2008 Annual Report 

Exhibit 13

COMPANY PROFILE

Books-A-Million is one of the nation’s leading book retailers and sells on the Internet at www.booksamillion.com. The Company presently operates more than 200 stores in 20 states and the District of Columbia. The Company operates two distinct store formats, including large superstores operating under the names Books-A-Million and Books & Co. and traditional bookstores operating under the names Books-A-Million and Bookland.

FIVE-YEAR HIGHLIGHTS

	For the Fiscal Year Ended:
(In thousands, except per share amounts)	2/2/08	2/3/07(1)	1/28/06	1/29/05	1/31/04
Statement of Income Data	52 weeks	53 weeks	52 weeks	52 weeks	52 weeks
Net revenue	$535,128	$520,416	$ 503,751	$ 474,099	$ 457,234
Net income	16,522	18,887	13,067	10,199	7,126
Earnings per share – diluted	1.01	1.12	0.77	0.59	0.42
Weighted average shares – diluted	16,302	16,805	16,888	17,178	16,789
Capital investment	16,878	14,907	11,297	14,923	10,402
Dividends per share - declared	3.36	0.33	0.23	0.23	0.00
Balance Sheet Data
Property and equipment, net	$53,514	$ 51,471	$ 51,001	$ 55,946	$ 59,892
Total assets	284,833	304,037	311,659	300,812	296,398
Long-term debt	6,975	7,100	7,200	7,500	20,640
Stockholders’ equity	99,051	157,034	145,009	134,859	131,001
Other Data
Working capital	$58,785	$117,737	$ 106,637	$ 95,382	$ 104,723
Debt to total capital ratio	0.26	0.04	0.05	0.05	0.14
Operational Data
Total number of stores	208	206	205	206	202
Number of superstores	184	179	173	168	163
Number of traditional stores	24	27	32	38	39

(1) The year ended February 3, 2007 included an extra week and $2.3 million of gift card breakage from prior periods.

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2008 Annual Report

TO OUR STOCKHOLDERS:

Fiscal Year 2008 was a year of stark contrasts. The summer brought the unprecedented success of the publication of the final book in the Harry Potter series and the fall brought a difficult holiday sales environment and the beginnings of what we now know to be a significant economic slowdown. Despite the tough environment we were able to control costs, manage our inventory and deliver solid earnings.

Our core book department business was down slightly for the year, however several categories performed well. Fiction sales were very strong, driven by commercial fiction and the January publication of John Grisham’s The Appeal and Stephen King’s Duma Key. The biography category experienced the phenomenal success of Elizabeth Gilbert’s memoir, Eat, Pray, Love. We also built on the positive sales trends in teen, graphic novels and our Faithpoint inspirational book category. Children’s books were an obvious bright spot with sales of Harry Potter and The Deathly Hallows setting new records and the ongoing growth of the broader category.

Our stores also produced solid gains in bargain books and gifts with toys and games emerging as an exciting growth opportunity. Our investment in new fixtures in the gift departments paid off and we continue to adjust our store model to exploit the growth areas of our business.

We opened 9 new stores during the year and were pleased with their performance. We intend to grow somewhat faster in the year ahead with an eye toward both filling in our existing real estate footprint and expanding to high growth markets.

We see a challenging year ahead as we face the economic headwinds that have developed in recent months. We remain focused on the fundamentals of our business and committed to a disciplined approach to delivering results.

 

Clyde B. Anderson Sandra B. Cochran

Executive Chairman of the Board President, Chief Executive Officer and Secretary

FINANCIAL HIGHLIGHTS	Fiscal Year Ended
(In thousands, except per share amounts)	2/2/08	2/3/07
Net revenue	$535,128	$520,416
Operating profit	27,420	30,099
Net income	16,522	18,887
Net income per share – diluted	1.01	1.12
Dividends per share – declared	3.36	0.33
	As of
(In thousands)	2/2/08	2/3/07
Working capital	$58,785	$117,737
Total assets	284,833	304,037
Stockholders’ equity	99,051	157,034

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2008 Annual Report 

SELECTED CONSOLIDATED FINANCIAL DATA
	Fiscal Year Ended
(In thousands, except per share data)	2/2/08	2/3/07	1/28/06	1/29/05	1/31/04
Statement of Operations Data:	52 weeks	53 weeks	52 weeks	52 weeks	52 weeks
Net revenue	$535,128	$520,416	$503,751	$474,099	$457,234
Cost of products sold, including warehouse distribution and store occupancy costs	376,580	363,688	357,166	339,012	330,150
Gross profit	158,548	156,728	146,585	135,087	127,084
Operating, selling and administrative expenses	117,139	112,560	109,160	99,207	93,974
Gain on insurance recovery		--	1,248	--	--
Depreciation and amortization	13,989	14,069	15,636	17,788	18,065
Operating profit	27,420	30,099	23,037	18,092	15,045
Interest expense, net	1,346	105	1,441	1,874	2,909
Income from continuing operations before income taxes	26,074	29,994	21,596	16,218	12,136
Provision for income taxes	9,552	11,107	8,545	6,001	4,613
Income from continuing operations	16,522	18,887	13,051	10,217	7,523
Discontinued operations:
(Loss) income from discontinued operations (including impairment      charge)	--	--	27	(29)	(641)
Income tax provision (benefit)	--	--	11	(11)	(244)
(Loss) income from discontinued operations	--	--	16	(18)	(397)
Net income	$16,522	$ 18,887	$ 13,067	$ 10,199	$ 7,126
Net income per common share:
Basic:
Income from continuing operations	$1.03	$ 1.16	$ 0.80	$ 0.62	$ 0.46
Loss from discontinued operations	--	--	--	--	(0.02)
Net income per share	$1.03	$ 1.16	$ 0.80	$ 0.62	$ 0.44
Weighted average number of shares outstanding - basic	16,089	16,352	16,275	16,453	16,279
Diluted:
Income from continuing operations	$1.01	$ 1.12	$ 0.77	$ 0.59	$ 0.45
Loss from discontinued operations	--	--	--	--	(0.03)
Net income per share	$1.01	$ 1.12	$ 0.77	$ 0.59	$ 0.42
Weighted average number of shares outstanding - diluted	16,302	16,805	16,888	17,178	16,789
Dividends per share – declared	$3.36	$ 0.33	$ 0.23	$ 0.23	--
Balance Sheet Data:
Property and equipment, net	$53,514	$ 51,471	$ 51,001	$ 55,946	$ 59,892
Total assets	284,833	304,037	311,659	300,812	296,398
Long-term debt	6,975	7,100	7,200	7,500	20,640
Stockholders’ investment	99,051	157,034	145,009	134,859	131,001
Other Data:
Working capital	$58,785	$117,737	$106,637	$ 95,382	$104,723

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2008 Annual Report

MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

General

The Company was founded in 1917 and currently operates 208 retail bookstores concentrated primarily in the southeastern United States. Of the 208 stores, 184 are superstores that operate under the names Books-A-Million and Books & Co., and 24 are traditional stores that operate under the Bookland and Books-A-Million names. In addition to the retail store formats, the Company offers its products over the Internet at www.booksamillion.com . As of February 2, 2008, the Company employed approximately 5,000 full and part-time employees.

The Company’s growth strategy is focused on opening superstores in new and existing market areas, particularly in the Southeast. In addition to opening new stores, management intends to continue its practice of reviewing the profitability trends and prospects of existing stores and closing or relocating under-performing stores. During fiscal 2008, the Company opened nine stores, closed seven stores and relocated three stores.

The Company’s performance is partially measured based on comparable store sales, which is similar to most retailers. Comparable store sales are determined each fiscal quarter during the year based on all stores that have been open at least 12 full months as of the first day of the fiscal quarter. Any stores closed during a fiscal quarter are excluded from comparable store sales as of the first day of the quarter in which they close. The factors affecting the future trend of comparable store sales include, among others, overall demand for products the Company sells, the Company’s marketing programs, pricing strategies, store operations and competition.

Executive Summary

The purpose of this section is to provide a brief summary overview of the 52-week period ended February 2, 2008. Additional detail about the income statement and balance sheet is provided in the pages following this summary.

Income Statement

For the 52-week period ended February 2, 2008, Books-A-Million reported net income of $16.5 million. This represents a 12.5% reduction from the 53-week period ended February 3, 2007. The decrease is primarily attributable to two events that occurred in fiscal year 2007. First, the 2007 fiscal year included one week more than fiscal year 2008. This additional week produced $9.0 million in net sales. Secondly, the 2007 fiscal year included one-time additional sales income of $2.3 million related to the recognition of gift card breakage from prior years. Without these two items, fiscal year 2007 net income would have been $16.8 million or $0.3 million higher than fiscal year 2008.

