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Filed Pursuant to
Rule 424(b)(4)
Registration No.333-89049

	[VARSITYBOOKS.COM LOGO]
	4,075,000 Shares
	Common Stock

	VarsityBooks.com is offering 4,000,000 shares of its common stock and the selling stockholders are selling an additional 75,000 shares. This is our initial public offering and no public market currently exists for our shares. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol “VSTY.”

	Investing in our common stock involves risks.
	See “Risk Factors” beginning on page 9.

      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 611,250 shares of common stock to cover over-allotments. FleetBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on February 18, 2000.

Robertson Stephens

	Thomas Weisel Partners LLC

	Friedman Billings Ramsey

	DLJdirect Inc.

The date of this Prospectus is February 15, 2000

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. The logo is a large, red stylized “V,” marked with an ® to indicate it is a registered mark, followed by our name, “VarsityBooks.com” in black bold type. Beneath our 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 attending colleges, universities, distance learning programs, and private high schools nationwide. 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.

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,” marked with an ® to indicate it is a registered mark, and our 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.

      The left side of the homepage is divided into four sections. From the top section, visitors can locate their books either by selecting their school, or by searching for specific books. From the next section on the left visitors can search through a variety of book categories. From the bottom two sections on the left, visitors can choose either to compare VarsityBooks.com prices to other sources or to browse the textbooks by subject, respectively.

      Along the right side of the Web page is a column comprised of four boxes. The top box enables the visitor to obtain information on how to apply for VarsityBooks.com scholarships. The second box, entitled “GET a job” allows students to browse various job and study abroad listings. From the next to last box in the right column, visitors can obtain information on VarsityBooks.com’s upcoming free e-mail account program. The last box in the right column provides students with information about additional products and services offered through the Web site.

      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.

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      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,” marked with an ® to indicate it is a registered mark, and our name. The Web page contains a sample list of schools from which visitors may obtain their schools’ booklists.

      Spread across the bottom of the left and right gatefolds is information about student representatives. The student 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 three overlapping pictures. The first picture on the left is of a student representative marketing to other students. The center picture is a group photograph of the student representatives. The third picture, appearing to the right of these photos, portrays two VarsityBooks.com employees training student representatives on marketing skills.

      On the right gatefold is a paragraph describing the VarsityBooks.com partnership program. The paragraph entitled “Our Partners,” 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, a VarsityBooks.com Web page appears from which the visitor may choose to shop for a particular partnership school’s books, to verify payment options or to obtain more information about ordering books from VarsityBooks.com.

Back Inside 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.

Back Cover:

      The back inside cover contains the VarsityBooks.com logo, a stylized red “V,” marked with an ® to indicate it is a registered mark, followed by our name in large, black print.

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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.

      Until March 11, 2000 (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 we provide marketing services to other businesses interested in reaching the college market. We have sold textbooks to students at over 2,600 colleges and universities in each of the 50 states. Recently, we have expanded beyond textbooks to offer other products and services geared to college students’ needs and interests. According to MediaMetrix, www.varsitybooks.com had over 645,000 unique visits in August 1999 and over 450,000 unique visits in September, which made us the most visited college-oriented Web site for two consecutive months during the back-to-school season.

      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 over 2,000 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 continue 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, according to Student Monitor, L.L.C., 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 believe an opportunity exists to more effectively and efficiently 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 student representatives to expand awareness of our current product offering, to introduce our new products and services and provide marketing services for other businesses.

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	•	Add Booklist Schools. We intend to increase our customer base by expanding the number of schools for which we post the prescribed reading lists 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. We currently offer general interest books, we launched our job and career center in January 2000, and we will soon begin to award scholarships and offer free e-mail services targeted toward college students.
	•	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.

Recent Developments

      On December 22, 1999, we entered into a three-year interactive marketing agreement with ICQ, Inc., a subsidiary of America Online, Inc., or AOL. Pursuant to the agreement, we will be the exclusive college-targeted commerce partner on the ICQ instant messaging service as well as its Web site, www.icq.com. In addition, other than ICQ itself, we will be the exclusive targeted advertiser and marketer of the ICQ service and ICQ.com on U.S. college campuses. The term of our exclusive relationship expires on December 31, 2000. During the exclusive period of our relationship, ICQ may not enter into an agreement with another college-targeted commerce partner and may not accept noncommerce-related college-targeted content from our specified competitors.

      Pursuant to the interactive marketing agreement, we have agreed to pay ICQ an aggregate of $9.0 million in installments over the next three years. In addition, we have granted AOL a warrant to purchase up to 528,738 shares of common stock, which represents 3% of our aggregate common stock outstanding and reserved for issuance immediately prior to the completion of this offering, at a price equal to the initial public offering price in this offering, including an additional 1,125 warrants we issued when we entered into a definitive agreement with Imperial Bank and an additional 34,367 warrants we issued when we entered into the product promotion agreement with Sallie Mae. Of the aggregate of 528,738 shares, 176,245 shares will be currently vested with the remaining 352,493 shares vesting over three years depending on the number of click throughs delivered by ICQ during that period.

      On February 3, 2000, we entered into a marketing services agreement and a product promotion agreement with Sallie Mae, Inc. Under the marketing services agreement, Sallie Mae will pay us $2.0 million over the two year term of the agreement. In exchange, we will customize a marketing plan for Sallie Mae to reach the college market.

