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SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

or

Commission File Number: 0-26063

barnesandnoble.com inc.

(212) 414-6000
(Registrant’s Telephone Number, Including Area Code)

          Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

          Number of shares of $.001 par value Class A Common Stock, Class B Common Stock and Class C Common Stock outstanding as of August 8, 2003 was 48,522,947, one and one, respectively.

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barnesandnoble.com inc.

June 30, 2003

Index to Form 10-Q

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PART I - FINANCIAL INFORMATION

Item 1:       Financial Statements

barnesandnoble.com inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of dollars, except per share data)
(unaudited)

See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars, except per share data)
(unaudited)

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and June 30, 2002
(in thousands of dollars, except per share data)
(unaudited)

     The unaudited consolidated financial statements include the accounts of barnesandnoble.com inc. (the “Company”), barnesandnoble.com llc (“B&N.com”) and BookQuest LLC (“BookQuest”), a wholly owned subsidiary of B&N.com.

     In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of June 30, 2003 and the results of its operations for the three months and six months then ended and its cash flows for the six months then ended. These consolidated financial statements are condensed and therefore do not include all of the information and footnotes required by generally accepted accounting principles. The consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. The Company followed the same accounting policies in preparation of this report as in such Annual Report. Operating results for the three months and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

1.

ORGANIZATION

     The Company is a holding company whose sole asset is a 29.3% equity interest in B&N.com, an online retailer of books, music and DVD/video, and whose sole business is currently acting as sole manager of B&N.com. As sole manager of B&N.com, the Company controls all of the affairs of B&N.com and as a result, B&N.com is consolidated with the Company. As of June 30, 2003, Barnes & Noble, Inc. (“Barnes & Noble”) and Bertelsmann AG (“Bertelsmann”) beneficially own equity interests of 38.0%, (or 57,500 Membership Units and 3,013 shares of Class A Common Stock) and 36.8%, (or 57,500 Membership Units and 1,126 shares of Class A Common Stock), respectively, in B&N.com. Each Membership Unit held by these companies is convertible into one share of the Company’s Class A Common Stock. As reflected in the consolidated statements of operations, the loss before minority interest represents the total loss for the period and the net loss represents the portion of the loss attributable to the Company subsequent to the commencement of its activities.

2.

RECLASSIFICATIONS

     Certain prior-period amounts have been reclassified for comparative purposes to conform to the 2003 presentation.

3.

STOCK OPTIONS

     The Company has one stock-based employee compensation plan in effect. The Company accounts for all transactions under which employees receive shares of stock or other equity instruments in the Company based on the price of its stock in accordance with the provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees”. Options which have been repriced have been treated as variable options. No stock-based employee compensation cost is reflected in net loss, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant and the market price of the stock subsequent to the repricing has not exceeded the exercise price. The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 “Stock-Based Compensation” (“SFAS No. 123”).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and June 30, 2002
(in thousands of dollars, except per share data)
(unaudited)

     The fair value for each option granted was estimated at the date of grant using the Black-Scholes option-pricing model, one of the allowable valuation methods under SFAS No. 123, with the following assumptions:

     The weighted-average fair value of the options granted during the six months ended June 30, 2003 and 2002 was estimated to be $0.54 and $1.12, respectively, and $0.71 and $1.08 for the three months ended June 30, 2003 and 2002, respectively, for options granted at fair market value.

4.

ACCRUED SPECIAL CHARGES

     An impairment of fixed assets and other special charges of $88,213 ($0.56 per share assuming conversion of membership units) was recorded as a component of operating expenses during the fourth quarter of 2001. These charges were primarily related to the impairment of fixed and other assets, including equity investments, as well as the consolidation of fulfillment operations and administrative functions. At June 30, 2003, the accrued liability associated with the special charges was $4,687 and consisted of the following:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and June 30, 2002
(in thousands of dollars, except per share data)
(unaudited)

5.

INVESTMENTS IN EQUITY METHOD INVESTEES

     The Company has made certain investments in business entities accounted for under the equity method of accounting. The Company accounts for an investment under the equity method if the investment gives the Company the ability to exercise significant influence over the operating and financial policies of such entity. An investment of 20% or more of the voting stock typically denotes such influence, in the absence of other evidence to the contrary.