Consolidated net revenue increased $25.9 million, or 5.1% in the 52-week ended February 2, 2008, compared to the 52-week period ended February 3, 2007 (which excludes the $9.0 million of additional sales from the 53rd week and the one-time additional sales income of $2.3 million from prior year gift card breakage recorded in fiscal year 2007). Comparable store sales increased 1.4% in fiscal year 2008 compared to the 52 week period ended February 3, 2007. The increase is primarily due to increased sales in best sellers and promotional items.

Gross profit, which includes cost of sales, distribution costs and occupancy costs, increased $1.8 million, or 1.2%, in the 52-week period ended February 2, 2008, compared to the 53-week period ended February 3, 2007. Excluding the additional week and one-time sales income associated with prior year gift card breakage recorded in fiscal year 2007, gross profit increased $7.1 million or 4.7% in fiscal year 2008. Gross profit as a percentage of sales decreased over the same period. The decrease is attributable to higher occupancy costs offset by higher club card membership income and lower markdowns and inventory shrinkage.

Consolidated operating profit was $27.4 million for the 52-week period ended February 2, 2008, compared to $30.1 million for the 53-week period ended February 3, 2007. Excluding the extra week and gift card breakage recorded in fiscal 2007, operating profit increased $0.6 million during fiscal 2008. This increase was primarily attributable to increased store sales.

Balance Sheet

Current assets decreased $21.6 million in fiscal year 2008 compared to fiscal year 2007. The decrease is primarily attributable to the $28.5 million decrease in cash and cash equivalents. This is partially offset by a $6.6 million increase in inventory. The decrease in cash and cash equivalents is primarily the result of the increase in shares repurchased, and the increase in dividends paid during fiscal 2008, and the reduction in sales during the fourth quarter. The increase in inventory is primarily due to the sales shortfall in the fourth quarter.

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2008 Annual Report 

Current liabilities increased $37.4 million in fiscal year 2008 compared to fiscal year 2007. The increase is primarily attributable to the $28.0 million increase in short-term borrowings and a $4.8 million increase in accounts payable. Accounts payable increased primarily due to a change in payment practices to more effectively meet vendor payment guidelines. The increase in short-term borrowings is the result of the increase in shares repurchased and the increase in dividends paid.

Critical Accounting Policies

General

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements require management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Company believes that the likelihood is remote that materially different amounts will be reported related to actual results for the estimates and judgments described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Property and Equipment

Property and equipment are recorded at cost. Depreciation on equipment and furniture and fixtures is provided on the straight-line method over the estimated service lives, which range from three to seven years. Depreciation of buildings and amortization of leasehold improvements, including remodels, is provided on the straight-line basis over the lesser of the assets estimated useful lives (ranging from five to 40 years) or, if applicable, the periods of the leases. Determination of useful asset life is based on several factors requiring judgment by management and adherence to generally accepted accounting principles for depreciable periods. Judgment used by management in the determination of useful asset life could relate to any of the following factors: expected use of the asset; expected useful life of similar assets; any legal, regulatory, or contractual provisions that may limit the useful life; and other factors that may impair the economic useful life of the asset. Maintenance and repairs are charged to expense as incurred. Improvement costs are capitalized to property accounts and depreciated using applicable annual rates. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the accounts, and the related gain or loss is credited or charged to income.

Other Long-Lived Assets

The Company’s other long-lived assets consist of property and equipment which includes leasehold improvements. At February 2, 2008, the Company had $53.5 million of property and equipment, net of accumulated depreciation, accounting for approximately 18.8% of the Company’s total assets. The Company 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 Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses totaled $0.1 million, $0.3 million and $0.2 million in fiscal 2008, 2007 and 2006, respectively, and were recorded in selling, general and administrative costs. For all years presented, the impairment losses related to the retail trade business segment.

Goodwill

At February 2, 2008, the Company had $1.4 million of goodwill, accounting for approximately 0.5% of the Company’s total assets. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and other unamortizable intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual impairment test on the goodwill during the fourth quarter of fiscal 2008 and determined 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.

Closed Store Expenses

Management considers several factors in determining when to close or relocate a store. Some of these factors are: decreases in store sales from the prior year, decreases in store sales from the current year budget, annual measurement of individual store pre-tax future net cash flows, indications that an asset no longer has an economically useful life, remaining term of an individual store lease, or other factors that would indicate a store in the current location cannot be profitable.

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2008 Annual Report

When the Company closes or relocates a store, the Company charges unrecoverable costs to expense. Such costs include the net book value of abandoned fixtures and leasehold improvements, lease termination costs, costs to transfer inventory and usable fixtures, other costs in connection with vacating the leased location, and a provision for future lease obligations, net of expected sublease recoveries. Costs associated with store closings of $599,810, $418,000 and $40,000 during fiscal 2008, 2007 and 2006, respectively, are included in selling and administrative expenses in the accompanying consolidated statements of income.

Inventories

Inventories are taken throughout the fiscal year. Store inventory counts are performed by an independent inventory service, while warehouse inventory counts are performed internally. All physical inventory counts are reconciled to the Company’s records. The Company’s accrual for inventory shortages is based upon historical inventory shortage results.

Cost is assigned to store and warehouse inventories using the retail inventory method. Using this method, store and warehouse inventories are valued by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail method is an averaging method that is widely used within the retail industry. Inventory costing also requires certain significant management estimates and judgments involving markdowns, the allocation of vendor allowances and shrinkage. These practices affect ending inventories at cost as well as the resulting gross margins and inventory turnover ratios.

The Company utilizes the last-in, first-out (LIFO) method of accounting for inventories. The cumulative difference between replacement and current cost of inventory over stated LIFO value is $2.5 million as of February 2, 2008 and $2.1 million as of February 3, 2007. The estimated replacement cost of inventory is the current FIFO value of $209.3 million.

Vendor Allowances

The Company receives allowances from its vendors from a variety of programs and arrangements, including merchandise placement and cooperative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in cost of products sold upon the sale of the related inventory.

Accrued Expenses

On a monthly basis, certain material expenses are estimated and accrued to properly record those expenses in the period incurred. Such estimates include those made for payroll and employee benefits costs, occupancy costs and advertising expenses among other items. Certain estimates are made based upon analysis of historical results. Differences in management’s estimates and assumptions could result in accruals that are materially different from the actual results.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Results of Operations

The following table sets forth statement of income data expressed as a percentage of net sales for the periods presented.

	Fiscal Year Ended
	2/2/08	2/3/07	1/28/06
	52 weeks	53 weeks	52 weeks
Net revenue	100.0%	100.0%	100.0%
Gross profit	29.6%	30.1%	29.1%
Operating, selling, and administrative expenses	21.9%	21.6%	21.7%
Gain on insurance recoveries	0.0%	0.0%	(0.3%)
Depreciation and amortization	2.6%	2.7%	3.1%
Operating profit	5.1%	5.8%	4.6%
Interest expense, net	0.3%	0.0%	0.3%
Income from continuing operations before income taxes	4.9%	5.8%	4.3%
Provision for income taxes	1.8%	2.2%	1.7%
Income from continuing operations	3.1%	3.6%	2.6%
(Gain)/loss from discontinued operations (including impairment charge), net of tax	0.0%	0.0%	0.0%
Net income	3.1%	3.6%	2.6%

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2008 Annual Report 

Fiscal 2008 Compared to Fiscal 2007

Consolidated net revenue increased $14.7 million, or 2.8%, to $535.1 million for the 52-week period ended February 2, 2008 from $520.4 million for the 53-week period ended February 3, 2007. Two events occurred in the year ended February 3, 2007 that increased total net revenue when compared to the year ended February 2, 2008. First, the 2007 fiscal year included one more week than the 2008 fiscal year. This additional week produced $9.0 million in net sales. Second, the 2007 fiscal year included one-time additional sales income of $2.3 million related to the recognition of gift card breakage from prior years. Consolidated net revenue increased $25.9 million, or 5.1%, to $535.1 million for the 52-week period ended February 2, 2008, when compared with $509.3 million during the period ending February 3, 2007 on a 52-week operating basis (which excludes the $9.0 million of additional sales from the 53^rd week of the 2007 fiscal year and the one-time additional sales income of $2.3 million in fiscal 2007 related to gift card breakage from prior years).