      In addition, we entered into a product promotion agreement with Sallie Mae under which we will pay Sallie Mae referral fees based on a percentage of any revenue generated by its customers during the term of the arrangement. Sallie Mae will promote our products to its customers. Sallie Mae will also actively promote our partnership program to some of the schools to which it sells and promotes its products. In addition, Sallie Mae will maintain links to our Web site, and we will be featured as the exclusive textbook retailer on its site. In exchange, we granted Sallie Mae a warrant to purchase up to 616,863 shares of common stock, which represents 3.5% of our aggregate common stock outstanding and reserved for issuance immediately prior to the completion of this offering, at a price equal to the initial public offering price in this offering. Of these shares, 352,493 will be currently vested and the remaining 264,370 shares

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Our Address

      Our principal executive offices are located at 2020 K Street N.W., 6^th Floor, Washington, D.C. 20006 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 8,966,879 shares of common stock immediately prior to the closing of this offering.
	•	A one for two reverse stock split of our common stock effective December  10, 1999.
	•	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 December 31, 1999 and excludes shares that may be issued upon exercise of the following options and warrants:

	•	1,851,982 shares of common stock issuable upon the exercise of stock options outstanding under our stock option plan at a weighted average exercise price of $5.30 per share and 2,024,036 additional shares of common stock reserved for issuance under this plan;
	•	455,350 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $2.41 per share;
	•	528,738 shares of common stock issuable upon the exercise of the warrant granted to AOL, at an exercise price equal to the initial public offering price, including 35,492 that we issued in connection with the Sallie Mae and Imperial Bank warrants;
	•	616,863 shares of common stock issuable upon the exercise of the warrants we granted to Sallie Mae, at an exercise price equal to the initial public offering price;
	•	37,500 shares of common stock issuable upon the exercise of the warrant we granted to Imperial Bank at an exercise price of $10.00 per share; and
	•	500,000 shares reserved for future issuances under our employee stock purchase plan.

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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 as adjusted balance sheet data gives effect to:

	•	The conversion of all our outstanding Series A, Series B and Series C preferred stock into 8,966,879 shares of common stock upon consummation of this offering; and
	•	The receipt of the net proceeds from the sale of 4,000,000 shares of common stock by us in the offering, after deducting underwriting discounts and commissions and estimated offering expenses.

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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. 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 seven of the eighteen 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 $2.7 million and had negative cash flows from operations of approximately $1.2 million. For the nine months ended September 30, 1999, we incurred a loss from operations of approximately $19.3 million and had negative cash flows from operations of approximately $10.2 million. As of September 30, 1999, we had an accumulated deficit of approximately $21.8 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 may not achieve the customer traffic we believe is necessary to become successful. Specific factors which could prevent widespread customer acceptance of our business and our ability to increase revenues include:

	•	lack of consumer awareness of our online presence;
	•	pricing that does not meet consumer expectations;
	•	consumer concerns about the security of online transactions;

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	•	shipping charges, which do not apply to shopping at traditional retail stores and are not always charged by some of our online competitors;
	•	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 and services 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 generate revenues from additional services or that such sales or revenues 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;
	•	technical difficulties or system downtime affecting the Internet generally or the operation of our Web site specifically;

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

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

We will be required to record significant expense because of targets set forth in our agreements with third parties.

      In December 1999, we granted AOL a warrant to purchase 493,246 shares of our common stock with an exercise price equal to the initial public offering price in this offering. In addition, in January and February 2000, we granted AOL additional warrants to purchase an aggregate of 35,492 shares of our

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      In addition, in February 2000 we granted to Sallie Mae warrants to purchase an aggregate of 616,863 shares of our common stock with an exercise price equal to the initial public offering price in this offering. Of these shares, 352,493 will be immediately exercisable and the remaining 264,370 shares will vest over the next two years based on Sallie Mae’s performance under our product promotion agreement. We believe that Sallie Mae will be able to meet the criteria needed to allow it to exercise the performance based warrants. As a result, we will begin to record an expense for the warrants from the date of issuance. Initially, we expect to record a deferred charge during the quarter ending March 31, 2000 of approximately $2.6 million, which we anticipate will be the fair value of the vested portion of the warrant on the date of issuance. The deferred charge will be amortized on a straight-line basis over the two-year life of the agreement.

      Going forward, during the period of time that either the AOL and Sallie Mae warrants are outstanding, the fair value of the unvested portion of the warrants will be remeasured each quarter and, if different from the fair value used in determining the expense in the prior quarter, the difference will be reflected as an additional charge or credit at that time. Accordingly, the higher our stock price is at the time of remeasurement, the more significant will be the expense we will be required to record. If we are required to record significant expense, our results of operations for that period could fall below the expectations of our investors or public market analysts, which could cause the price of our common stock to fall substantially. At the time any portion of either of the warrants vests, the fair value of the vested portion will be remeasured for a final time and will not continue to be remeasured in subsequent periods.

      In April 1999, we entered into an agreement with Campus Pipeline under which a warrant to purchase 25,000 shares of our common stock with an exercise price of $6.00 per share was issued which will be exercisable upon the achievement of contractual revenues of $30.0 million on or before December 31, 2000, with an additional warrant for 50,000 shares of our common stock with an exercise price of $6.00 per share which will be exercisable if contractual revenues equal or exceed $80.0 million on or before July 31, 2001. Since the exercisability of these warrants is based on the achievement of uncertain future revenue targets, we have not recorded any expense for these warrants. If and when it becomes probable that our contractual revenues will reach the necessary level for either of the warrants we issued to Campus Pipeline to vest, we would begin to record an expense in the manner described above.

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 except to repay a debt we incurred in January 2000. We intend generally to use the net proceeds to us from this offering for repayment of debt and 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

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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 build our brand awareness, we must succeed in our brand marketing efforts, provide high-quality services to our customers and increase user traffic on our Web site. These efforts have required, and will continue to require, significant expenses. From January 1, 1998 to December 31, 1998, we incurred approximately $589,000 in marketing and sales expenses. From January 1, 1999 to September 30, 1999, we incurred approximately $13.4 million in marketing and sales expenses. We may find it necessary to increase expenditures relating to our marketing and sales efforts or otherwise increase our financial commitment to creating and maintaining brand awareness among potential customers.

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

      We depend on our network of 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) and textbooks.com (affiliated with Barnes & Noble College Bookstores, Inc.);
	•	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

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	•	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 margins, loss of market share and a diminished brand franchise. To remain competitive, we may from time to time make pricing, service or marketing decisions or acquisitions that could affect our financial condition and results of operations. It is possible that our supply channel (distributors and, indirectly, publishers) may enter the market and match our pricing through direct retail centers or that either or both our supply channel and traditional college bookstores may enter the online commerce market as our competitors. It is also possible that companies that control access to transactions through network access or Web browsers could promote our competitors or charge us a substantial fee for inclusion. As Internet use becomes increasingly prevalent, it is possible that the full text of books we offer for sale will be available for viewing on the Web or on other electronic devices such as virtual textbooks. If virtual textbooks become a reality and students rely on them in lieu of purchasing hard copies of textbooks, our business may decline.

We are subject to litigation that may force us to change our advertising.