     The Company has periodically evaluated whether the declines in fair value of its equity investments are other-than-temporary. This evaluation consisted of reviewing qualitative and quantitative factors including operating results and trends, as well as market prices of public companies operating in the same sector. As of June 30, 2003, the investment in equity method investees had no carrying value as the business entity invested in has ceased all operations and is in the process of being dissolved.

6.

RELATED PARTY TRANSACTIONS

     B&N.com has entered into agreements with Barnes & Noble, Bertelsmann and their affiliates. The Company believes that the transactions and agreements discussed below (including renewals of any existing agreements) between B&N.com and its affiliates are at least as favorable to B&N.com as could be obtained from unaffiliated parties. The Board of Directors and its Audit Committee must approve in advance any proposed transaction or agreement with affiliates and will utilize procedures in evaluating the terms and provisions of such proposed transaction or agreement as are appropriate in light of the fiduciary duties of directors under Delaware law.

     B&N.com entered into a Supply Agreement, dated October 31, 1998, as amended, with Barnes & Noble (the “Supply Agreement”), whereby Barnes & Noble has agreed to supply inventory to B&N.com through Barnes & Noble’s distribution facilities and purchasing departments. Pursuant to the Supply Agreement, Barnes & Noble charges B&N.com its actual cost to acquire the inventory plus any incremental overhead incurred by Barnes & Noble in connection with providing such merchandise supply services. The Company purchased $49,101 and $50,659 from Barnes & Noble representing 36.6% and 39.1% of the Company’s merchandise purchases for the six months ended June 30, 2003 and 2002, respectively. The charges for incremental overhead for the six months ended June 30, 2003 and 2002 were $1,620 and $1,169, respectively.

     Under a Services Agreement, dated October 31, 1998, as amended, between B&N.com and Barnes & Noble (the “Services Agreement”), B&N.com receives various administrative services from Barnes & Noble, including, among other things, services for payroll processing, benefits administration, insurance (property and casualty, medical, dental and life) and tax administration. In accordance with the terms of the Services Agreement, B&N.com reimburses Barnes & Noble in an amount equal to the third-party expenses it incurs to fund and provide such services, plus any incremental internal costs. B&N.com was charged $1,496 and $596 for such services during the six months ended June 30, 2003 and 2002, respectively.

     B&N.com purchases merchandise directly from Calendar Club, L.L.C. (“Calendar Club”), a company engaged in the wholesaling and retailing of calendars, in which Barnes & Noble owns a 73.9% interest. B&N.com’s purchases from Calendar Club were $0 and $304 for the six months ended June 30, 2003 and 2002, respectively.

     B&N.com subleases, from Barnes & Noble, approximately one-third of a 300,000 square foot warehouse facility located in New Jersey. B&N.com was charged, by Barnes & Noble, $282 and $249 for such subleased space during the six months ended June 30, 2003 and 2002, respectively. The amount paid to Barnes & Noble by B&N.com approximates the cost per square foot paid by Barnes & Noble as tenant pursuant to its lease of the space from an unaffiliated third party.

     Since 1999, B&N.com has used AEC One Stop Group, Inc. (“AEC”) as its main music supplier, and as one of its suppliers of DVD/video. AEC is among the largest wholesale distributors of music, videos and DVDs in the United States. AEC also provides B&N.com with a music, DVD and video product database. Subsequent to the initial supply arrangement between AEC and B&N.com, AEC’s parent corporation was acquired by an investor group in which Leonard Riggio, Chairman of the Board of the Company and B&N.com, became a minority investor. B&N.com was charged by AEC $18,722

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and June 30, 2002
(in thousands of dollars, except per share data)
(unaudited)

and $14,015, representing 14.0% and 10.8% of the Company’s merchandise purchases, during the six months ended June 30, 2003 and 2002, respectively. In addition, B&N.com was charged by AEC $165 and $136 for database services during the six months ended June 30, 2003 and 2002, respectively. At June 30, 2003 and 2002, $3,785 and $4,481, respectively, remained payable to AEC.