Comparable store sales for the 52-week period ended February 2, 2008 increased 1.4% when compared to the same 52-week period in the prior fiscal year. The increase in comparable store sales was primarily attributable to a strong performance in our best sellers and promotional items. During the second quarter of the year ended February 2, 2008, Harry Potter and the Deathly Hallows was released and added to our comparable store sales increase.

Consolidated net revenue included $1.4 million of gift card breakage income for the 52-week period ended February 2, 2008 compared to $3.2 million for the 53-week period ended February 3, 2007. The 53-week period ended February 3, 2007 included $2.3 million, $1.4 million net of taxes, of gift card breakage income related to periods prior to fiscal 2007. In fiscal 2007 the Company formed a gift card subsidiary, Books-A-Million Card Services (“Card Services”), and began recording gift card breakage income for those cards for which the likelihood of redemption is deemed to be remote (after 24 months of inactivity) and which there is no legal obligation to remit the value of such redeemed gift cards to the relevant jurisdictions. The primary function of Card Services is to administer the Company’s gift card program and to provide a more advantageous legal structure. The $2.3 million related to periods prior to fiscal 2007 represents a change in estimate in the escheat liability due to operational changes related to the creation of Card Services.

Our core book department business was down slightly for the year. However, several categories performed well. Fiction sales were very strong, driven by commercial fiction and the January publication of John Grisham’s The Appeal and Stephen King’s Duma Key. The biography category experienced the success of Elizabeth Gilbert’s memoir, Eat, Pray Love. We also built on the positive sales trends in teen, graphic novels and our Faithpoint inspirational book category. Children’s books sales increased over prior year due to sales of Harry Potter and The Deathly Hallows setting new records and the ongoing growth of the broader category. Our stores produced solid gains in bargain books and gifts with toys and games experiencing gains over prior periods.

The Company opened nine new stores during fiscal 2008 resulting in partial year sales of $6.4 million and closed seven stores during fiscal 2008 with partial year sales of $1.2 million. The Company also converted one traditional store to a superstore during fiscal 2008 with partial year sales of $1.0 million.

Net sales for the retail trade segment increased $15.6 million, or 3.0%, to $528.6 million in the 52-week period ended February 2, 2008, from $513.0 million in the 53-week period ended February 3, 2007. When compared to the same 52-week period last year, the retail trade segment increased $23.8 million, or 4.7%. In addition to the factors discussed above, the increase in net sales for the retail trade segment was primarily due to new stores opened in fiscal 2008.

Net sales for the electronic commerce segment increased $1.0 million, or 3.6%, to $27.0 million in the 52-week period ended February 2, 2008, from $26.0 million in the 53-week period ended February 3, 2007. When compared to the same 52-week period last year, the electronic commerce segment increased $1.7 million, or 6.7%. The increase in net sales for the electronic commerce segment was primarily due to increased business to business sales.

Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues), increased $1.8 million, or 1.2%, to $158.5 million in the 52-week period ended February 2, 2008, from $156.7 million in the 53-week period ended February 3, 2007. Gross profit as a percentage of net sales decreased to 29.6% in the 52-week period ended February 2, 2008 from 30.1% in the 53-week period ended February 3, 2007. Excluding the extra week and gift card breakage recorded in fiscal 2007, gross profit as a percentage of net sales decreased 0.2% in fiscal 2008. The decrease is primarily the result of higher occupancy and warehouse costs partially offset by lower promotional discounts, lower markdowns, improvements in store inventory shrinkage and higher club card membership income.

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2008 Annual Report

Operating, selling and administrative expenses increased $4.5 million, or 4.1%, to $117.1 million in the 52-week period ended February 2, 2008, from $112.6 million in the 53-week period ended February 3, 2007. Operating, selling and administrative expenses as a percentage of net sales remained relatively flat at 21.9% in the 52-week period ending February 2, 2008 compared to 21.6% in the 53-week period ended February 3, 2007. Excluding the extra week recorded in fiscal 2007, operating, selling and administrative expenses as a percentage of net sales increased 0.2% in fiscal 2008. The increase was primarily due to an increase in health care expense, promotional expense for our club card program and a revision of the franchise tax estimate.

Depreciation and amortization decreased $0.1 million, or 0.6%, to $14.0 million in fiscal 2008, from $14.1 million in fiscal 2007. Depreciation and amortization as a percentage of net sales decreased to 2.6% in fiscal 2008, from 2.7% in fiscal 2007, due to the impact of certain assets becoming fully depreciated during the prior year.

Consolidated operating profit was $27.4 million for the 52-week period ended February 2, 2008, compared to $30.1 million for the 53-week period ended February 3, 2007. Excluding the extra week and gift card breakage recorded in fiscal 2007, operating profit increased $0.6 million during fiscal 2008. This increase was primarily attributable to increased store sales for the reasons set forth above, which resulted in higher gross profit for fiscal 2008. Operating profit as a percentage of sales was 5.1% for fiscal 2008. Excluding the extra week and the gift card breakage recorded in fiscal 2007, operating profit was 5.3% of sales for fiscal 2007. The decrease as a percentage of sales from fiscal 2007 is attributable to the decrease in gross margin as a percent of sales plus the increase in operating, selling and administrative expenses offset by the reduction in depreciation as outlined above. The operating profit for the electronic commerce segment was $1.5 million, compared to $1.4 million in fiscal 2007. The improvement in operating results was primarily due to higher gross margin partially offset by higher customer service payroll, an adjustment to our gift card reserves, software maintenance and bad debt.

Net interest expense increased $1.2 million, or 1185.8%, to $1.3 million in fiscal 2008, from $0.1 million in fiscal 2007, primarily due to borrowing from our revolving credit facility primarily as a result of the special dividend paid on July 5, 2007 and our share repurchase program. During fiscal 2008, the Company purchased 1.4 million shares of its common stock at a total cost of $20.0 million under its share repurchase program.

The effective rate for income tax purposes was 36.64% for fiscal 2008 and 37.0% for fiscal 2007. The decrease in the effective tax rate was due to federal tax credits for prior year returns taken in fiscal 2008.

The Company closed two stores in fiscal 2008 in a market where the Company does not expect to retain the closed stores’ customers at another store in the same market. The store’s sales and operating results for fiscal 2008 have not been included in discontinued operations because the impact on the financial statements was immaterial. The Company continues to report in discontinued operations for prior year stores closed where the Company does not expect to retain the closed stores’ customers at another store. One such store was closed in fiscal 2007. The financial impact of these closings was reported as discontinued operations in the financial statements, but had a minimal impact on the financial results of the Company.

Presented below is certain financial information for the fiscal year ended February 3, 2007 on a 52-week “operating basis,” the effect of which is to exclude the financial results for the final week of the fiscal period and to exclude the effect of prior year gift card breakage income. This information is presented because the fiscal year ended February 3, 2007 was one week longer than the fiscal year ended February 2, 2008 and included gift card breakage income related to periods prior to fiscal 2007.

Management uses these non-GAAP financial measures because it believes that they are important to investors in comparing the Company’s financial performance in one fiscal period against a prior fiscal period in circumstances where the fiscal periods are of a different duration or include a material non-recurring item such as a change in estimate. As noted above, the fiscal year ended February 3, 2007, was one week longer than the fiscal year ended February 2, 2008 and included $2.3 million, $1.4 million net of taxes, of prior year gift card breakage income.

These non-GAAP financial measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for results determined in accordance with GAAP. Additionally, other companies in the retail industry may not exclude portions of a fiscal period from the financial results for such period, limiting their usefulness as a comparative measure. The following table reconciles the non-GAAP measures from the fiscal year ended February 3, 2007, with the comparable financial measure calculated and presented in accordance with GAAP.