      We have recently been sued by the National Association of College Stores, or N.A.C.S., a trade association whose members are largely college bookstores. The lawsuit claims that we engage in false and misleading advertising. Although the lawsuit does not seek monetary damages, in the event the lawsuit were adversely decided, we may have to change our advertising. Our inability to advertise discounts could harm our business. In addition, to the extent the litigation requires significant attention from management, their attention could be diverted from our operations.

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

      We obtain the prescribed reading lists 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

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Loss of any of our key management personnel or the inability of our key management personnel to work together effectively or successfully manage our growth could negatively affect our business.

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

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 representatives or attract, assimilate or retain other highly qualified employees or student representatives in the future. The failure to attract and retain the necessary managerial, marketing, merchandising, operational, customer service, technical, financial or administrative personnel could harm our business. In addition, as we grow and add additional product and service offerings, we anticipate a need to further develop and expand our Web site. Competition for highly skilled and qualified Web site and software developers is intense. We cannot be certain we will be able to attract and retain a sufficient number of qualified software developers or outside consultants for our Web site and transaction-processing systems.

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 for 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, to introduce new products or services or to acquire complementary businesses or services or intellectual property rights. Any required additional financing may be unavailable on terms favorable to us or at all. If we raise additional funds by issuing equity securities, you may experience significant dilution of your ownership interest and such securities may have rights senior to those of the holders of our common stock. Obtaining additional financing will be subject to a number of factors, including:

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

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      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 January 17, 2000, we had approximately 200 employees and over 2,000 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. We expect that we will need to continue to improve our financial and managerial controls and reporting and training systems and procedures. We will also need to continue to expand and maintain close coordination among our marketing and sales, operational, technical, accounting, finance and administrative organizations. We may not succeed with these efforts.

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 are expanding our operations by promoting new, complementary products, expanding the breadth and depth of products and services we currently offer and expanding our market presence through relationships with new schools and other third parties. We cannot be certain that our current expansion and 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. 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.

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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 retain customers and maintain adequate customer service levels. An unanticipated dramatic increase in the volume of traffic on our Web site or the number of orders placed by our customers may force us to expand and upgrade our technology, transaction-processing systems and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our Web site or timely expand and upgrade our systems and infrastructure to accommodate such increases. To be successful, we must adapt to our rapidly changing market by continually enhancing the technologies used in our Internet products and services and introducing new technology to address the changing needs of our business and customers. If we are unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or business and customer requirements, our business could be harmed.

As an Internet-based retailer, we depend heavily on our information technology infrastructure and our operations could be jeopardized by any system failure or inadequacy.

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

      Substantially all of our computer and communications hardware and software systems are located at a single facility in Herndon, Virginia. That facility is owned, maintained and serviced by Frontier

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      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.

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 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

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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 because, for example, we would be unable to prevent the use of an unregistered similar mark by a prior user or to prevent the use of a similar name in our markets or similar mark for products and services we would like to offer.

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

Defending against intellectual property infringement claims could be time consuming and expensive and, if we are not successful, could subject us to significant damages and disrupt our business.

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

As Internet technology and regulation advances, we may not be able to protect our domain names.

      We currently hold various Web domain names relating to our brand, including the “VarsityBooks.com” domain name. The acquisition and maintenance of domain names generally is

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Some 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 44.0% of our outstanding 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 disproportion-

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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. Current stockholders who, in the aggregate, will hold 11,416,747 shares of our outstanding common stock upon the closing of this offering; AOL, which will hold warrants for the purchase of up to 528,738 shares of common stock; and Sallie Mae, which holds warrants for the purchase of up to 616,863 shares of common stock, will have the right to require us to register their shares for sale or participate in subsequent registrations of our common stock. In addition, the holders of contingent warrants to purchase up to 75,000 shares of our common stock will have the right to participate in subsequent registrations of our common stock if the warrants become exercisable and are exercised. 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.

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

      Delaware corporate law and our 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 that investors might be willing to pay in the future for shares of our common stock. These provisions include those which:

	•	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;

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	•	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 $6.27. 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 $35.7 million, or $41.4 million if the underwriters exercise their over-allotment option in full, after deducting 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.

      On January 19, 2000, we signed a revolving credit agreement with Imperial Bank and we began borrowing under the agreement in February. As of February 14, 2000, there was $2.5 million outstanding. Amounts outstanding under the facility will bear interest at Imperial’s prime rate (8.5% as of December 31, 1999) plus 1.0% and will become due on December 31, 2000.

      We intend to use the net proceeds to us of this offering for repayment of any borrowings under the Imperial facility, under which we will be permitted to borrow up to $7.5 million, and 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.

      We anticipate that a majority of the net proceeds will be used for our sales and marketing efforts and that the balance will be spent on the purposes listed above with the order representing the relative amount we expect to spend on each purpose.

      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.

      We have not yet determined the actual expected expenditures and thus 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 September 30, 1999 on an actual basis and an as adjusted basis.

      The as adjusted capitalization gives effect to:

	•	the filing of our 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 8,966,879 shares of common stock upon consummation of the offering and our sale of 4,000,000 shares of common stock in the offering and receipt of the estimated net proceeds from the offering, after deducting 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 as of September 30, 1999:

	•	1,201,963 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 $1.11 per share and 893,007 additional shares of common stock reserved for issuance under our stock option plan, and
	•	455,350 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $2.41 per share.

      From September 30, 1999 through December 31, 1999, we:

	•	granted options to purchase an aggregate of 904,820 shares of common stock at a weighted average exercise price of $9.70 per share;
	•	reserved 1,905,030 additional shares of common stock for issuance under our stock option plan, leaving 2,024,036 additional shares reserved for issuance under our stock option plan as of December 31, 1999;
	•	issued a warrant to purchase 493,246 shares of common stock at the initial public offering price to AOL, which represents the aggregate number of shares that may be purchased by AOL pursuant to the warrant issued to AOL in December 1999 but does not include the additional warrant to purchase 1,125 shares of common stock we granted to AOL when we entered into definitive agreements with Imperial Bank and the additional warrant to purchase 34,367 shares of common stock we granted to AOL when we entered into the product promotion agreement with Sallie Mae; and
	•	reserved 500,000 shares of common stock for future issuances under our employee stock purchase plan.

