Dear Shareholder:
Although 2007 was a challenging year for the entire retail sector, including bookselling, Barnes & Noble achieved growth in store sales, a five-year high in online sales growth, and a record increase in our Member Program.

The year began with strong sales and a solid line-up of new titles. In fact, we enjoyed an early Christmas in July with the seventh and final installment of J.K. Rowling’s phenomenal Harry Potter and the Deathly Hallows.

While book sales were strong for the first three quarters of 2007, sales of recorded music dropped dramatically in the fourth quarter. That fall-off led to a disappointing holiday performance and negative comparable store sales.

Nevertheless, Barnes & Noble comparable store sales grew 1.8 percent and Barnes & Noble.com added $56 million to its top line on a comparable basis to the prior year. Online sales increased 13.4 percent, the strongest performance in more than five years. Our newly designed website, incorporating many elements of Web 2.0 technology, as well as containing new features and enhanced functionality, has led to an increase in traffi c and conversion.

We experienced record growth in our Member Program, adding more new Members in 2007 than in any year since the program’s launch in October 2000. More importantly, our Member renewals are higher than ever.

Fueling this increase was the change in the Member discount structure in October 2006. The fi rst full year of the increased Member discounts drove a record number of title sales – more than 1.1 million unique titles were sold, further evidence of the ever lengthening “long tail” in our business.

By increasing discounts to our best customers, we believe we have strengthened our long-term position in the marketplace. While price has never been the number one reason book buyers cite as a factor in choosing where to shop, it has become progressively more important. And, of course, it is even more important online.

Tightened fiscal controls at every level of our organization and intensified rigor around expense and inventory management refl ected our ongoing commitment to operational excellence.

We delivered world-class service in 2007 and offered unparalleled selection to customers thanks to our strong and well-developed supply chain. Last year, we made the supply chain more efficient and completed the consolidation of our online and retail distribution centers. As we continue to focus on and improve our inventory management, our results illustrate the fruits of our labor. Inventory turnover improved to 2.63 times, the highest level in our Company’s history, as inventories increased less than one percent on a sales increase of 4.6 percent compared to the prior year.

Another success has been our Barnes & Noble Recommends program. The program showcases newly published titles selected by our booksellers. Two selections, Chris Bohjalian’s The Double Bind, and Mohsin Hamid’s The Reluctant Fundamentalist, became instant fi ction bestsellers upon publication.

One title we are especially proud of was our own illustrated edition of Peter Yarrow and Lenny Lipton’s classic song, “Puff , the Magic Dragon,” which sold over half a million copies for Sterling Publishing.

We are encouraged by the pipeline of titles for 2008. We see strong new releases on the horizon from several namebrand fiction writers, including James Patterson, David Baldacci, Dean Koontz, Stephenie Meyer and Janet Evanovich.

Others expected this year include nonfi ction titles such as Prince of Frogtown by Rick Bragg, Life Beyond Measure by Sidney Poitier, Audition by Barbara Walters, When You Are Engulfed in Flames by David Sedaris, Man Who Loved China by Simon Winchester and America’s Hidden History by Ken Davis, just to name a few. We expect to see the wave of political titles to continue as we approach the Democratic and Republican conventions and the 2008 presidential election.

The Barnes & Noble brand is our most powerful competitive advantage. In 2007, Barnes & Noble was ranked as the nation’s top bookseller for the fourth year in a row according to Harris InteractiveTM. We also led the specialty retail category in customer satisfaction, according to the University of Michigan’s Customer Satisfaction Index.

We will open 35-40 new stores this year, entering new markets as well as upgrading our position in existing locations.

A new feature on our bn.com website, Barnes & Noble Studio, is the Internet’s first and largest destination for
multimedia information about books and authors. Barnes & Noble Studio incorporates innovative original video
programming and podcasts as well as those supplied by publishers and independent producers. Early response from our customers has been extremely favorable. We will continue to invest in new online initiatives in 2008.

Looking ahead, we are confi dent that the overall strength of our marketplace position will enable us to meet bookselling challenges equal to those we experienced last year. Our competitive off ering will reflect the ongoing transformation of the bookselling business. Our prices have been lowered, we have invested in a first-class real estate portfolio and our IT systems enable us to execute world-class customer service.

In addition to investing in the business, the Company has delivered value to its shareholders once again by increasing our quarterly cash dividend to our shareholders from $0.15 per share to $0.25 per share, commencing with the dividend to be paid this June. Our balance sheet at year-end remained strong and our overall financial condition is excellent.

Even after investing capital in new stores, re-launching our website and improving our inventory management systems, the company achieved operating free cash flow of $201 million for the year. We acquired 6.9 million shares of Barnes & Noble stock for $248 million, issued $39 million in dividends and ended the year with $361 million in cash and no outstanding debt.

On behalf of our 40,000 booksellers, we’d like to thank our shareholders and customers for your continued loyalty and support during these challenging times and we remain committed to delivering exceptional value in 2008.

Download Barnes & Noble 2007 Annual Report

PDF format, 1.2MB, 52Pages.

CONTENTS
2 Barnes & Noble 2007 Letter to Shareholders
4 Selected Consolidated Financial Data
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
18 Consolidated Statements of Operations
19 Consolidated Balance Sheets
20 Consolidated Statements of Changes in Shareholders’ Equity
21 Consolidated Statements of Cash Flows
22 Notes to Consolidated Financial Statements
41 Report of Independent Registered Public Accounting Firm
43 Reports of Management
44 Shareholder Information
46 Barnes & Noble Bestsellers 2007
48 2007 Award Winners

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Barnes & Noble 2008 Annual Report

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