     B&N.com licenses the “Barnes & Noble” name under a royalty-free license agreement, dated October 31, 1998, as amended, between B&N.com and Barnes & Noble College Bookstores, Inc. (the “License Agreement”), of which Leonard Riggio is the principal stockholder. Pursuant to the License Agreement, the Company has been granted an exclusive license to use the “Barnes & Noble” name and trademark for the purpose of selling books over the Internet (excluding sales of college textbooks). Under a separate agreement dated as of January 2001, between the Company and Textbooks.com, Inc. (“Textbooks.com”), a corporation owned by Leonard Riggio, B&N.com was granted the right to sell college textbooks over the Internet using the “Barnes & Noble” name. Pursuant to this agreement, B&N.com pays Textbooks.com a royalty on revenues (net of product returns, applicable sales tax and excluding shipping and handling) realized by the Company from the sale of books designated as textbooks. The term of the agreement is for five years and renews annually for additional one-year periods unless terminated 12 months prior to the end of any given term. For the six months ended June 30, 2003 and 2002, the Company recorded royalty expense of $1,943 and $1,864, respectively, under the terms of this agreement.

     B&N.com has various royalty-free non-exclusive licenses dated October 31, 1998, as amended, from Barnes & Noble, and Bertelsmann’s Books Online (“BOL”). B&N.com licenses from Barnes & Noble the right to use Barnes & Noble’s database of book bibliographic data as well as certain software applications. B&N.com licenses from BOL, the subsidiary through which Bertelsmann conducts its Internet business, its name and trademark for use in B&N.com’s operations. Under Technology Sharing License Agreements, B&N.com was granted a royalty-free license to view, access and use BOL’s computer technology and systems, and B&N.com granted BOL a license to view, access and use B&N.com’s computer technology and systems. All of the agreements described in this paragraph are subject to certain renewal and termination provisions.

     B&N.com and Barnes & Noble commenced a marketing program in November 2000, whereby a customer purchases a “Readers’ Advantage™ card” for an annual membership fee of $25.00 which is non-refundable after the first 30 days of the membership term. With this card, customers can receive discounts of 10 percent on certain Barnes & Noble purchases and 5 percent on all B&N.com purchases. B&N.com and Barnes & Noble have agreed to share the expenses, net of revenue from the sale of the cards, related to this program in proportion to the discounts customers receive on purchases with each company. B&N.com’s share of the card revenue generated from this program for the six months ended June 30, 2003 and 2002 were $1,159 and $788, respectively.

     In the fourth quarter of 2002, B&N.com entered into an agreement with Marketing Services (Minnesota) Corp. (“MSC”), a wholly owned subsidiary of Barnes & Noble, for marketing services, which includes the issuance of gift cards. Under this agreement B&N.com has received $8,464 as of June 30, 2003 from MSC, which represents reimbursement for purchases made with gift cards purchased in a Barnes & Noble store and redeemed on the B&N.com Web site.

     B&N.com ships, through its fulfillment centers, customer orders on behalf of Barnes & Noble to Barnes & Noble retail stores as well as to Barnes & Noble customers’ homes. B&N.com charges Barnes & Noble the costs associated with such shipments plus any incremental overhead incurred by B&N.com to process these orders. For the six months ended June 30, 2003 and 2002, B&N.com recorded $1,011 and $205, respectively, as a reimbursement for shipping and handling from Barnes & Noble. In addition, during the year 2001, B&N.com and Barnes & Noble entered into an agreement whereby B&N.com receives a commission on all items ordered by customers at Barnes & Noble stores and shipped directly to customers’ homes by B&N.com. Commissions for these sales were recorded as revenue and amounted to $536 and $572 for the six months ended June 30, 2003 and 2002, respectively.

     Barnes & Noble subleased warehouse space from the Company in Reno, Nevada. B&N.com charged Barnes & Noble $0 and $500 for such subleased space for the six months ended June 30, 2003 and 2002, respectively. Additionally, Barnes & Noble reimbursed B&N.com $6,186 during the three months ended March 31, 2002, for fixed assets purchased on behalf of Barnes & Noble for the Reno warehouse. The equipment was sold to Barnes & Noble at its original cost. In January 2002,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and June 30, 2002
(in thousands of dollars, except per share data)
(unaudited)

B&N.com determined it could not effectively utilize the full capacity of its Reno, Nevada distribution center. Accordingly B&N.com agreed to transfer the Reno warehouse lease and sell B&N.com’s inventory located in Reno to Barnes & Noble. Barnes & Noble purchased the inventory from B&N.com during the three months ended March 31, 2002, at cost for approximately $9,877. The Reno lease assignment and the transfer of the operations of the Reno facility to Barnes & Noble was completed in April 2002. In connection with the transfer, B&N.com agreed to pay one-half of the rent charged for the facility through December 31, 2002.

