mr. Kuhn, Mr. Levy or us. If we terminate the agreement of either Mr. Kuhn or Mr. Levy with cause, or if either resigns without good reason, he is only entitled to his base salary through the date of termination. If we terminate the agreement of either Mr. Kuhn or Mr. Levy without cause or if either Mr. Kuhn or Mr. Levy resign for good reason, he is entitled to his base salary through the date of termination, together with his pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn or Mr. Levy, we will pay an amount equal to twelve months’ salary, payable in twelve equal installments after termination of his employment. If there is a change in control of the Company, and if at anytime thereafter the employment of Mr. Kuhn or Mr. Levy is terminated without cause, or if Mr. Kuhn or Mr. Levy terminate his employment with good reason, we will pay his base salary through the date of termination at the rate in effect at the time, together with pro-rata bonus. In lieu of any further salary or bonus payments to Mr. Kuhn or Mr. Levy, we will pay a severance payment in an amount equal to 150% of their base salary in effect as of termination.

      Noncompetition and Confidentiality. Neither Mr. Kuhn nor Mr. Levy may compete with us during the term of his employment and neither may solicit our employees for a period of twelve months immediately following the termination of his relationship with us for any reason, whether with or without cause.

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      Confidentiality and Assignment of Investors. Messrs. Kuhn and Levy are also bound by confidential information and invention assignment agreements that prohibit them from, among other things, disseminating or using confidential information about our business or clients in any way that would be adverse to us. Messrs. Kuhn and Levy have agreed to assign to VarsityBooks.com all inventions which they may develop during their respective terms of employment.

Stock Option Plan

      We have adopted our 1998 Stock Option Plan. The plan provides for grants of incentive stock options and nonqualified stock options to our employees, consultants, advisors and directors. The plan authorizes the issuance of an aggregate of up to           shares of common stock. As of September 30, 1999, we had granted options to purchase           shares of common stock under the plan. We adopted the plan to promote our best interests. We believe that encouraging stock ownership enables us to attract, retain and incent employees, directors, consultants and advisors. In addition, we want to reward those employees, directors, consultants and advisors who contribute to our success.

      The Board of Directors, or a committee appointed by the board, has the authority to determine the terms of the options, including the exercise price of the options, the number of shares subject to each option, the terms upon which the option may be exercised and the form of consideration payable on such exercise. The exercise price must be at least 100% of fair market value for incentive stock options. Incentive stock options granted to any holder of 10% or more of the combined voting power of all classes of our stock must have an exercise price of not less than 110% of fair market value.

      An option granted pursuant to our stock option plan must be exercised within ten (10) years from the effective date of grant.

      The Board of Directors may amend or terminate the plan at any time except that such amendment or termination may not adversely affect or alter any right or obligation with respect to any outstanding option, except to allow the outstanding option to qualify as an incentive stock option.

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CERTAIN TRANSACTIONS

Series A Private Placement

      On August 6, 1998 and on December 3, 1998, we sold an aggregate of 2,071,420 shares of Series A preferred stock at a price of $0.70 per share. Immediately prior to the consummation of this offering, each share of Series A preferred stock will convert into            shares of common stock. The purchasers of Series A preferred stock included the following directors, executive officers, holders of 5% or more of our common stock on a fully converted basis and immediate family members of such persons:

      In connection with this private placement, we entered into an investors’ rights agreement and a right of first refusal and co-sale agreement with investors in our Series A preferred stock. The holders of the Series A preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series A preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering.

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Series B Private Placement

      On February 25, 1999, we sold an aggregate of 6,933,806 shares of our Series B preferred stock at a price of $1.44 per share. Immediately prior to the consummation of this offering, each share of Series B preferred stock will convert into           shares of common stock. The purchasers of Series B preferred stock included the following directors, executive officers, holders of 5% or more of our common stock on a fully converted basis and immediate family members of such persons:

      In connection with this private placement, we entered into an amended and restated investors’ rights agreement and an amended and restated right of first refusal and co-sale agreement with investors in our Series B preferred stock and Series A preferred stock. In accordance with those agreements, Mr. Riechers, a designee of FBR Technology Venture Partners L.P., and Mr. Morgan, a designee of Mayfield Fund, have been elected to our board. In addition, the holders of the Series B preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series B preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering.