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2008 Annual Report 

BOOKS-A-MILLION, INC.
Unaudited Consolidated Statements of Income
(In thousands, except per share data)
Year-to-Date FY 2008
	Year Ended February 2, 2008	Year Ended February 3, 2007
	GAAP Basis	GAAP Basis	Adjustments	Operating Basis
	(52 weeks)	(53 weeks)		(52 weeks)
NET SALES	$535,128	$520,416	$11,244	$509,172
Cost of sales (including warehouse, distribution and store occupancy costs)	376,580	363,688	6,005	357,683
GROSS PROFIT	158,548	156,728	5,239	151,489
Operating, selling and administrative expenses	117,139	112,560	1,892	110,668
Depreciation and amortization	13,989	14,069	-	14,069
OPERATING INCOME	27,420	30,099	3,347	26,752
Interest expense (income), net	1,346	105	-	105
INCOME BEFORE INCOME TAXES	26,074	29,994	3,347	26,647
Income tax provision	9,552	11,107	1,239	9,868
NET INCOME	$ 16,522	$ 18,887	$   2,107	$ 16,780
NET INCOME PER COMMON SHARE:
Basic:
Net income	$     1.03	$     1.16	$     0.13	$     1.03
Weighted average shares outstanding	16,089	16,353	16,353	16,353
Diluted:
Net income	$     1.01	$     1.12	$     0.12	$     1.00
Weighted average shares outstanding	16,302	16,805	16,805	16,805

Fiscal 2007 Compared to Fiscal 2006

Consolidated net revenue increased $16.6 million, or 3.3%, to $520.4 million for the 53-week period ended February 3, 2007, from $503.8 million for the 52-week period ended January 28, 2006. Sales for the 52-week period ended January 27, 2007 increased 1.6%. Comparable store sales for the 52-week period ended January 27, 2007 decreased 0.6% when compared to the same 52-week period in the prior year. The decrease in comparable store sales was primarily attributable to a decrease in magazines sales and café sales, with book and gift sales primarily flat with the previous year. The café business is increasingly competitive with saturation of the market from new competitor store openings. Magazines sales continued to experience negative comparable sales as book retailers’ shares declined due to grocery and convenience store offerings.

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2008 Annual Report

Included in fiscal 2007 net revenue is $3.2 million of gift card breakage income of which $2.3 million relates to periods prior to fiscal 2007. In fiscal 2007 the Company formed a gift card subsidiary, Books-A-Million Card Services (“Card Services”), and began recording gift card breakage income for those cards for which the likelihood of redemption is deemed to be remote (after 24 months of inactivity) and which there is no legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdictions. The primary function of Card Services is to administer the Company’s gift card program and to provide a more advantageous legal structure. The $2.3 million represents a change in estimate in the escheat liability due to operational changes related to the creation of Card Services.

Several categories of book sales showed increases during fiscal 2007, including adventure books, inspirational books, fiction, the gift category, social sciences, pets, teen reading, and cooking. These increases were offset by lower sales in the children’s book category driven by the phenomenal sales of The Chronicles of Narnia and Harry Potter and the Half Blood Prince in the prior year. John Grisham’s non-fiction bestseller, Innocent Man, drove sales in the social science category. The gift category experienced growth from import book accessories. The pet category increases were driven by sales of two titles-Marley and Me and Caesar’s Way. Teen fiction continued to experience dynamic growth, predominately as a result of interest in a wide ranging number of fiction titles and Food Network stars Paula Deen and Rachael Ray dominated the cookbook category. A diet book, You: On A Diet, proved to be a surprise fourth-quarter bestseller in the cookbook category.

The Company opened nine new stores during fiscal 2007 resulting in partial year sales of $12.6 million and closed eight stores during fiscal 2007 with partial year sales of $3.9 million. The stores in Biloxi, Mississippi, and Deerfield Beach, Florida, which were temporarily closed due to the hurricanes in the prior year, were reopened in fiscal 2007.

Net sales for the retail trade segment increased $16.4 million, or 3.3%, to $513.0 million in fiscal 2007, from $496.6 million in fiscal 2006. In addition to the factors discussed above, the increase in net sales for the retail trade segment was primarily due to new stores opened during fiscal 2007 and the additional selling week in fiscal 2007.

Net sales for the electronic commerce segment decreased $1.6 million, or 5.6%, to $26.0 million in fiscal 2007, from $27.6 million in fiscal 2006. The decrease in net sales for the electronic commerce segment for fiscal 2007 was primarily due to sales of Harry Potter and the Half Blood Prince during fiscal 2006, which were not replaced in fiscal 2007.

Gross profit, which includes cost of sales, distribution costs and occupancy costs (including rent, common area maintenance, property taxes, utilities and merchant association dues), increased $10.1 million, or 6.9%, to $156.7 million in fiscal 2007, from $146.6 million in fiscal 2006. Gross profit as a percentage of net sales increased to 30.1% in fiscal 2007, from 29.1% in fiscal 2006, partially due to gift card breakage income discussed above as well as increased sales of proprietary product which has a higher gross profit than regular product. Also, the Company was able to generate higher sales in fiscal 2007 with less promotional discounting.

Operating, selling and administrative expenses increased $3.4 million, or 3.1%, to $112.6 million in fiscal 2007, from $109.2 million in fiscal 2006. Operating, selling and administrative expenses as a percentage of net sales remained relatively flat at 21.6% in fiscal 2007 compared to 21.7% in fiscal 2006. Higher stock based compensation expense in fiscal 2007 was offset by a reduction in costs incurred for Sarbanes-Oxley compliance, other corporate expenses and the non-recurrence of costs associated with the NASDAQ de-listing hearing in October 2005.

In fiscal 2006 the Company recognized an insurance gain of $754,000, net of taxes, related to insurance recoveries for hurricane damage suffered at certain stores in fiscal 2005. The insurance recovery amount was finalized with the insurance company during the third quarter of fiscal 2006 (for stores damaged by hurricanes in fiscal 2005), and therefore the gain was recorded in the respective period.

Depreciation and amortization decreased $1.5 million, or 10.0%, to $14.1 million in fiscal 2007, from $15.6 million in fiscal 2006. Depreciation and amortization as a percentage of net sales decreased to 2.7% in fiscal 2007 from 3.1% in fiscal 2006, due to lower capital expenditures in fiscal 2007, as well as the impact of certain assets becoming fully depreciated during the prior year.

Consolidated operating profit was $30.1 million for fiscal 2007, compared to $23.0 million in fiscal 2006. Operating profit for the retail trade segment was $29.2 million in fiscal 2007, versus $22.4 million in fiscal 2006. This increase was partially attributable to increased store sales for the reasons set forth above, which resulted in higher gross profit for fiscal 2007. Also, gross profit improved as a percentage of sales due to increased gift card breakage income, increased sales of proprietary product which has a higher gross profit, as well as less promotional discounting. These increases were partially offset by higher operating, selling and administrative expenses due to higher store selling costs and other corporate expenses. The operating profit for the electronic commerce segment was $1.4 million, compared to $1.0 million in fiscal 2006. The improvement in operating results was primarily due to lower costs incurred for shipping and warehouse handling

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2008 Annual Report 

Net interest expense decreased $1.3 million, or 92.7%, to $0.1 million in fiscal 2007 from $1.4 million in fiscal 2006, primarily due to lower average debt levels and increased short term investments during fiscal 2007.

The effective rate for income tax purposes was 37.0% for fiscal 2007 and 39.6% for fiscal 2006. The decrease in the effective tax rate was due to a lower state effective tax rate in fiscal 2007.

The Company closed one store in fiscal 2007 in a market where the Company does not expect to retain the closed stores’ customers at another store in the same market. The store’s sales and operating results for fiscal 2007 have not been included in discontinued operations because the impact on the financial statements was immaterial. The Company continues to report in discontinued operations for prior year stores closed where the Company does not expect to retain the closed stores’ customers at another store. Two such stores were closed in fiscal 2006. The financial impact of these closings was reported as discontinued operations in the financial statements, but had a minimal impact on the financial results of the Company.

Seasonality and Quarterly Results

Similar to many retailers, the Company’s business is seasonal, with its highest retail sales, gross profit and net income historically occurring in the fourth fiscal quarter. This seasonal pattern reflects the increased demand for books and gifts experienced during the year-end holiday selling season. Working capital requirements are generally highest during the third fiscal quarter and the early part of the fourth fiscal quarter due to the seasonality of the Company’s business. The Company’s results of operations depend significantly upon net sales generated during the fourth fiscal quarter, and any significant adverse trend in the net sales of such period would have a material adverse impact on the Company’s results of operations for the full year.