     In 2000, B&N.com began purchasing new and used textbooks directly from MBS Textbook Exchange, Inc. (“MBS”), a corporation majority-owned by Leonard Riggio and one of the nation’s largest wholesalers of college textbooks. B&N.com’s total purchases for the six months ended June 30, 2003 and 2002 were $7,086 and $8,822, respectively. In addition, B&N.com maintains a link on its Web site called “Sell Your Textbooks” which is hosted by MBS and through which B&N.com customers are able to sell back used books purchased at B&N.com directly to MBS. B&N.com is paid a commission based on the price paid by MBS to the consumer. Total commissions received and recorded as revenue for the six months ended June 30, 2003 and 2002 were $44 and $29, respectively.

     Under a Strategic Relationship Agreement, dated as of May 1, 2001 (the “Strategic Relationship Agreement”), between B&N.com and GameStop Corp. (“GameStop”), a majority-owned subsidiary of Barnes & Noble, B&N.com’s Web site refers customers to the GameStop Web site for purchases of video game hardware, software and accessories and PC entertainment software. GameStop pays B&N.com a referral fee based on its net sales revenue from certain eligible purchases made by customers as a result of the redirection from the B&N.com Web site. Either party may terminate the Strategic Relationship Agreement on 60 days’ notice. Commissions of $6 and $59 were recorded as revenue for the six months ended June 30, 2003 and 2002, respectively, under this agreement.

     B&N.com has an approximate 46.8% equity stake in enews, inc. (“enews”), a company previously engaged in selling magazine subscriptions on the Internet, and accounted for this investment under the equity method. Substantially all of the balance of the shares are owned by Barnes & Noble. In July 2002, the Board of Directors and stockholders of enews approved a Plan of Complete Liquidation (the “Liquidation Plan”). As of June 30, 2003, the implementation of the Liquidation Plan had been substantially completed and is expected to be concluded by December 31, 2003. Prior to the implementation of the Liquidation Plan, B&N.com fulfilled a majority of orders for magazine subscriptions through enews and recorded a commission on these sales. B&N.com recorded commissions of $0 and $697 for the six months ended June 30, 2003 and 2002, respectively, and was reimbursed $367 and $232, respectively, for expenses incurred on behalf of enews for the six months ended June 30, 2003 and 2002.

     At June 30, 2003 and 2002, $49,107 and $40,347, respectively, remained payable to Barnes & Noble in connection with the transactions described above.

     Michael N. Rosen, a director of the Company, is also a member of Bryan Cave LLP, outside counsel to the Company and B&N.com.

7.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146 “Accounting for the Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”), which requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring).” The provisions of SFAS No. 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The financial impact of SFAS No. 146 does not have a material effect on the Company.

     In November 2002, the EITF reached a consensus on Issue 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor” (“Issue 02-16”), addressing the accounting of cash consideration received by

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and June 30, 2002
(in thousands of dollars, except per share data)
(unaudited)

a customer from a vendor, including vendor rebates and refunds. The consensus reached states that consideration received should be presumed to be a reduction of the prices of the vendor’s products or services and should therefore be shown as a reduction of cost of sales in the income statement of the customer. The presumption could be overcome if the vendor receives an identifiable benefit in exchange for the consideration or the consideration represents a reimbursement of a specific incremental identifiable cost incurred by the customer in selling the vendor’s product or service. If one of these conditions is met, the cash consideration should be characterized as revenues or a reduction of such costs, as applicable, in the income statement of the customer. The consensus reached also concludes that rebates or refunds based on the customer achieving a specified level of purchases should be recognized as a reduction of cost of sales based on a systematic and rational allocation of the consideration to be received relative to the transactions that mark the progress of the customer toward earning the rebate or refund, provided the amounts are probable and reasonably estimable. This standard is effective for arrangements entered into after December 31, 2002. Implementation of this standard does not have a material effect on the Company.