Series C Private Placement

      Between August 27, 1999 and September 21, 1999, we sold an aggregate of 8,928,571 shares of our Series C preferred stock at a price of $3.36 per share. Immediately prior to the consummation of this offering, each share of Series C preferred stock will convert into           shares of common stock immediately prior to completion of this offering. The purchasers of Series C preferred stock included the following directors, executive officers, holders of 5% or more of our common stock on a fully converted basis and immediate family members of such persons:

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      In connection with this private placement, we entered into a second amended and restated investors’ rights agreement and a second amended and restated right of first refusal and co-sale agreement with investors in our Series A preferred stock, Series B preferred stock and Series C preferred stock. In accordance with those agreements, Mr. Oleszczuk, a designee of the holders of the Series C preferred stock, has been elected to our board. In addition, the holders of the Series C preferred stock have registration rights applicable to the common stock issuable upon conversion of the Series C preferred stock. Other than the registration rights, all other rights under these agreements terminate upon the closing of this offering.

Transactions with Baker & Taylor

      On July 10, 1998, we entered into an Equity Investment and Operating Agreement, and other related agreements, with Baker & Taylor, Inc., our principal supplier of textbooks, fulfillment, shipping and handling services and a supplier of promotional, customer service and data base management services. In consideration for Baker & Taylor’s fulfillment and drop-ship services and assistance in developing our product and customer base, we sold Baker & Taylor           shares of our common stock at par value and granted a warrant to purchase an additional           shares of our common stock at a weighted average exercise price of $          per share. In accordance with this agreement, James S. Ulsamer was elected to our board.

      In October 1998, we issued to Baker & Taylor a warrant to purchase            shares of our common stock at an exercise price of $          .

      In December 1998, we issued a warrant to purchase                      shares of our common stock at an exercise price of $                in conjunction with a bridge loan from Baker & Taylor in the amount of $500,000.

      In each of January and February 1999, we issued a warrant to Baker & Taylor to purchase            shares of our common stock at an exercise price of $          per share in conjunction with the December 1998 bridge loan.

      In February 1999, we issued to Baker & Taylor a warrant to purchase            shares of our common stock at an exercise price of $  per share. In addition, we converted a bridge loan note in the amount of $500,000 issued in December 1998 into            shares of our Series B preferred stock.

      In August 1999, Baker & Taylor transferred its ownership interest in VarsityBooks.com to B&T ENTERPRISES, L.L.C., a limited liability company owned by certain of the shareholders of Baker & Taylor.

      Effective October 1, 1999, we entered into a new Operating Agreement with Baker & Taylor and amended the other agreements governing our operating relationship. Subject to certain exceptions related to obligations for existing customers, Baker & Taylor has agreed for a period of 18 months not to provide direct to consumer fulfillment services for any online textbook retailer serving students at colleges and universities, distance learning programs and high schools that require students to purchase their textbooks located in the United States. In return, we have agreed to use Baker & Taylor as our principal supplier. The exclusivity is automatically extended each semester to remain at 18 months as long as we agree with Baker & Taylor on the amount of inventory they need to acquire for the upcoming semester. The agreement provides that Baker & Taylor would provide its services initially for three years, subject to automatic annual extensions after the initial period.

Indebtedness of Management

      On August 24, 1999, we sold to each of Mr. Kuhn and Mr. Levy           shares of our common stock at a purchase price of $     per share. Each of Mr. Kuhn and Mr. Levy paid for these shares with a full recourse promissory note. The shares purchased by Messrs. Kuhn and Levy are subject to forfeiture based on conditions relating to their continued employment. These conditions lapse with respect to           shares each on August 24, 2000 and with respect to           shares each on August 24, 2001.