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DILUTION

      Our net tangible book value as of September 30, 1999 was $22.1 million, or $1.92 per share, as adjusted to give effect to the automatic conversion of all of the outstanding shares of convertible preferred stock into 8,966,879 shares of our common stock upon consummation of this offering. Net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities divided by 11,506,483 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 net tangible book value per share of common stock immediately after completion of this offering. After giving effect to the sale of 4,000,000 shares of common stock by us in this offering and the receipt of the net proceeds, after deduction of underwriting discounts and commissions and the payment of the estimated offering expenses, our net tangible book value as of September 30, 1999, would have been $57.8 million, or $3.73 per share. This represents an immediate dilution in net tangible book value of $6.27 per share to purchasers of common stock in this offering and an immediate increase in net tangible book value of $1.81 per share to existing stockholders, as illustrated in the following table:

      The following table summarizes on an as adjusted basis as of September 30, 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:

      The foregoing table and calculation assumes no exercise of stock options or warrants outstanding as of September 30, 1999. As of September 30, 1999, there were options outstanding to purchase an aggregate of 1,201,963 shares of common stock at a weighted average exercise price of $1.11 per share. In addition, as of September 30, 1999, there were warrants outstanding to purchase an aggregate of 455,350 shares of common stock at a weighted average exercise price of $2.41. 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 nine months ended September 30, 1999 and the consolidated balance sheet data as of December 31, 1998 and September 30, 1999 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 1998 are derived from our unaudited consolidated financial statements for such period which are included elsewhere 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.

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

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

      Since the launch of our Web site, we have continued these activities and have also focused on increasing sales, expanding our product and service offerings, improving the efficiency of our order and fulfillment process, recruiting and training employees, 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 Spring 2000 semester, we increased the booklists we posted to over 240,000 courses at over 380 different targeted colleges and universities and we launched partnership programs with 25 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 general interest books, banner advertisements and marketing service agreements, as well as co-marketing programs, pursuant to which we have arrangements to sell textbooks through other Web sites. Revenues from the sales of Internet advertisements are recognized net of commissions paid. Revenues from our marketing programs are recognized over the period in which the services are delivered, provided that no significant performance obligations remain and the collection of the related receivable is probable. During the fourth quarter of fiscal 1999, we began generating revenues from co-marketing programs for which we used 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 $2.7 million and negative cash flows from operations of $1.2 million. For the nine months ended September 30, 1999, we incurred a loss from operations of approximately $19.3 million and negative cash flows from operations of $10.2 million. As of December 31, 1998 and September 30, 1999, we had accumulated deficits of approximately $2.7 million and $21.8 million, respectively. We expect operating losses and negative cash flows to continue for the foreseeable future. We anticipate our net losses will

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      We granted options to purchase 179,490 shares for the period ended December 31, 1998 and options to purchase 1,201,963 shares for the nine months ended September 30, 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 $4.2 million during the nine months ended September 30, 1999. Additionally, effective August 1, 1999, we sold 207,077 shares of our common stock at a price of $0.30 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 138,052 shares of our common stock at an exercise price of approximately $0.30 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 for these transactions, resulting in total deferred compensation for the nine month period ended September 30, 1999 of $7.7 million. Amortization of deferred compensation was $1.5 million for the nine months ended September 30, 1999 and is included in non-cash compensation in the accompanying consolidated statements of operations as a component of the marketing and sales, product development and general and administrative line items, as appropriate. 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:

      In the quarter ended December 31, 1999, the Company granted 904,820 options at a weighted average exercise price of $9.70, resulting in additional deferred compensation of approximately $2.7 million. The deferred compensation will be amortized over the four year vesting period of the options.

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      The following table sets forth the results of our operations for the year ended December 31, 1998 and the nine months ended September 30, 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 two months during the nine months ended September 30, 1998 as compared to all nine months during the period ended September 30, 1999.

Nine Months Ended September 30, 1999 Compared with Nine Months Ended September 30, 1998

  Net Sales

      Net sales increased to $8.9 million for the nine months ended September 30, 1999 from $96,000 for the nine months ended September 30, 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 $7.7 million for the nine months ended September 30, 1999 from $79,000 for the nine months ended September 30, 1998. This increase was primarily attributable to our increased sales volume. We expect that cost of product — related party will continue to increase as we expand our customer base and partnership program.

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      Cost of Shipping — Related Party (Baker & Taylor). Cost of shipping — related party consists of outbound shipping. Cost of shipping increased to $723,000 for the nine months ended September 30, 1999 from $7,000 in the nine months ended September 30, 1998. This increase was primarily attributable to our increased sales volume. Also for the nine months ended September 30, 1999, cost of shipping — related party exceeded shipping revenue by $182,000 or 33.6%. As part of our business strategy, we charge a flat rate for shipping, which is less than our actual costs. We believe that this strategy is responsive to the competitive nature of our business and is positively perceived by our customer base. We expect that cost of shipping — related party will continue to exceed shipping revenue and will increase as we expand our customer base.

      As discussed further in “Related Party 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 other services, including Web site content and customer database management. Such assignment is based on the relative fair value of each element as determined by Baker & Taylor. Effective with the amendment of our agreement with Baker & Taylor on October 1, 1999, we have included in “cost of product — related party” in our statement of operations the cost of purchased books from Baker & Taylor, we will include in “shipping — related party” the cost of shipping charges from Baker & Taylor and we will include in “marketing and sales — related party” the cost of other services charged from Baker & Taylor.