     In November 2002, the FASB issued Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“Interpretation 45”). Interpretation 45 requires a guarantor to include disclosure of certain obligations, and if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The recognition requirement is effective for guarantees issued or modified after December 31, 2002. The Company has no obligations regarding Interpretation 45 and it is not expected to have a material impact on the Company.

     In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure.” This Statement amends SFAS No. 123, to provide alternative methods of transition for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of this standard are effective for fiscal years ending after December 15, 2002. The Company has elected to continue using the intrinsic value method and has incorporated these expanded disclosures into the footnotes to the Company’s consolidated financial statements included herein.

     In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“Interpretation 46”). Interpretation 46 clarifies the application of Accounting Research Bulletin No. 51 “Consolidated Financial Statements”, and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. The Company holds no interest in variable interest entities.

8.

SUBSEQUENT EVENTS

     In July 2003, Barnes & Noble announced that it reached an agreement with DirectGroup Bertelsmann, the direct-to-customer division of German-based media company Bertelsmann, to acquire all of Bertelsmann’s interest in B&N.com for $164,000 in a combination of cash and notes, equivalent to $2.80 per share or LLC Membership Unit. The transaction is subject to certain closing conditions and is expected to close within 45 days of the date of announcement.

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

Overview

     The Company is a holding company whose sole asset is its 29.3% equity interest in B&N.com and whose sole business is acting as sole manager of B&N.com. B&N.com launched its initial online store in March 1997 and is currently ranked the ninth most-trafficked online shopping site, based on the ComScore Media Metrix June 2003 report.

     B&N.com has pursued a strategy of focusing on the sale of books, music, DVD/video and online courses. Since opening its online store (www.bn.com) in March 1997, B&N.com has sold products to more than 15.2 million customers in 230 countries. B&N.com’s online bookstore includes the largest in-stock selection of in-print book titles, supplemented by more than 30 million listings from its nationwide network of out-of-print, rare and used book dealers. B&N.com offers its customers fast delivery, easy and secure ordering and rich editorial content.

     The results of operations discussed hereafter include the consolidated results of the Company and B&N.com. In view of the changing nature of B&N.com’s business and its limited operating history, the Company believes that period-to-period comparisons of the operating results of B&N.com, including gross profit margin and operating expenses as a percentage of net sales, are not necessarily meaningful and should not be relied upon as an indication of future performance.

Critical Accounting Policies

     Securities and Exchange Commission Financial Reporting Release No. 60 requests all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The Company believes that the following critical accounting policies affect the significant judgments and estimates used in the preparation of the Company’s financial statements.

     Revenue Recognition. The Company’s product sales, including outbound shipping and handling charges, are recognized, net of estimated returns and discounts, at the time the products are shipped to customers. Commissions received on sales of magazine subscriptions were recorded at the net amount earned as the Company was acting as an agent in such transactions. The Company continuously monitors and tracks product returns and records a provision for the estimated amount of future returns, based on historical experience. While returns have historically been within the Company’s expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same return rates that it has in the past. Any significant increase in product return rates could have a material adverse impact on the Company’s operating results for the period or periods in which such returns materialize.

     As of April 2003, the Company now receives commissions on sales of used and out of print books, through BookQuest, a service that allows independent book dealers to sell their used books on the B&N.com Web site. In accordance with EITF Issue No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” revenues are recorded at the net amount earned as the Company is acting as an agent in such transactions.

     Impairment of Goodwill and Other Long-Lived Assets. The Company’s long-lived assets include fixed assets and goodwill. At June 30, 2003, the Company had $48.3 million of fixed assets, net of accumulated depreciation, and $13.8 million of net goodwill, accounting for approximately 39.8% of the Company’s total assets. B&N.com reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In valuation, assets held and used are measured by a comparison of the carrying amount of an asset to undiscounted pre-tax future net cash flows. Future events could cause B&N.com to conclude that impairment indicators exist and that long-lived assets may be impaired. Any resulting impairment loss could have a material adverse impact on the Company’s financial condition and results of operations. As required by SFAS Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which the Company implemented in 2002, the Company completed its annual impairment test on the goodwill as of November 30, 2002 and deemed that no impairment charge was necessary. The Company has noted no subsequent indicators of impairment. Changes in market conditions, among other factors, could have a material impact on these estimates.

