Independent auditors’ report

Consolidated financial statements:

Balance sheets

Statements of operations

Statements of stockholders’ equity and comprehensive income

Statements of cash flows

Notes to consolidated financial statements

New York, NY

December 9, 2009

Assets

Current:

Cash

Receivables, net

Merchandise inventories (Note 2)

Prepaid expenses and other current assets

Total current assets

Property and equipment, net (Note 3)

Buildings and leasehold improvements

Fixtures and equipment

Less: Accumulated depreciation and amortization

Net property and equipment

Other noncurrent assets, net (Note 5)

Goodwill

Total assets

Liabilities and Stockholders’ Equity

Current liabilities:

Short-term borrowings (Note 4)

Accounts payable – trade

Accounts payable – affiliates (Note 7)

Accrued employee compensation

Accrued liabilities

Total current liabilities

Long-term liabilities (Note 4)

Total liabilities

Commitments and contingency (Notes 5 and 6)

Stockholders’ equity:

Common stock – no par value:

Class A, voting; authorized 200 shares; issued 196.67 shares (including 89.34 shares in treasury for both years)

Class B, nonvoting; authorized 200 shares; issued 16.13 shares (including 16.13 shares in treasury for both years)

Additional paid-in capital

Retained earnings

Less: Cost of shares in treasury

Total stockholders’ equity

Year ended

May 2,

Sales

Cost of sales and occupancy (Note 7)

Gross profit

Selling and administrative expenses

Depreciation and amortization

Pre-opening expenses

Operating (loss) profit

Interest expense, net

(Loss) income before income tax (benefit) expense

Income tax (benefit) expense (Note 2)

Net (loss) income from operations

Balance, May 3, 2008

Comprehensive income:

Net income

Net effect of excluded assets and liabilities (Note 2)

Total comprehensive income

Dividend distributions

Balance, May 2, 2009

Comprehensive loss:

Net loss

Net effect of excluded assets and liabilities (Note 2)

Total comprehensive loss

Dividend distributions

Balance, August 1, 2009

Cash flows from operating activities:

Net (loss) income from operations

Adjustments to reconcile net (loss) income from operations to net cash (used in) provided by operating activities:

Depreciation and amortization

Impairment charge

Loss (gain) on sale of fixed assets

Deferred tax provision (recovery)

Changes in operating assets and liabilities:

Decrease (increase) in:

Trade receivables

Merchandise inventories

Prepaid expenses and other current assets

Other noncurrent assets

Increase (decrease) in:

Accounts payable – trade

Accounts payable – affiliate

Accrued expenses

Net cash (used in) provided by operating activities

Cash flows from investing activities:

Capital expenditures

Proceeds from the sale of assets

Net cash used in investing activities

Cash flows from financing activities:

Dividend distributions

Short-term borrowings (repayments)

Payments on long-term liabilities

Net cash provided by (used in) financing activities

Effect on cash of excluded assets and liabilities (Note 2)

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents:

Beginning of period

End of period

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

Income taxes

1.      Description of Business

2.      Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying financial statements are presented on a consolidated basis which includes the accounts of the Company and its wholly-owned subsidiaries, BNCB Management Corporation and BNCB Management Holding Corporation. All intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements have been prepared to present the assets acquired and liabilities assumed by Barnes & Noble, Inc. (“BKS”) in a transaction that closed on September 30, 2009 (see Note 9). Accordingly, such financial statements have been adjusted to exclude the assets and liabilities of the Company that were not acquired or assumed by BKS. The excluded assets consisted primarily of an airplane owned by the Company, as well as the Company’s investments in BKS and GameStop Corp. The primary liability not assumed was the debt related to the airplane. The net book value of the excluded assets and liabilities, which amounted to approximately $117 million as of May 3, 2008, has been reflected as a reduction of retained earnings as of that date. The changes in the net book value of such excluded assets and liabilities have been presented in the accompanying consolidated statement of stockholders’ equity. Such amounts are presented as an increase in retained earnings to be consistent with the initial exclusion of assets and liabilities recorded on May 3, 2008 as a reduction of retained earnings.

In the opinion of management, the accompanying unaudited consolidated financial statements of the Company contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly its consolidated financial position as of August 1, 2009 and the results of its operations and its cash flows for the three months ended August 1, 2009 and August 2, 2008.

Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid securities with original maturities of three months or less to be cash equivalents.

Concentrations of Risk

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand.

Inventories

Merchandise inventories, consisting entirely of finished goods, are stated at the lower of cost, determined under both the first-in, first-out (FIFO) method and the last-in, first-out (LIFO) method, or market. As of August 1, 2009 and May 2, 2009, 87.3% and 71.8%, respectively, of the Company’s inventory was valued using the LIFO method. The Company’s LIFO reserve was not material to the recorded amount of inventory or the results of operations.

Property and Equipment

Property and equipment are carried at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are expensed as incurred. Construction-in-progress consists primarily of build-out of new stores and renovation of existing stores.

Goodwill

The costs in excess of net assets of businesses acquired are carried as goodwill in the accompanying consolidated balance sheets.

The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”, and, as a result, the Company does not amortize goodwill. The Company performs an annual impairment review of its goodwill and determined that no impairment charges have been necessary through August 1, 2009.