      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 a warrant to purchase 107,143 shares of our common stock at an exercise price of $2.33 per share in July; a warrant to purchase up to 50,000 shares of our common stock at an exercise price of $0.20 per share in October; and a warrant to purchase up to 53,571 shares of our common stock at an exercise price of $2.33 per share in December. Additional warrants to purchase up to 5,950 and 62,500 shares of our common stock at an exercise price of $2.33 and $0.22 per share respectively were 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 535,714 shares of our common stock to Baker & Taylor at par value. 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 expensed the excess of the fair value of the common stock over its cost, which was approximately $643,000, in July 1998. In connection with all of the Baker & Taylor equity transactions, we recorded an aggregate expense of $169,000 for the nine months ended September 30, 1999, a decrease from the $708,000 we recorded for such transactions for the nine months ended September 30, 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 $13.4 million for the nine months ended September 30, 1999 from $142,000 for the nine months ended September 30, 1998. Advertising expense increased to $8.3 million in the nine months ended September 30, 1999 from $100,700 for the nine months ended September 30, 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. We expect that marketing and sales expense will continue to increase in absolute dollars as we expand our network of student representatives and incur additional advertising and promotional expenses to build our sales base. Marketing and sales expense will also increase as a result of

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      Product Development. Product development expense consists of payroll and related expenses for development and systems personnel and consultants. Product development expense increased to $2.5 million for the nine months ended September 30, 1999 from $262,000 for the nine months ended September 30, 1998. This increase was primarily attributable to increased staffing and other costs related to feature and functionality enhancements to our Web site. We expect that product development expenses will continue to increase as we add additional features and functionality 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 $3.7 million for the nine months ended September 30, 1999 from $230,000 for the nine months ended September 30, 1998. This increase was primarily attributable to the hiring of additional personnel and increased professional services expenses. We expect that general and administrative expenses will increase as we continue to build our back-office infrastructure.

  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 $156,000 for the nine months ended September 30, 1999 compared to other income of $6,000 for the nine months ended September 30, 1998. This increase was primarily attributable to interest income on higher average cash and cash equivalent balances during the nine months ended September 30, 1999.

  Income Taxes

      As of December 31, 1998 and September 30, 1999, we had net operating loss carryforwards for federal income tax purposes of $1.7 million and $18.7 million, respectively, 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 cost of shipping—related party was $10,000 as a result of our increased sales volume. Equity transactions—related party of $798,000 relates to expense recognized in connection with warrants and common stock issued to Baker & Taylor as described above. Marketing and sales expense was $589,000 as a result of our online and offline advertising as well as personnel and related expenses. Product development expense was $696,000 as a result of staffing and other costs related to feature and functionality enhancements to our web site. General and administrative expense was $617,000 as a result of the hiring of personnel and professional services expenses.

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

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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 8,966,879 shares of our common stock.

      In April 1999, we entered into an agreement with Campus Pipeline, Inc. under which a warrant to purchase 25,000 shares of our common stock with an exercise price of $6.00 per share was issued and will be exercisable upon the achievement of contractual revenues of $30.0 million on or before December 31, 2000, with an additional warrant for 50,000 shares with an exercise price of $6.00 per share which will be exercisable if contractual revenues equal or exceed $80.0 million on or before July 31, 2001. Since the exercisability of these warrants is based on the achievement of uncertain future revenue targets, we have not recorded any expense for these warrants. These warrants could result in a significant charge to operating results in the future as described under “Risk Factors — We will be required to record significant expense because of targets set forth in our agreements with third parties.”

      In December 1999, we granted AOL a warrant to purchase 493,246 shares of our common stock, which does not include the additional warrant to purchase 1,125 shares which we granted to AOL when we entered into definitive agreements with Imperial Bank and the additional warrant to purchase 34,367 shares which we granted to AOL when we entered into the product promotion agreement with Sallie Mae, with an exercise price equal to the initial public offering price in this offering. Of the aggregate of 528,738 shares subject to purchase under these warrants, 176,245 are immediately exercisable and the remaining 352,493 shares will vest over the next three years based on ICQ’s performance under our interactive marketing agreement. This warrant will result in charges to operating results in the future as described under “Risk Factors — We will be required to record significant expense because of targets set forth in our agreements with third parties.”

      In February 2000, we granted Sallie Mae, Inc. warrants to purchase up to 616,863 shares of our common stock, with an exercise price equal to the initial public offering price in this offering. Of these shares, warrants to purchase 352,493 are immediately exercisable and the warrants to purchase the remaining 264,370 shares will vest over the next two years based on Sallie Mae’s performance under our product promotion agreement. This warrant will result in charges to operating results in the future as described under “Risk Factors — We will be required to record significant expense because of targets set forth in our agreements with third parties.”

      In August 1999, we loaned $62,000 to each of our founders, Eric J. Kuhn and Timothy J. Levy, to each purchase 207,077 shares of our common stock. The notes bear interest at a floating rate equal to the then current applicable federal rate, which was 5.41% for October 1999, and are due August 1, 2001.

      As of September 30, 1999, we had $28.6 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.

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      Net cash used in operating activities was $10.2 million for the nine months ended September 30, 1999, and $221,000 for the nine months ended September 30, 1998, consisting primarily of net losses adjusted for changes in accounts receivable, accounts payable and accrued expenses.

      Net cash used in investing activities was $1.2 million for the nine months ended September 30, 1999, and $27,000 for the nine months ended September 30, 1998, consisting primarily of purchases of computer equipment, fixtures and furniture, as well as an investment in United States government debt securities and related proceeds for the nine month period ended September 30, 1998.

      Net cash provided by financing activities was $38.5 million for the nine months ended September 30, 1999, and $1.3 million for the nine months ended September 30, 1998. Net cash provided by financing activities during the nine months ended September 30, 1999 consisted primarily of net proceeds of $38.5 million from the issuance of preferred stock.

      On January 19, 2000 we entered into a revolving credit facility with Imperial Bank in an aggregate amount of $7.5 million with a sublimit of $3.0 million for purchases of property, equipment and software. The maturity date for advances for working capital would be December 31, 2000 and the maturity date for property, equipment and software advances would be October 18, 2002. Interest on outstanding balances would accrue at Imperial’s prime rate (8.5% at December 31, 1999) plus 1.0% until the closing of this offering, and afterwards at Imperial’s prime rate. All amounts outstanding, which could be up to $7.5 million, would be secured by a pledge of all of our assets. Under the terms of the credit facility, as amended, we must maintain a tangible net worth of $15 million and we must maintain a ratio of our current assets to our current liabilities of 1.5 to 1. We also issued a warrant to Imperial to purchase 37,500 shares of our common stock at an exercise price of $10.00 per share. If we do not close this offering by February 29, 2000, we would be obligated to issue warrants to purchase additional shares of our common stock each month in an amount equal to an aggregate exercise price of $150,000 divided by the lesser of $10.00 per share or the price of a private equity offering in the event we were to undertake such an offering. We began borrowing under the revolving credit facility during February 2000, and we anticipate repaying all of the borrowings with a portion of the net proceeds of this offering. As of February 14, 2000, there was $2.5 million outstanding.