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Transactions with Promoters

      Mr. Kuhn and Mr. Levy, each a director or an executive officer, were involved in our founding and organization and each may be deemed a promoter for purposes of the federal securities laws. At our inception, we issued  shares of common stock to each of Mr. Kuhn and Mr. Levy and received a nominal amount of capital for their initial capitalization. When issued,                of the shares purchased by each of Mr. Kuhn and Mr. Levy were subject to forfeiture based on conditions relating to their continued employment. As of September 30, 1999,           shares remain subject to repurchase by the Company. These conditions lapse with respect to            shares on the first day of each month until July 1, 2001, at which point our repurchase right expires as to any remaining shares.

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PRINCIPAL AND SELLING STOCKHOLDERS

      The following table sets forth information regarding beneficial ownership of our common stock as of           , 1999, by:

	•	each person, or group of affiliated persons, who we know beneficially owns more than five percent in the aggregate of the outstanding shares of our common stock;
	•	each of our executive officers named in the Summary Compensation Table;
	•	each selling stockholder;
	•	each of our directors; and
	•	all directors and executive officers as a group.

      Under the rules of the Securities and Exchange Commission, beneficial ownership includes voting or investment power with respect to securities and includes the shares issuable under stock options that are exercisable within 60 days of           , 1999. Shares issuable under stock options are deemed outstanding for computing the percentage of the person holding options but are not outstanding for computing the percentage of any other person. The number of shares of common stock outstanding after this offering includes shares of common stock being offered for sale by us in this offering. The percentage of beneficial ownership for the following table is based upon       shares of common stock outstanding as of           , 1999 (after giving effect to the conversion of all of our outstanding preferred stock to common stock), and            shares of common stock outstanding after the completion of this offering.

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      Unless otherwise indicated, the address for each listed stockholder is: c/o VarsityBooks.com Inc., 1050 Thomas Jefferson Street, N.W., Suite 525, Washington, D.C. 20007. To our knowledge, except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting power and investment power with respect to all shares of common stock.

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(4)	The address for FBR Technology Venture Partners L.P. is Potomac Tower, 1001 19th Street North, Arlington, Virginia 22209.
(5)	Includes            shares held without restriction,            shares held subject to risk of forfeiture upon discontinuance of employment under certain conditions which restrictions lapse with respect to  shares in August 2000, with respect to            shares in August 2001 and with respect to  shares on the first day of each month until July 2001 and            shares subject to options exercisable within the next 60 days.

(6)	Includes            shares held without restriction and             shares held subject to risk of forfeiture upon discontinuance of employment under certain conditions which restrictions lapse with respect to  shares in August 2000 and with respect to            shares in August 2001 and with respect to            shares on the first day of each month until July 2001.
(7)	Includes            shares currently outstanding. None of the options held by Mr. Hozik are exercisable within the next 60 days.
(8)	Includes            shares held by Mayfield IX,            shares held by Mayfield Associates Fund IV and            shares held directly by Mr.  Morgan. Except for those shares held by Mr.  Morgan, Mr. Morgan disclaims beneficial ownership of all other shares except to the extent of any pecuniary interest therein.
(9)	Includes            shares beneficially owned by Tribune Ventures. Mr.  Oleszczuk is a partner of Tribune Ventures, and, as such may be deemed to have voting and investment power over such shares. Mr. Oleszczuk disclaims by beneficial ownership of these shares.

(10)	Includes            shares beneficially owned by FBR Technology Venture Partners L.P. Mr. Riechers is a partner of FBR Technology Venture Partners L.P. and, as such, may be deemed to have voting and investment power over such shares. Mr. Riechers disclaims beneficial ownership of these shares.
(11)	Includes            shares held without restriction and             shares held subject to risk of forfeiture upon discontinuance of service as director under certain conditions which restrictions lapse with respect to            shares on the first day of each month until June 2003.
(12)	Includes            shares subject to options exercisable within the next 60 days.