3.      Property and Equipment

4.      Debt Obligations

(a)    On November 13, 2006, the Company entered into a new credit facility. The new agreement provides for a $400 million five-year revolving credit facility (“Credit Facility”). The Credit Facility permits borrowings at various interest rates based on the prime rate or London Interbank Offered Rate (“LIBOR”). In addition, the agreement requires the Company to pay a commitment fee for the unused portion. The Credit Facility contains covenants, limitations and events of default typical of credit facilities of this size and nature, including financial covenants which require the Company to meet, among other things, debt service coverage and leverage ratios and dividend distributions. The Company is required to pay the outstanding balance down to zero during each fiscal year. As a result of this requirement, the Credit Facility is classified as short-term debt.

Selected information related to the Company’s Credit Facility is as follows:

Fees expensed with respect to the unused portion of the Company’s Credit Facility were $0.3 million during the fiscal year ended May 2, 2009.

(b)    Other long-term liabilities consist of an obligation under a capital lease with a related party of $1.5 million and a capital lease for computer hardware acquired through a third party of $0.8 million as of May 2, 2009 (see Note 5). The current portion of the capital lease obligation is included in accrued liabilities in the consolidated balance sheets.

As of May 2, 2009, annual maturities of debt obligations are as follows:

5.      Leases

6.      Profit Sharing Plan

7.      Related Party Transactions

(a)    The operating leases and capital lease described in Note 5 include commitments for certain premises leased by the Company from related parties, as follows:

(i)     The Company’s previous administrative offices located in New York City are subleased from an affiliated company, BKS, through March 2020. The sublease agreement provides for annual rentals ranging from $555,000 to $595,000 for the first 12 years, adjusting to fair market value in the last 13 years based upon a calculation stipulated in the lease. During fiscal 2004, the Company vacated the premises covered by this lease and relocated its corporate offices from New York City, NY to Basking Ridge, NJ. The Company has entered into a sublease of this space with a new unrelated third party tenant through March 2020. This sublease agreement provides for annual rental payments of approximately equivalent amounts to the sublease with BKS. Sublease income is recorded as a reduction of rent expense.

(ii)    The Company leases a store from a partnership in which the principal stockholder of the Company has a majority interest, for a 30-year term ending in 2014. The lease provides for annual rentals of $401,000 but also provides for periodic increases in annual rentals based upon the determination of fair market rent, as defined in the lease. The lease has been accounted for as a capital lease based on the minimum lease payment requirements at the inception of the lease. Increases in the minimum rentals are expensed as incurred.

(b)    During the three months ended August 1, 2009 and August 2, 2008 and the year ended May 2, 2009, the Company had net purchases of college textbooks from MBS Textbook Exchange, Inc. (“MBS”), an affiliate, approximating $68.7 million, $74.6 million and $90.6 million, respectively. In addition, the Company earned commissions from MBS’s buy-back program of used college textbooks and distance learning approximating $6.8 million and $4.7 million during the three months ended August 1, 2009 and August 2, 2008, respectively, and $14.7 million for the year ended May 2, 2009.

(c)    The Company allocates certain administrative expenses to BKS incurred on its behalf. Allocated expenses were approximately $0.1 million for the three months ended August 1, 2009 and August 2, 2008, and $0.4 million for fiscal 2009.

(d)    The Company purchased $13.9 million, $16.6 million and $48.4 million, (at cost) of trade books from BKS during the three months ended August 1, 2009 and August 2, 2008 and the fiscal year ended May 2, 2009, respectively. The books were sold at retail in certain of the Company’s college bookstores. In addition, the Company was allocated expenses from BKS approximating $1.1 million, $0.9 million and $4.3 million for the three months ended August 1, 2009, August 2, 2008 and the fiscal year ended May 2, 2009, respectively, for occupancy, insurance and other related costs.

(e)    The Company is provided with national freight distribution, including trucking services, by Argix Direct Inc. (“Argix”) (formerly the LTA Group, Inc.), a company in which the brother of the principal stockholder owns a minority interest. The Company paid Argix approximately $0.4 million and $0.5 million during the three months ended August 1, 2009 and August 2, 2008, respectively, and $1.6 million during the fiscal year ended May 2, 2009. The Company believes these costs compare favorably with other third-party freight carriers.

8.      Fair Value

9.      Subsequent Events

SFAS No. 165 requires that companies evaluate subsequent events through the date that the financial statements are issued. Management has evaluated subsequent events through the time of the filing of these financial statements on December 9, 2009.

On September 30, 2009, BKS completed their acquisition of the Company through a stock purchase agreement previously entered into on August 7, 2009, with the shareholders, pursuant to which BKS acquired all of the issued and outstanding capital stock of the Company. Assets and liabilities excluded from the sale were removed from the Company prior to closing including common stock of BKS (see Note 2). In connection with the distribution of the excluded assets, 667,058 shares of the common stock of BKS previously held by the Company were transferred to members of its management team and employees. The previously announced purchase price of $596 million was reduced to reflect $82 million in cash bonuses paid by the Company to members of its management team and employees immediately prior to closing. In conjunction with the transaction, the revolving credit facility described in Note 4 was repaid in full.