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Results of Operations

Net sales

     Net sales are comprised of sales of books, music, DVD/video and online courses including outbound shipping and handling charges, net of returns and discounts. In April 2003, the Company began recording in net sales the net commission received on any used and out-of-print product sold by dealers listing their books on the Web site and shipping directly to the Company’s customers as the Company is acting as an agent on these sales. Prior to April 2003, the Company recorded the gross amount of sales of used and out-of-print product in its net sales due to inventory risk placed on the Company. Net sales for the three months ended June 30, 2003 increased 1.0 percent to $86.5 million. Had the company continued to record the gross amount of the used and out-of-print book sales, its total sales for the second quarter would have been $89.6 million. The Company expects net sales for the third quarter ending September 30, 2003 to range between $97 million and $102 million.

Gross profit

     Gross profit is net sales less the cost of sales, which consists of the cost of merchandise sold to customers and the cost of online courses as well as inbound and outbound shipping costs. Gross profit and gross margin increased for the three months ended June 30, 2003 due to an increase in the Company’s internal fulfillment rate resulting in less reliance on more expensive wholesalers and to the change in the model for selling and distributing used and out-of-print books. The Company expects 2003 gross margin to exceed 2002 results. Quarterly gross margin results will fluctuate due to the timing of promotional activities.

Fulfillment and customer service

     Fulfillment and customer service expenses consist primarily of the cost of operating and staffing distribution and customer service centers, including costs attributable to picking, packing and preparing customer orders for shipment and responding to inquiries from customers. Fulfillment and customer service expenses decreased on an absolute basis and as a percentage of net sales primarily as a result of realizing productivity gains in both fulfillment and customer service as well as a decline in customer contacts per order resulting from improvements to self-service features on the Web site. The Company expects fulfillment and customer service expenses to decrease as a percentage of sales during 2003.

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Marketing, sales and editorial

     Marketing, sales and editorial expenses consist primarily of advertising and promotional expenditures, as well as payroll and related expenses for personnel engaged in marketing and selling activities. Marketing, sales and editorial expenses decreased primarily due to the Company’s increased focus on more targeted and measurable marketing programs as well as the renegotiation of many of the Company’s online marketing deals at more advantageous terms. The Company expects to reduce marketing, sales and editorial expenses as a percentage of net sales during 2003.

Technology and web site development

     Technology and web site development expenses consist of payroll and related expenses for Web page production and computer network operations personnel and consultants, and costs of infrastructure related to systems and telecommunications. Certain costs relating to the development of internal-use software are capitalized and depreciated over three years. The decrease in technology and web site development was primarily attributable to increased infrastructure efficiency and negotiated price reductions in many expense categories. The Company expects technology and web site development expenses to be lower as a percentage of net sales during 2003.

General and administrative

     General and administrative expenses primarily consist of payroll and related expenses for executive, finance and administrative personnel, recruiting, professional fees and other general corporate expenses including costs to process credit card transactions.

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Depreciation and amortization

     The decrease in depreciation and amortization expenses was the result of lower capital expenditures in fiscal 2003, 2002 and 2001 as compared with fiscal 2000. The carrying balance of goodwill is assessed for recoverability on a periodic basis. In 2002 the Company no longer amortized goodwill due to the adoption of SFAS No. 142.

Equity in net loss of equity investments including related amortization of intangibles

     Equity in net loss of equity investments (including related amortization of intangibles) consisted of losses from the Company’s equity investment in enews for the second quarter ended June 30, 2002. As of December 31, 2002, the Company had written off its entire investment in enews of $3.3 million. As of March 31, 2002, there was no remaining goodwill related to equity investments. In July 2002, the Board of Directors and stockholders of enews approved the Liquidation Plan. As of June 30, 2003, the implementation of the Liquidation Plan had been substantially completed and is expected to be concluded by December 31, 2003.

Interest income, net

     Interest income was lower as, compared with last year, as cash balances decreased due to their use as a source of funding the Company’s operations. All available cash is invested in various marketable securities consisting primarily of money market funds containing highly liquid U.S. Treasury Securities, U.S. government agency securities and investments in high quality corporate issuers.

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Income Taxes

     The Company has not generated any taxable income to date and therefore has not paid any federal income taxes since inception. The Company has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, due to the uncertainty of its realizability.