In addition, the Company’s results of operations may fluctuate from quarter to quarter as a result of the amount and timing of sales and profits contributed by new stores as well as other factors. New stores require the Company to incur pre-opening expenses and often require several months of operation before generating acceptable sales volumes. Accordingly, the addition of a large number of new stores in a particular quarter could adversely affect the Company’s results of operations for that quarter.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are cash flows from operations, including credit terms from vendors, and borrowings under its credit facilities. The Company has an unsecured revolving credit facility under a credit agreement with a syndicate of banks that allows borrowings up to $100.0 million, which expires in July, 2011. Availability under the facility is reduced by outstanding letters of credit issued under this facility. The credit agreement contains certain financial and non-financial covenants, the most restrictive of which is the maintenance of a minimum fixed charge coverage ratio. The outstanding balance under this credit facility as of February 2, 2008 and February 3, 2007, was $28.0 million and $0, respectively, and the face amount of letters of credit issued under the facility was $2.4 million and $2.9 million, respectively. The maximum and average outstanding borrowings under the credit facility (excluding the face amount of letters of credit issued thereunder) during fiscal 2008 were $55.9 million and $20.7 million, respectively.

During fiscal 1996 and fiscal 1995, the Company acquired and constructed certain warehouse and distribution facilities with the proceeds of loans made pursuant to an industrial development revenue bond (the “Bond”). As of February 2, 2008 and February 3, 2007, there was $7.0 million and $7.1 million of borrowings outstanding, respectively, under these arrangements, which bear interest at variable rates.

The Company’s capital expenditures totaled $16.9 million in fiscal 2008. These expenditures were primarily used for new store openings, renovation and improvements to existing stores, upgrades and expansion of warehouse distribution facilities and

investment in management information systems.

Financial Position

During fiscal 2008, the Company opened nine stores, closed seven stores and re-opened three other stores. The challenging retail environment in the fourth quarter resulted in an increase in inventory balances to $206.8 million at February 2, 2008, as compared to $200.3 million at February 3, 2007. The challenging retail environment resulted in lower sales than anticipated in the fourth quarter which, in turn, increased inventory levels.

Net property and equipment increased due to higher capital expenditures primarily for nine new stores opened and three other stores re-opened in fiscal 2008. Additionally, cash and cash equivalents decreased by $28.5 million as of February 2, 2008 as compared with the balance as of February 3, 2007, primarily due to the special dividend and the share repurchase program. Offsetting the reduced cash balance were higher accounts payable balances of $4.8 million between fiscal years and a $28.0 million increase in short-term borrowings. The increase in accounts payable was primarily due to a change in payment practices to more effectively meet vendor payment guidelines. The increase in short-term borrowings is the result of the special dividend and the share repurchase program.

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2008 Annual Report

Future Commitments

The following table lists the aggregate maturities of various classes of obligations and expiration amounts of various classes of commitments related to Books-A-Million, Inc. at February 2, 2008:

	Payments Due Under Contractual Obligations
(in thousands)	Total	FY 2009	FY 2010	FY 2011	FY 2012	FY 2013	Thereafter
Short-term borrowings(1)	$27,967	$27,967	$ --	$ --	$ --	$ --	$ --
Long-term debt-industrial revenue bond	6,975	--	--	--	6,975	--	--
Subtotal of debt	34,942	27,967	--	--	6,975	--	--
Operating leases	133,101	30,297	24,752	19,991	14,730	11,521	31,810
Total of obligations	$168,043	$58,264	$24,752	$19,991	$21,705	$11,521	$31,810

(1) Short term borrowings represent borrowings under the $100 million credit facility that are due in 12 months or less.

Guarantees

From time to time, the Company enters into certain types of agreements that require the Company to indemnify parties against third-party claims. Generally, these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company’s request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors for claims arising from the Company’s use of the property, and (d) agreements with the Company’s directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy’s conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles.

The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. Historically, the Company has not incurred significant costs related to performance under these types of indemnities.

Cash Flows

Operating activities provided cash of $34,493,000, $21,306,000 and $36,713,000 in fiscal 2008, 2007 and 2006 respectively, and included the following effects:

• Cash used by inventories in fiscal 2008 of $6,559,000 was the result of the sales shortfall in the fourth quarter. Cash provided by inventories was $4,512,000 and $5,481,000 in fiscal 2007 and 2006 respectively. This was primarily the result of increased sales and improved inventory management during the respective years.

• Cash provided by accounts payable (including related party payables) in fiscal 2008 of $4,800,000 was the result of a deliberate change in our payment practices to more effectively meet vendor payment guidelines, and improved accounts payable leveraging with vendors. Cash used by accounts payable (including related party payables) in fiscal 2007 of $14,455,000 was due to the timing of vendor payments for fourth quarter merchandise versus the prior year end and lower inventory levels for fiscal 2007. Cash used by accounts payable (including related party payables) in fiscal 2006 of $5,914,000 was due to lower inventory levels for fiscal 2006 which resulted in lower accounts payable balances.

• Depreciation and amortization expenses were $13,989,000, $14,069,000 and $15,651,000 in fiscal 2008, 2007 and 2006, respectively. The decrease in fiscal 2008 and 2007 was primarily due to the impact of certain assets becoming fully depreciated during the prior years.

• Cash provided by accrued expenses was $4,537,000 in fiscal 2008 and was primarily due to unused gift card reserve, accrued payroll taxes and the adoption of FASB Staff Position FIN 48-1. Cash used by accrued expenses was $3,090,000 in fiscal 2007 and was primarily due to a lower gift card liability due to the recognition of gift card breakage, lower capital expenditure accruals and lower audit fee accruals. Cash provided by accrued expenses was $5,519,000 in fiscal 2006 and was primarily due to increases in deferred revenues related to the Company’s discount card, deferred rent related to landlord allowances and higher bonus accruals due to the Company’s improved earnings performance.

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2008 Annual Report 

Cash used in investing activities in fiscal 2008, 2007 and 2006 reflected a net use of cash of $16,878,000, $16,176,000 and $11,286,000, respectively. Cash was used to fund capital expenditures for new store openings, renovation and improvements to existing stores, warehouse distribution purposes and investments in management information systems.

Financing activities used cash of $46,141,000 in fiscal 2008 primarily to purchase stock ($20,054,000) and for dividend payments ($56,824,000), offset by proceeds from the issuance of stock upon the exercise of stock options ($1,257,000) and related tax benefits ($1,638,000). Financing activities used cash of $8,528,000 in fiscal 2007 primarily to purchase stock ($7,460,000) and for dividend payments ($5,303,000), offset by proceeds from the issuance of stock upon the exercise of stock options ($1,768,000). Financing activities used cash of $4,467,000 in fiscal 2006 primarily to purchase stock ($5,324,000) and for dividend payments ($3,273,000), offset by proceeds from the issuance of stock upon the exercise of stock options ($4,431,000).

Dividends

The Company paid $56.8 million in dividends in fiscal 2008 and $5.3 million in dividends in fiscal 2007. See the table below for summary of dividends declared each quarter. On June 4, 2007, the Company’s board of directors declared a special one-time cash dividend of $3.00 per common share. The dividend was paid on July 5, 2007 to stockholders of record at the close of business on June 20, 2007. A total of $50.9 million was paid on the Company’s 16,958,000 outstanding shares of common stock as a result of the special dividend.

Dividends Declared
Fiscal 2008	Fiscal 2007

First quarter $0.09 $0.08

Second quarter $3.09 $0.08

Third quarter $0.09 $0.08

Fourth quarter $0.09 $0.09

Annual Total $3.36 $0.33

Impact of Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48, effective February, 4, 2007. As a result of the adoption of FIN 48, the Company recorded an increase of $1,987,000 in other long-term liabilities in its consolidated balance sheet for unrecognized tax benefits, which was accounted for as a cumulative effect adjustment to the February 4, 2007 balance of retained earnings.

Recently Issued Accounting Pronouncements Not Yet Adopted

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 was issued to provide increased consistency and comparability in fair value measurements. Specifically, SFAS No. 157 creates a significant definition of fair value emphasizing fair value as a market-based measurement. The Company is required to adopt SFAS No. 157 as of the beginning of its fiscal year that begins after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an amendment of FASB No. 115” (“SFAS No. 159”). SFAS No. 159 permits all entities to elect to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings. The fair value option is generally applied on an instrument-by-instrument basis and may be elected for a single item without electing other identical items, even if issued in a single transaction. The Company is required to adopt SFAS No. 159 as of the beginning of its fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”). FSP FIN 48-1 amends FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purposes of recognizing previously unrecognized tax benefits. The Company is required to apply the guidance provided in FSP FIN 48-1 upon its adoption of FIN 48 which was as of February 4, 2007. The application of FSP FIN 48-1 has not had a material effect on the Company’s financial position, results of operations, or cash flows.