      We expect that operating losses and negative cash flows will continue for the foreseeable future and anticipate that losses will increase significantly from current levels because of additional costs and expenses related to brand development, marketing and other promotional activities, continued expansion of booklist operations, continued development of our Web site and information technology infrastructure expansion of product offerings and development of relationships with other businesses. We could reduce some of these costs if working capital decreased significantly. Our failure to generate sufficient revenues, raise additional capital or, if necessary, reduce discretionary spending could harm our results of operations and financial condition.

      We currently anticipate that the net proceeds of this offering, together with our available funds including amounts we expect to be available under the revolving credit agreement, 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 September 30, 1999, all of our cash equivalents mature within three months. As of September 30, 1999, we believe the reported amounts

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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 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 needed to be upgraded to comply with such year 2000 requirements or risked system failure or miscalculations causing disruptions of normal business activities.

      State of Readiness. We made an 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.

      We performed a year 2000 simulation on our software during the fourth quarter of 1999 to test system readiness. Our simulation uncovered two non-critical issues, both of which were subsequently corrected and re-tested. We have been informed by the majority of our material software component vendors and by 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 similar confirmations. We purchased all of our software and hardware within the past two years, and therefore we generally 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 are seeking assurance of year 2000 compliance from the providers of material non-IT systems. Until testing is complete and we receive responses from 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.

      As of February 14, 2000, we had not experienced any problems associated with year 2000 issues with any of our IT or non-IT systems, and we do not believe that any year 2000 problems will arise in the future.

      Costs. To date we have not incurred any material incremental costs in identifying or evaluating year 2000 compliance issues. We have established a year 2000 budget of approximately $200,000 for external costs for consultants and purchases of hardware and software associated with the project. We have assigned several employees to work on the project as necessary, but have not tracked the cost of these employees.

      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

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      Contingency Plan. As discussed above, we are engaged in an ongoing year 2000 assessment and developed contingency plans in case of year 2000 disruptions. We took 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 our contingency plans.

Recent Accounting Pronouncements

      In January 1999, we adopted Statement of Position No. 98-1, or SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” which provides guidance on accounting for the cost of computer software developed or obtained for internal use. SOP 98-1 was effective for fiscal years beginning after December 15, 1998. The adoption of SOP 98-1 did not have a material impact on our consolidated financial statements.

      In January 1999, we adopted Statement of Position No. 98-5, or SOP 98-5, “Reporting on the Costs of Start-Up Activities.” This standard requires companies to expense the costs of start-up activities and organization costs as incurred. In general, SOP 98-5 is effective for fiscal years beginning after December 15, 1998. Our adoption of SOP 98-5 did not have a material impact on our consolidated financial statements.

      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 we provide marketing services to other businesses interested in reaching the college market. According to Student Monitor L.L.C., a nationally syndicated market research company, we were the Web site “most visited,” “most heard-of,” and “most often visited” by college students in the fall of 1999. Our brand is built on saving students time and money while providing a high level of customer service. Our student representative network enables us to customize our marketing to the particular dynamics of each campus and reach students on a peer-to-peer basis. We plan to increase the number of products and services we offer and to provide a marketing channel for other businesses.

Industry Background

      According to statistics published by the National Center for Educational Statistics, the college student market is large and growing. Student Monitor reports show that 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. The National Center for Educational Statistics predicts that college enrollment will increase to approximately 16 million students by 2008. According to Student Monitor, college students spent over $105 billion in 1998 on goods and services, excluding tuition, room and board.

      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 common needs. For instance, most students must buy expensive school-related goods and services, such as textbooks and school supplies. In fact, textbooks are most students’ single largest school-related expenditure after tuition and room and board, with most students spending an average of $440 each year on textbooks according to Student Monitor. 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 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. Approximately 57% 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 purchases.

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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. We believe 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 January 17, 2000, we had a network of over 2,000 student representatives on the campuses of over 500 colleges, universities and graduate schools. 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 2,600 colleges and universities. To provide maximum convenience, in the Spring 2000 semester we posted booklists for over 240,000 courses from over 380 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 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

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		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 student 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. We 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 product offerings, to introduce our new products and services and to provide marketing services for other businesses. We believe that our campus presence allows us to customize our marketing strategy and that our peer-to-peer marketing, together with our traditional marketing campaign, enables us to reach college students more effectively than a traditional marketing campaign alone. We intend to continue to devote substantial efforts to building a talented student representative base and to attracting recognized student leaders to our team.

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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. In January 2000, we launched our job and career center and will soon begin to award scholarships and offer free e-mail services targeted toward college students. 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 380 colleges or universities 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.
		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.

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	•	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.
	•	Find a Job. The find a job section of our site enables a search for full-time and part-time jobs as well as internships. In addition, we provide job interview tips and industry and company information. Also, we offer relocation tools to assist job seekers in evaluating opportunities.

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 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 marketing channels we have developed are as follows:

      •  Student Representatives. To penetrate the difficult-to-reach college student market, we have created a network of student representatives, employing over 2,000 as of January 17, 2000. 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. We conduct regular training sessions for our lead representatives, during which we teach them about our company, marketing techniques and how to select a student representative team. Our lead student

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      •  Off-line Advertising and Public Relations. We combine the active marketing of our 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 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 , The Wall Street Journal 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.