Liquidity and Capital Resources

     As of June 30, 2003, the Company’s cash and cash equivalents were $35.6 million, compared to $70.1 million on December 31, 2002. The Company continues to have a debt-free balance sheet.

     Net cash flows used in operating activities were $31.8 million for the six months ended June 30, 2003 and $27.2 million for the six months ended June 30, 2002. Cash used for the six months ended June 30, 2003 was attributable to a net loss of $6.9 million, minority interest of $20.5 million, a decrease in accrued liabilities of $23.8 million, a decrease of $4.2 million in accounts payable and an increase in prepaid expenses and other current assets of $0.9 million. This was offset by a decrease in receivables of $8.9 million, depreciation and amortization of $14.1 million, a $0.6 million decrease in merchandise inventories and an increase in payable to affiliate of $0.8 million. Cash used for the six months ended June 30, 2002 was attributable to a net loss of $11.3 million, minority interest of $29.8 million, a decrease in accrued liabilities of $15.0 million, a decrease in payable to affiliate of $3.2 million and an increase in prepaid expenses and other current assets of $1.9 million. This was offset by a decrease in receivables of $5.9 million, depreciation and amortization of $16.8 million, a $10.8 million decrease in merchandise inventories and an increase of $0.5 million in accounts payable.

     Net cash flows used in investing activities of $3.5 million for the six months ended June 30, 2003 was attributable to purchases of fixed assets totaling $3.5 million. Net cash flows from investing activities of $9.7 million for the six months ended June 30, 2002 were attributable to a decrease of $2.9 million in other non-current assets and sales of marketable securities of $10.1 million, offset by purchases of fixed assets totaling $3.4 million.

     Net cash flows from financing activities for the six months ended June 30, 2003 were $0.8 million due to proceeds from the exercise of stock options.

     At June 30, 2003, the Company’s principal sources of liquidity consisted of $35.6 million in cash and cash equivalents. As of June 30, 2003, the Company’s remaining principal commitments consisted of obligations outstanding under operating leases. The Company has pledged a portion of its cash and cash equivalents as collateral for stand-by letters of credit that guarantee certain of the Company’s real property lease obligations. At June 30, 2003 and 2002, the total amount of collateral pledged under these agreements was $4.2 million and $4.3 million, respectively. The Company has no unconsolidated majority-owned subsidiaries and no interests in special purpose entities.

     The Company believes that current cash and cash equivalents will be sufficient to meet its anticipated cash needs for at least twelve months. However, any projection of future cash needs and cash flows is subject to substantial uncertainty. If current cash and cash equivalents in addition to cash generated from operations are insufficient to satisfy the Company’s liquidity requirements, the Company may seek to sell additional equity or debt securities or to obtain a credit facility. The sale of additional equity or convertible debt securities could result in additional dilution to the Company’s stockholders. There can be no assurance that financing will be available in amounts or on terms acceptable to the Company, if at all. In addition, the Company will, from time to time, consider the acquisition of or investment in complementary businesses, products and technologies, which might increase the Company’s liquidity requirements or cause the Company to issue additional equity or debt securities.

Forward-Looking Statements

     This report may contain certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) and information relating to the Company and B&N.com that are based on the beliefs of the management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions, as they relate to the Company, B&N.com or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events, the outcome of which is subject to certain risks, including among others general economic and market conditions, changes in product demand, the growth rate of Internet usage and e-commerce, possible disruptions in the Company’s or B&N.com’s computer or telephone

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systems, possible increases in shipping rates or interruptions in shipping service, effects of competition, possible work stoppages or increases in labor costs or labor shortages, unanticipated adverse litigation results or effects, the performance of B&N.com’s current and future investments and new product initiatives, unanticipated costs associated with B&N.com’s warehouse or the failure to successfully integrate that warehouse into B&N.com’s distribution network, the level and volatility of interest rates, the successful integration of acquired businesses, changes in tax and other governmental rules and regulations applicable to the Company or B&N.com and other factors that may be outside of the Company’s control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected, intended or planned. Subsequent written and oral forward-looking statements attributable to the Company, B&N.com or persons acting on their behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere described in this report and other reports filed by the Company with the Securities and Exchange Commission.