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2008 Annual Report

In June 2007, the Emerging Issues Task Force (EITF) of the FASB ratified their consensus position 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 provides guidance on how a company should recognize the income tax benefit received on dividends that are paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options charged to retained earnings under FASB Statement 123(R), “Share-Based Payment.” The Company is required to apply the guidance provided in EITF 06-11 prospectively to income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after September 15, 2007. Early adoption of EITF 06-11 is permitted for the income tax benefit of dividends on equity-classified employee share-based payment awards that are declared in periods for which financial statements have not yet been issued. The Company has elected early adoption of this pronouncement as of the fiscal quarter ending August 4, 2007. The early adoption of EITF 06-11 has not had a material effect on the Company’s financial position, results of operation or cash flows.

In December 2007, the FASB issued SFAS No. 141 revised, Business Combinations. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.   SFAS 141 revised is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.  The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the Noncontrolling interest in a subsidiary and for the decosolation of a subsidiary.  SFAS 160 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.

In March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

Related Party Activities

As discussed in Note 6 of Notes to Consolidated Financial Statements, the Company conducts business with other entities in which certain officers, directors and principal stockholders of the Company have controlling ownership interests. The most significant related party transactions include inventory purchases from, and sales of merchandise to, related parties. Related party inventory purchases increased by $1.8 million, or 6.2%, to $30.8 million in fiscal 2008, compared to fiscal 2007 purchases of $29.0 million. The increase in related party purchases was primarily due to increased magazine, music and collectibles purchases versus fiscal 2007. Related party sales transactions increased in fiscal 2008 to $3.6 million, an increase of $1.2 million, as a result of increased book merchandise sales. The Company leases certain office, retail and warehouse space from related parties, for which the rents have remained relatively unchanged. Management believes the terms of these related party transactions are substantially equivalent to those available from unrelated parties.

Disclosure Regarding Forward-Looking Statements

This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, the competitive environment in the book retail industry in general and in the Company’s specific market areas; inflation; economic conditions in general and in the Company’s specific market areas; the number of store openings and closings; the profitability of certain product lines; capital expenditures and future liquidity; liability and other claims asserted against the Company; uncertainties related to the Internet and the Company’s Internet operations; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Given these uncertainties, stockholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events or developments.

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2008 Annual Report 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS

Board of Directors and Shareholders

Books-A-Million, Inc.

We have audited the accompanying consolidated balance sheets of Books-A-Million, Inc. and subsidiaries (the “Company”) as of February 2, 2008 and February 3, 2007 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended February 2, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of February 2, 2008 and February 3, 2007, and the results of its operations and its cash flows for each of the years in the periods ended February 2, 2008, February 3, 2007 and January 28, 2006 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, "Accounting for Uncertainty in Income Tax - an interpretation of FASB Statement No. 109" effective February 4, 2007 and adopted the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” effective January 29, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated April 15, 2008 expressed an unqualified opinion.

/s/ GRANT THORNTON LLP

Atlanta, Georgia

April 15, 2008

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2008 Annual Report

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Stockholders

Books-A-Million, Inc.

We have audited Books-A-Million, Inc.'s and subsidiaries (the "Company") internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on Books-A-Million, Inc.'s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 2, 2008, based on criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of the Company as of February 2, 2008 and February 3, 2007, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the years in the periods ended February 2, 2008, February 3, 2007 and January 28, 2006 and our report dated April 15, 2008 expressed an unqualified opinion on those financial statements.

/s/ GRANT THORNTON LLP

Atlanta, Georgia

April 15, 2008

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2008 Annual Report 

Consolidated Balance Sheets
	As of
(Dollars in thousands, except per share amounts)	2/2/08	2/3/07
Assets
Current Assets:
Cash and cash equivalents	$5,595	$ 34,121
Accounts receivable, net of allowance for doubtful accounts of $741 and $711,        respectively	6,450	7,524
Related party receivables	3,780	2,647
Inventories	206,836	200,277
Prepayments and other	4,678	4,365
Total Current Assets	227,339	248,934
Property and Equipment:
Land	628	628
Buildings	6,915	6,869
Equipment	84,843	77,806
Furniture and fixtures	53,071	51,354
Leasehold improvements	76,653	74,263
Construction in process	398	54
Gross Property and Equipment	222,508	210,974
Less accumulated depreciation and amortization	168,994	159,503
Net Property and Equipment	53,514	51,471
Deferred Income Taxes	2,452	2,031
Other Assets:
Goodwill	1,368	1,368
Other	160	233
Total Other Assets	1,528	1,601
Total Assets	$284,833	$304,037
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable:
Trade	$88,994	$ 83,419
Related party	2,213	2,988
Accrued expenses	41,539	38,584
Accrued income taxes	995	2,714
Deferred income taxes	6,846	3,492
Short-term borrowings	27,967
Total Current Liabilities	168,554	131,197
Long-term Debt	6,975	7,100
Other Long-term Liabilities	10,253	8,706
Commitments and Contingencies
Stockholders’ Equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares outstanding	-	-
Common stock, $.01 par value; 30,000,000 shares authorized 20,850,611 and      20,461,333 shares issued at February 2, 2008 and February 3, 2007, respectively	209	205
Additional paid-in capital	89,752	85,396
Treasury stock at cost (5,216,951 shares at February 2, 2008 and 3,818,356 shares      at February 3, 2007, respectively)	(44,468)	(24,414)
Retained earnings	53,558	95,847
Total Stockholders’ Equity	99,051	157,034
Total Liabilities and Stockholders’ Equity	$284,833	$304,037

The accompanying notes are an integral part of these consolidated statements.

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2008 Annual Report

CONSOLIDATED STATEMENTS OF INCOME

	Fiscal Year Ended
(In thousands, except per share data)	2/2/08	2/3/07	1/28/06
	52 weeks	53 weeks	52 weeks
Net revenue	$535,128	$520,416	$503,751
Cost of products sold, including warehouse distribution and store occupancy costs	376,580	363,688	357,166
Gross profit	158,548	156,728	146,585
Operating, selling and administrative expenses	117,139	112,560	109,160
Gain on insurance recoveries (note 10)	--	--	1,248
Depreciation and amortization	13,989	14,069	15,636
Operating profit	27,420	30,099	23,037
Interest expense, net	1,346	105	1,441
Income from continuing operations before income taxes	26,074	29,994	21,596
Provision for income taxes	9,552	11,107	8,545
Income from continuing operations	16,522	18,887	13,051
Discontinued operations:
Income (loss) from discontinued operations before taxes (including impairment charge)	--	--	27
Income tax provision (benefit)	--	--	11
Income (loss) from discontinued operations	--	--	16
Net Income	$16,522	$  18,887	$  13,067
Net income per common share:
Basic
Income from continuing operations	$1.03	$     1.16	$      0.80
Income (loss) from discontinued operations	--	--	--
Net Income per share	$1.03	$     1.16	$      0.80
Weighted average number of shares outstanding – basic	16,089	16,352	16,276
Diluted
Income from continuing operations	$1.01	$     1.12	$      0.77
Income (loss) from discontinued operations	--	--	--
Net Income per share	$1.01	$     1.12	$      0.77
Weighted average number of shares outstanding – diluted	16,302	16,805	16,888
Dividends per share – declared	$ 3.36	$     0.33	$      0.23

The accompanying notes are an integral part of these consolidated statements.