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:

	•	AOL’s ICQ. We entered into a three-year interactive marketing agreement with AOL’s ICQ pursuant to which we are the exclusive college-targeted commerce partner on the ICQ instant messaging service as well as its Web site, www.icq.com . We will act as the exclusive third-party targeted advertiser and a marketer of the ICQ service and ICQ.com on U.S. college campuses. Our exclusivity provisions expire on December 31, 2000, and the agreement itself is scheduled to expire on December 22, 2002 unless earlier terminated because of breach, insolvency, or change of control affecting us.
	•	Sallie Mae. We entered into both a marketing services agreement and a product promotion agreement with Sallie Mae, Inc., an educational loan delivery organization. Pursuant to the marketing services agreement, Sallie Mae will pay us $2.0 million over the two year term. In exchange, we will customize a marketing plan for Sallie Mae to reach the college market. In addition, we entered into a product promotion agreement with Sallie Mae under which we will pay Sallie Mae referral fees based on a percentage of any revenue generated by its customers during the term of the arrangement. Sallie Mae will promote our products to its customers. Sallie Mae will also actively promote our partnership program to the schools to which it sells and promotes its products. In addition, Sallie Mae will maintain links on its Web site to our Web site and we will be the exclusive textbook retailer on the Sallie Mae site. In exchange, we granted Sallie Mae a

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		warrant to purchase up to 616,863 shares of common stock, which represents 3.5% of our aggregate common stock outstanding and reserved for issuance immediately prior to the completion of this offering, at a price equal to the initial public offering price in this offering. Of these shares, 352,493 are currently vested and the remaining 264,370 shares will vest over the two year term of the agreement depending on the number of customer transactions and partnership school referrals Sallie Mae delivers during that period. Both of these agreements will expire on February 1, 2002 unless earlier terminated because of breach, insolvency, or change of control affecting us.
	•	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. The written agreement we have entered into with edu.com is scheduled to expire on August  20, 2000 unless both parties agree to its renewal. The agreement provides that edu.com will receive a percentage of the revenue generated from the co-branded edu.com/VarsityBooks.com Web site.
	•	Book Tech. We have a partnership with Book Tech, Inc., a 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. The written agreement we have entered into with Book Tech is scheduled to expire on June 30, 2000, but will extend automatically for one-year terms unless either party elects not to renew. The agreement provides that Book Tech will receive a percentage of revenue from our sales of books that originated from Book Tech’s Web site.
	•	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 an educational and career service company. We do not have a written agreement with Kaplan Educational Centers.
	•	JobDirect.com. We have a relationship with JobDirect.com that enables students who visit our Web site to search for part-time and full-time jobs and internships. JobDirect.com is an online database for employers to target, search and find prospective job candidates from the college market. Our agreement with JobDirect.com terminates December 31, 2000, but is subject to cancellation with 60 days written notice.

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

Partnership Program

      As of January 17, 2000, we were the exclusive new textbook supplier for 25 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 distance learning programs and that the number of students taking such courses will increase by more than 30% per year before 2002.

      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 that 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

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Fulfillment

      We fulfill all of our textbook orders through Baker & Taylor, a leading distributor of books, videos and music products with whom we have a series of written agreements, each of which are scheduled to expire on October 1, 2002 with automatic renewal for one year unless either party elects in writing not to renew. The agreements are terminable upon up to 30 days’ notice by either party in the event of a default. Under these agreements with Baker & Taylor, we agree to provide Baker & Taylor with our written demand forecasts for each upcoming semester and we agree to use Baker & Taylor as our principal supplier of textbooks and drop-ship and fulfillment services. We pay fees and expenses related to the services Baker & Taylor provides and we purchase products from Baker & Taylor at a discount to the suggested price. In return, Baker & Taylor agrees not to provide drop-ship services to any online textbook retailer serving students at colleges and universities or distance learning programs located in the United States that require students to purchase textbooks, unless the retailer was an existing customer of Baker & Taylor on or prior to June 10, 1998, the date we initially contracted with Baker & Taylor. Our agreements with Baker & Taylor provide us access to and use of an electronic set of data elements from Baker & Taylor’s title file database which contains bibliographic records. In addition, under these agreements, Baker & Taylor provides us with promotional, customer service, and database management services.

      As a result of the data access our agreements provide, 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 three business days of the placement of the order. We extend a convenient return policy to our customers under which returns are shipped directly to Baker & Taylor to expedite processing. Providing Baker & Taylor with our demand forecasts for each semester helps to ensure they maintain an adequate and relevant inventory to meet the demands of our customers.

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

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      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. Although we own and maintain our hardware and software systems, Frontier/ Global Center, located in Herndon, Virginia, hosts our two separate server environments and acts as our Internet service provider and we lease the space in which our hardware system resides from Frontier/ Global Center. 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.

      Our agreement with Frontier/ Global Center currently provides for service to be provided on an annual basis, subject to renewal. We pay for the space in which our hardware system resides and our Internet access based on our usage, on a monthly basis. We may terminate this agreement on any annual renewal date without penalty.

      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 ease with which new Web sites can be developed. We currently or potentially compete, directly and indirectly, for customers, advertisers and sponsors with 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) and textbooks.com (affiliated with Barnes & Noble College Bookstores, Inc.);
	•	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.

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      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. We received an anticipatory refusal to our application for registration on December 15, 1998 because of a prior-filed application to register VARSITY BOOK for personal computers, peripheral equipment and various hardware items. We filed a response to this anticipatory refusal on June 15, 1999. The examining attorney at the United States Patent and Trademark Office will review that response and decide whether to withdraw the anticipatory refusal, in which case our application would proceed, or to continue it, in which case our application would be suspended until the prior-filed application matures into a registration or is abandoned.

      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 remember such names, therefore there can be no assurance that our domain name will not lose its value if, for example, users begin to rely on mechanisms other than domain names to access online resources. The current system for registering, allocating and managing domain names has been the subject of litigation and of proposed regulatory reform. There can be no assurance that our domain name will not lose its value, or that we will not have to obtain an entirely new domain name in addition to or in lieu of our current domain name, if such litigation or reform effort results in a restructuring of the current domain name system.

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

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      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 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 demographic information and to target advertising. Some of the currently available Internet browsers allow users to modify their browser settings to remove cookies or prevent cookies from being stored on their hard drives. In addition, a number of Internet commentators, advocates and governmental bodies in the United States and other countries have urged the passage of laws limiting or abolishing the use of cookies. Limitations on or elimination of the use of cookies could limit the effectiveness of our targeting of advertisements, which could harm our ability to generate advertising revenue.

      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.

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      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 some 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 January 17, 2000, we had approximately 200 full-time employees and over 2,000 student representatives, including over 600 lead student representatives. Each semester our lead student representatives recruit 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 2020 K Street, N.W. in Washington, D.C. At this headquarters site, we presently lease an aggregate of approximately 34,000 square feet. Our current lease for this facility expires in February 2003. We believe this space will be sufficient for our needs for approximately twelve months.

Legal Proceedings

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

      We believe these claims to be completely without merit. Our Web site and our advertising truthfully state that we offer college textbooks at up to 40% off suggested price. We also believe that the industry data we use to determine the suggested price from which we calculate discounts is appropriate. We have filed a motion to dismiss these claims and are awaiting a ruling on our motion.