Item 3:       Quantitative and Qualitative Disclosures about Market Risk

     The Company previously invested in enews primarily for strategic purposes, which had been accounted for under the equity method as it gave the Company the ability to exercise significant influence, but not control, over the investee. This is generally defined as an ownership interest in voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors and the impact of commercial arrangements, are considered in determining whether the equity method is appropriate. The Company regularly reviews the carrying value of its investments and identifies and records impairment losses when events and circumstances indicate that such assets are permanently impaired. In July 2002, the Board of Directors and stockholders of enews approved the Liquidation Plan. As of June 30, 2003, the implementation of the Liquidation Plan had been substantially completed and is expected to be concluded by December 31, 2003. As of December 31, 2002, the Company had written off its entire investment in enews of $3.3 million and had no remaining investments accounted for under the equity method.

     B&N.com invests certain of its excess cash in money market funds consisting of debt instruments of the U.S. Government and its agencies, and of high quality corporate issuers. All highly liquid instruments with an original maturity of three months or less are considered cash equivalents; those with original maturities greater than three months and less than one year are classified as marketable securities. Long-term marketable securities mature in periods greater than one year. B&N.com is exposed to interest rate risk on the debt instruments that it holds. The value of the Company’s marketable securities is subject to market price volatility. As of June 30, 2003, the Company’s cash and cash equivalents totaled approximately $35.6 million.

Item 4:       Controls and Procedures

     Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

     Internal Control Over Financial Reporting. There was no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1:       Legal Proceedings

     No material developments have occurred with respect to previously reported legal proceedings, except as follow:

     As previously described in the Company's Annual Report on Form 10-K for the year ended December 31, 2002, there is a class action lawsuit pending in the United States District Court for the Southern District of New York, In Re Initial Public Offering Securities Litigation (the "Action"). The Action originally named over one thousand individuals and 300 corporations, including Fatbrain.com, LLC ("Fatbrain"), a former subsidiary of the Company, and its former officers and directors. The Amended Complaints in the Action all allege that the initial public offering registration statements filed by the defendant issuers with the Securities and Exchange Commission were false and misleading because they failed to disclose that the defendant underwriters were receiving excess compensation in the form of profit sharing with certain of its customers and that some of those customers agreed to buy additional shares of the defendant issuers' common stock in the after market at increasing prices. The Amended Complaints also allege that the foregoing constitute violations of: (i) Section 11 of the Securities Act of 1933 (the "1933 Act"), as amended against the defendant issuers, the directors and officers signing the related registration statements, and the related underwriters; (ii) Rule 10b-5 promulgated under the Securities Exchange Act of 1934 (the "1934 Act") against the same parties; and (iii) the control person provisions of the 1933 Act and 1934 Act by certain directors and officers of the defendant issuers. A motion to dismiss by the defendant issuers, including Fatbrain, was denied.

     After extensive negotiations among representatives of plaintiffs and defendants, a memorandum of understanding ("MOU"), outlining a proposed settlement resolving the claims in the Action between plaintiffs and the defendant issuers, has been entered into. It is contemplated that a settlement agreement among the defendants and plaintiffs in the Action will be prepared, the terms of which will be consistent with the MOU and which, after execution, will be submitted to the court for approval. The proposed settlement is not expected to have any material adverse impact on the Company.

Item 2:       Changes in Securities and Use of Proceeds

     Not applicable.

Item 3:       Defaults upon Senior Securities

     None.

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

     The Company’s annual meeting of stockholders was held on July 17, 2003.

     The following nominees were elected as Directors, each to serve until the 2006 Annual Meeting of Stockholders and until their respective successors are duly elected and qualified, by the vote set forth below:

     In addition to the elected Directors noted above, the term of office for the following Directors continued after the Company’s Annual Meeting of Stockholders:

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     The appointment of BDO Seidman, LLP as independent certified public accountants for the Company’s fiscal year ending December 31, 2003 was ratified by the vote set forth below:

Item 5:       Other Information

     None.

Item 6:       Exhibits and Reports on Form 8-K

               (a) Exhibits

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          (b) Reports on Form 8-K

	On April 30, 2003, the Company filed a Form 8-K announcing first quarter 2003 financial results.

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SIGNATURES

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