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2008 Annual Report 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

							Accumulated
			Additional				Other	Total
	Common Stock		Paid-In	Treasury Stock		Retained	Comprehensive	Stockholders'
(In thousands)	Shares	Amount	Capital	Shares	Amount	Earnings	Income (Loss)	Equity
Balance, January 29, 2005	19,068	$191	$74,024	2,793	$(11,630)	$72,469	$(195)	$134,859
Net income						$13,067		$  13,067
Unrealized gain on accounting for derivative instruments, net of tax provision of $89							141	141
Reclassification of unrealized loss related to de-designation of cash flow hedge, net of tax benefit of $30							47	47
Subtotal comprehensive income								13,255
Purchase of treasury stock, at cost				494	(5,324)			(5,324)
Dividends paid						(3,273)		(3,273)
Issuance of restricted stock	43	1	(1)					--
Amortization of deferred compensation related to restricted stock			448					448
Issuance of stock for employee stock purchase plan	13		84					84
Exercise of stock options	640	6	4,341					4,347
Tax benefit from exercise of stock options			613					613
Balance, January 28, 2006	19,764	$198	$79,509	3,287	$(16,954)	$82,263	$   (7)	$145,009
Net income						18,887		18,887
Unrealized gain on accounting for derivative instruments, net of tax provision of $4							7	7
Subtotal comprehensive income								18,894
Purchase of treasury stock, at cost				531	(7,460)			(7,460)
Dividends paid						(5,303)		(5,303)
Issuance of restricted stock	148	1	1,558					1,559
Issuance of stock for employee stock purchase plan	9		88					88
Exercise of stock options	540	6	1,674					1,680
Tax benefit from exercise of stock options			2,567					2,567
Balance, February 3, 2007	20,461	$205	$85,396	3,818	$(24,414)	$95,847	$    --	$157,034
Net income						16,522		16,522
Subtotal comprehensive income								16,522
FIN 48 Adjustment						(1,987)		(1,987)
Purchase of treasury stock, at cost				1,399	(20,054)			(20,054)
Dividends paid						(56,824)		(56,824)
Issuance of restricted stock	155	2	1,464					1,466
Issuance of stock for employee stock purchase plan	8		118					118
Exercise of stock options	226	2	1,136					1,138
Tax benefit from exercise of stock options			1,638					1,638
Balance, February 2, 2008	20,850	$209	$89,752	5,217	$(44,468)	$53,558	$    --	$99,051

The accompanying notes are an integral part of these consolidated statements

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2008 Annual Report

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Year Ended
(In thousands)	2/2/08	2/3/07	1/28/06
Cash Flows from Operating Activities:
Net income	$16,522	$18,887	$13,067
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,989	14,069	15,651
Stock-based compensation	1,466	1,559	448
Loss on impairment of assets	60	336	215
(Gain) loss on sale of property and equipment	479	228	(4)
Deferred income tax provision	2,933	465	1,281
Excess tax benefit of exercise of stock options	(1,638)	(2,567)	613
Reclassification of unrealized loss from de-designation of cash flow hedge	--	--	47
(Increase) decrease in assets:
Accounts receivable	1,074	2,144	(2,673)
Related party receivables	(1,133)	(1,513)	(1,061)
Inventories	(6,559)	4,512	5,481
Prepayments and other	(315)	(25)	2,571
Noncurrent assets (excluding amortization)	(3)	(124)	1,176
Increase (decrease) in liabilities:
Accounts payable	5,575	(14,752)	986
Related party payables	(775)	297	(6,900)
Accrued income taxes	(1,719)	880	296
Accrued expenses	4,537	(3,090)	5,519
Total adjustments	17,971	2,419	23,646
Net cash provided by operating activities	34,493	21,306	36,713
Cash Flows from Investing Activities:
Capital expenditures	(16,878)	(16,191)	(11,297)
Proceeds from sale of property and equipment	--	15	11
Net cash used in investing activities	(16,878)	(16,176)	(11,286)
Cash Flows from Financing Activities:
Borrowings under credit facilities	174,212	2,850	189,119
Repayments under credit facilities	(146,370)	(2,950)	(189,420)
Proceeds from exercise of stock options and issuance of common stock under employee stock purchase plan	1,257	1,768	4,431
Purchase of treasury stock	(20,054)	(7,460)	(5,324)
Payment of dividends	(56,824)	(5,303)	(3,273)
Excess tax benefit from exercise of stock options	1,638	2,567	--
Net cash used in financing activities	(46,141)	(8,528)	(4,467)
Net (Decrease) increase in Cash and Cash Equivalents	(28,526)	(3,398)	20,960
Cash and Cash Equivalents at Beginning of Year	34,121	37,519	16,559
Cash and Cash Equivalents at End of Year	$5,595	$34,121	$37,519
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest	$1,907	$     910	$  1,607
Income taxes, net of refunds	$6,666	$  7,199	$  6,787
Supplemental Disclosures of Non Cash Investing Activities:
Capital expenditures in accrued expenses	$(368)	$(1,284)	$ --

The accompanying notes are an integral part of these consolidated statements.

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2008 Annual Report 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Business

Books-A-Million, Inc. and its subsidiaries (the “Company”) are principally engaged in the sale of books, magazines and related items through a chain of retail bookstores. The Company presently operates 208 bookstores in 20 states and the District of Columbia, which are predominantly located in the southeastern United States. The Company also operates a retail Internet website. The Company presently consists of Books-A-Million, Inc. and its three wholly owned subsidiaries, American Wholesale Book Company, Inc. (“American Wholesale”) , American Internet Service, Inc (“AIS”) and Books-A-Million Card Services, Inc. (“Card Services”). All inter-company balances and transactions have been eliminated in consolidation. For a discussion of the Company’s business segments, see Note 8.

Fiscal Year

The Company operates on a 52 or 53-week year, with the fiscal year ending on the Saturday closest to January 31. Fiscal year 2008 was a 52-week period while fiscal year 2007 was a 53-week period. Fiscal year 2006 was a 52-week period.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue from the sale of merchandise at the time the merchandise is sold and the customer takes delivery. Returns are recognized at the time the merchandise is returned and processed. At each period end, an estimate of sales returns is recorded. Sales return reserves are based on historical returns as a percentage of sales activity. The historical returns percentage is applied to the sales for which returns are projected to be received after period end. The estimated returns percentage and return dollars have not materially changed in the last several years. Sales tax collected is recorded net and is not recognized as revenue and is included on the consolidated balance sheets in accrued expenses.

The Company sells its Millionaire’s Club Card, which entitles the customer to receive a ten percent discount on all purchases made during the twelve-month membership period, for a non-refundable fee. The Company recognizes this revenue over the twelve-month membership period based upon historical customer usage patterns. Related deferred revenue is included in accrued expenses.

The Company sells gift cards to its customers in its retail stores. The gift cards do not have an expiration date. Income is recognized from gift cards when: (1) the gift card is redeemed by the customer; or (2) the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and there is no legal obligation to remit the value of the unredeemed gift cards to the relevant jurisdictions. The gift card breakage rate is determined based upon historical redemption patterns. Based on this historical information, the likelihood of a gift card remaining unredeemed can be determined after 24 months of card inactivity. At that time, breakage income is recognized for those cards for which the likelihood of redemption is deemed to be remote and which there is no legal obligation to remit the value of such unredeemed gift cards to the relevant jurisdictions. In fiscal 2007, the Company formed a gift card subsidiary, Books-A-Million Card Services ("Card Services") to administer the Company’s gift card program and to provide a more advantageous legal structure. During fiscal 2008, the Company recognized $1.4 million of gift card breakage income. Breakage income for fiscal 2007 was $3.2 million of which $2.3 million relates to periods prior to fiscal 2007. The $2.3 million represents a change in estimate in the escheat liability due to operational changes related to the creation of Card Services. Breakage income for fiscal 2006 was $482,000. Gift card breakage income is included in revenue.

Vendor Allowances

The Company receives allowances from its vendors from a variety of programs and arrangements, including placement and co-operative advertising programs. Effective February 3, 2002, the Company adopted the provisions of Emerging Issues Task Force (“EITF”) No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor, which addresses the accounting for vendor allowances. As a result of the adoption of this statement, vendor allowances in excess of incremental direct costs are reflected as a reduction of inventory costs and recognized in cost of products sold upon the sale of the related inventory.

Accounts Payable

The Company classifies its checks written but not yet cleared by the bank in Accounts Payable. Checks are only written once approved by management. Amounts included in Accounts Payable as of February 2, 2008 and February 3, 2007 were $24,991,000 and $12,719,000, respectively.

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2008 Annual Report

Inventories

Inventories are valued at the lower of cost or market, using the retail method. Market is determined based on the lower of replacement cost or estimated realizable value. Using the retail method, store and warehouse inventories are valued by applying a calculated cost to retail ratio to the retail value of inventories.

The Company currently utilizes the last-in, first-out (LIFO) method of accounting for inventories. The cumulative difference between replacement and current cost of inventory over stated LIFO value is $2.5 million as of February 2, 2008 and $2.1 million as of February 3, 2007. The estimated replacement cost of inventory is the current FIFO value of $209.3 million.

Physical inventory counts are taken throughout the course of the fiscal period and reconciled to the Company’s records. Accruals for inventory shortages are estimated based upon historical shortage results.