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MANAGEMENT

Executive Officers, Directors and Key Employees

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

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

(2)  Member of the audit committee.

      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. Mr. Levy received a B.A. from Columbia University in 1992 and a J.D. with honors from The George Washington University Law School in 1996.

      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

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      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.

      Debra Graham has served as a Vice President of Marketing since November 1998. From 1995 to 1998, Ms. Graham was at Dean & Company where, as a Manager, she focused on retail and high-tech marketing. From 1993 to 1995, Ms. Graham worked in brand management at Procter & Gamble. Ms. Graham received an A.B. from Harvard and Radcliffe Colleges in 1988 and a M.B.A. from Harvard Business School in 1993.

      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.

      Jonathan Kaplan has served as our Vice President of Communications and Strategic Planning since October 1999. From 1994 to 1999, Mr. Kaplan worked in the Clinton Administration, most recently in the White House as Special Assistant to the President for Economic Policy and Chief of Staff of the National Economic Council. From 1992 to 1994, Mr. Kaplan practiced law at Covington & Burling in Washington, D.C. where he specialized in general litigation matters. Mr. Kaplan received an A.B. (with honors) from Harvard College in 1986 and a J.D. from the Boston University School of Law in 1992.

      Helen Kim has served as a Vice President of Marketing since May 1999. From 1997 to May 1999, Ms. Kim was with SRI Consulting, a subsidiary of Stanford Research Institute. From 1995 to 1997, Ms. Kim served as the Director of Marketing and Corporate Development for Rally’s Inc. Ms. Kim received a B.A. from the University of Virginia in 1989 and an M.B.A. from Darden Business School at the University of Virginia in 1994.

      Bruce McNamer has served as our Vice President of Business Development since February 2000. From 1998 to 1999, Mr. McNamer served as a White House Fellow at the National Economic Council. From 1996 to 1998 Mr. McNamer was with McKinsey & Company. From 1985 through 1988, Mr. McNamer worked for Morgan Stanley & Company. Mr. McNamer received an A.B. (with honors) from Harvard College in 1985, a J.D. from Stanford Law School in 1996, and an M.B.A. from the Stanford University Graduate School of Business, also in 1996.

      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., with honors, 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 division of Tribune Company. From

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      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. and webMethods, 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.

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 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 December 31, 1999, we had granted to Mr. Kuhn an option to purchase 138,052 shares at an exercise price of $0.30 per share and an option to purchase 453,383 shares which includes options to purchase 107,913 shares we granted on February 3, 2000 pursuant to the AOL, Imperial and Sallie Mae transactions at an exercise price of $10.00 per share. On

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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.

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 138,052 shares of our common stock at an exercise price of $0.30 per share. In December 1999, we granted Mr. Kuhn an option to purchase 453,383 shares of our common stock, which includes options to purchase 107,913 shares granted on February 3, 2000 in conjunction with the warrants we issued to AOL, Imperial and Sallie Mae, at an exercise price of $10.00 per share. Both options vest 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 Mr. Kuhn and Mr. Levy is determined by the board of directors provided that, according to their respective 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, Mr. Kuhn and Mr. 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 Mr. Kuhn and Mr. Levy.

      Termination of Agreements. Mr. Kuhn’s and Mr. Levy’s 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

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      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.

      Confidentiality and Assignment of Inventions. Mr. Kuhn and Mr. 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. Mr. Kuhn and Mr. 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 4,000,000 shares of common stock. As of December 31, 1999, we had options to purchase 1,851,982 shares of common stock outstanding 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.

Employee Stock Purchase Plan

      The Employee Stock Purchase Plan will become effective upon the completion of this offering. A total of 500,000 shares of common stock are available for issuance under the plan. The number of shares of common stock available for issuance under the plan will be increased on the first day of each of our fiscal years during the term of the plan by the lesser of 300,000 shares or 2% of our issued and outstanding common stock as of the last day of the preceding year.

      The plan will be administered by a committee appointed by the board of directors. Employees are eligible to participate if they are customarily employed by us for at least 20 hours per week and more than five months in any fiscal year. The plan permits an eligible employee to purchase our common stock at a discount through accumulated payroll deductions of up to 15% of his or her compensation.

      The plan, which is intended to qualify under Section 423 of the IRS Code, will be implemented by a series of overlapping offering periods of 24 months’ duration, with new offering periods, other than the first offering period, commencing on or about January 1, April 1, and July 1 and October 1 of each year. Each offering period will consist of eight consecutive purchase periods of approximately three months’ duration,

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      Individuals who are eligible employees as of the first business day of each offering period may enter the plan as of that offering period. Once enrolled in the plan, a participant will continue to participate in the plan for future offering periods, until the participant ceases to be an eligible employee, withdraws from the plan or discontinues his or her contributions.

      The purchase price per share will be 85% of the lower of (1) the fair market value of our common stock on the purchase date and (2) the fair market value of a share of our common stock on the last trading day before the offering date, or, in the case of the first offering period under the plan, the price at which one share of our common stock is offered to the public in our initial public offering.

      The board may at any time amend, modify or terminate the plan. The plan will terminate no later than December 17, 2009.

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RELATED PARTY 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, shares of Series A preferred stock will convert into an aggregate of 1,035,706 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 investors’ rights agreement granted the holders of the Series A preferred stock the right to nominate a director to our board and rights to receive information about our financial performance and obligated us to meet operational covenants. The nominee of the Series A preferred stock resigned from our board in September 1999. The right of first refusal and co-sale agreement granted the investors in the Series A preferred stock the ability to purchase any shares of common stock proposed to be sold by Mr. Kuhn or Mr. Levy and, if they were not all purchased by the investors, for the nonpurchasing investors to sell their shares, on a pro rata basis, to the third party purchaser with those proposed to be sold by Mr. Kuhn or Mr. Levy. 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. None of the rights may be exercised in connection with this offering.

      The sales to our directors, executive officers and holders of 5% or more of our common stock, as well as any other rights granted to them, were on the same terms as those agreed to by third parties on an arm’s-length basis.

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, shares of Series B preferred stock will convert into an aggregate of 3,466,897 shares of common stock. The purchasers of

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