Inventories were:

	Fiscal Year Ended
(In thousands)	February 2, 2008	February 3, 2007
Inventories (at FIFO)	$209,314	$202,327
LIFO reserve	(2,478)	(2,050)
Net inventories	$206,836	$200,277

Property and Equipment

Property and equipment are recorded at cost. Depreciation of equipment and furniture and fixtures is provided on the straight-line method over the estimated service lives, which range from three to seven years. Depreciation of buildings and amortization of leasehold improvements, including remodels, is provided on the straight-line basis over the lesser of the assets’ estimated useful lives (ranging from five to 40 years) or, if applicable, the periods of the leases. Determination of useful asset life is based on several factors requiring judgment by management and adherence to generally accepted accounting principles for depreciable periods. Judgment used by management in the determination of useful asset life could relate to any of the following factors: expected use of the asset; expected useful life of similar assets; any legal, regulatory, or contractual provisions that may limit the useful life; and other factors that may impair the economic useful life of the asset. Maintenance and repairs are charged to expense as incurred. Improvement costs, which extend the useful life of an asset, are capitalized to property accounts and depreciated over the asset's expected remaining life. The cost and accumulated depreciation of assets sold, retired or otherwise disposed of are removed from the accounts, and the related gain or loss is credited or charged to income.

Long-Lived Assets

The Company’s long-lived assets consist of property and equipment which includes leasehold improvements. At February 2, 2008, the Company had $53.5 million of property and equipment, net of accumulated depreciation, accounting for approximately 18.8% of the Company’s total assets. The Company 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 Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified. When evaluating long-lived assets for potential impairment, the Company will first compare the carrying amount of the assets to the individual store’s estimated future undiscounted cash flows. If the estimated future cash flows are less than the carrying amount of the assets, an impairment loss calculation is prepared. The impairment loss calculation compares the carrying amount of the assets to the individual store’s fair value based on its estimated discounted future cash flows. If required, an impairment loss is recorded for that portion of the asset’s carrying value in excess of fair value. Impairment losses totaled $0.1 million, $0.3 million and $0.2 million in fiscal 2008, 2007 and 2006, respectively, and were recorded in selling, general administrative costs. For all years presented, the impairment losses related to the retail trade business segment.

Goodwill

At February 2, 2008, the Company had $1.4 million of goodwill, accounting for approximately 0.5% of the Company’s total assets. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that goodwill and other indefinite life intangible assets no longer be amortized, but instead be tested for impairment at least annually or earlier if there are impairment indicators. The Company performs a two-step process for impairment testing of goodwill as required by SFAS No. 142. The first step of this test, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount. The second step (if necessary) measures the amount of the impairment. The Company completed its annual impairment test on the goodwill during the fourth quarter of fiscal 2008 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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2008 Annual Report 

Deferred Rent

The Company recognizes rent expense by the straight-line method over the lease term, including lease renewal option periods that can be reasonably assured at the inception of the lease. The lease term commences on the date when the Company takes possession and has the right to control use of the leased premises. Also, funds received from the lessor intended to reimburse the Company for the cost of leasehold improvements are recorded as a deferred credit resulting from a lease incentive and are amortized over the lease term as a reduction of rent expense.

Loss from Discontinued Operations

The Company periodically closes under-performing stores. The Company believes that a store is a component under SFAS No. 144. Therefore, each store closure would result in the reporting of a discontinued operation unless the operations and cash flows from the closed store could be absorbed in some part by surrounding Company stores(s) within the same market area. Management evaluates certain factors in determining whether a closed store’s operations could be absorbed by surrounding store(s); the primary factor considered is the distance to the next closest Books-A-Million store. When a closed store results in a discontinued operation, the results of operations of the closed store include store closing costs and any related asset impairments. See Note 7 for discontinued operations disclosures.

In November 2004, the Emerging Issues Task Force ("EITF") issued EITF No. 03-13, "Applying the Conditions in Paragraph 42 of FASB No. 144 in Determining Whether to Report Discontinued Operations." EITF No. 03-13 addresses how an ongoing entity should evaluate whether the operations and cash flows of a disposed component have been or will be eliminated from the ongoing operations of the entity and the types of continuing involvement that constitute significant continuing involvement in the operations of the disposed component. EITF No. 03-13 became effective with the fiscal year beginning January 30, 2005. Prior to the effective date of EITF No. 03-13, the Company was already reporting certain closed stores as discontinued operations (see footnote 7). Therefore, adopting this new guidance did not impact the Company’s financial position, results of operations or cash flows.

Store Opening Costs

Non-capital expenditures incurred in preparation for opening new retail stores are expensed as incurred.

Store Closing Costs

The Company continually evaluates the profitability of its stores. When the Company closes or relocates a store, the Company incurs unrecoverable costs, including net book value of abandoned fixtures and leasehold improvements, lease termination payments, costs to transfer inventory and usable fixtures and other costs of vacating the leased location. Such costs are primarily expensed as incurred and are included in selling, general and administrative costs. During fiscal 2008, 2007 and 2006, the Company recognized store closing costs of $599,810, $418,000 and $40,000, respectively.

Advertising Costs

The costs of advertising are expensed as incurred. Advertising costs, net of applicable vendor reimbursements of $1,756,487, $1,413,000 and $1,647,000, are charged to operating, selling and administrative expenses, and totaled $3,801,000, $3,629,000 and $3,578,000 for fiscal years 2008, 2007 and 2006, respectively.

Insurance Accruals

The Company is subject to large deductibles under its workers’ compensation and health insurance policies. Amounts are accrued currently for the estimated cost of claims incurred, both reported and unreported.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that result in temporary differences between the amounts recorded in its financial statements and tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Accounts Receivable and Allowance for Doubtful Accounts

Receivables represent customer, landlord and other receivables due within one year and are net of any allowance for doubtful accounts. Net receivables were $10,230,000 and $10,171,000 for February 2, 2008 and February 3, 2007, respectively. Trade accounts receivable are stated at the amount the Company expects to collect and do not bear interest. The collectability of trade receivable balances is regularly evaluated based on a combination of factors such as customer credit-worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment patterns. If it is determined that a customer will be unable to fully meet its financial obligation, such as the case of a bankruptcy filing or other material events impacting its business, a specific reserve for doubtful accounts is recorded to reduce the related receivable to the amount expected to be recovered.

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2008 Annual Report

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all short-term, highly liquid investments with original maturities of 90 days or less to be cash equivalents.

Sales and Use Tax Contingencies

The Company is subject to potential ongoing sales and use tax audits, income tax audits and other tax issues for both its retail and electronic commerce segments. It is the policy of the Company to estimate any potential tax contingency liabilities based on various factors such as ongoing state and federal tax audits, historical results of audits at the state or federal level and specific tax issues. Accruals for potential tax contingencies are recorded by the Company when they are deemed to have a probable likelihood of a liability and the liability can be reasonably estimated.

Stockholders' Equity

Basic net income per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution, using the treasury stock method that could occur if stock options are exercised or restricted stock granted to employees vested and resulted in an increase of common stock that then shared in the earnings of the Company. Diluted EPS has been computed based on the average number of shares outstanding including the effect of outstanding stock options and restricted stock, if dilutive, in each respective year. A reconciliation of the weighted average shares for basic and diluted EPS is as follows:

	Fiscal Year Ended
(In thousands)	2/2/08	2/3/07	1/28/06
Weighted average shares outstanding:
Basic	16,089	16,352	16,276
Dilutive effect of stock options and restricted stock outstanding	213	453	612
Diluted	16,302	16,805	16,888

Weighted options outstanding of 0, 0 and 94,000 for the years ended February 2, 2008, February 3, 2007 and January 28, 2006, respectively, were not included in the table above as they were anti-dilutive in those periods.

In March 2004, the Board of Directors authorized a common stock repurchase program for up to 1.6 million shares, or 10% of the outstanding stock (“The March 2004 Plan”). Under the March 2004 Plan, the Company repurchased a total of 1,452,000 shares at a cost of $13,667,000. This plan is now discontinued.

On June 8, 2006, the Board approved a new stock repurchase program (“The June 2006 Plan”). The program authorized the repurchase of up to $10 million in shares of the Company’s common stock over the next twelve months, but no specific number of shares was approved. This stock repurchase program replaced the March 2004 Plan.

On August 23, 2006, the Board approved an additional stock repurchase program (“The August 2006 Plan”). This program authorized the repurchase of up to additional $25 million in shares of the Company’s common stock over the next eighteen months. This program is in addition to the June 2006 Plan to repurchase up to $10 million in shares of common stock. Under the August 2006 Plan, the Company repurchased 1,399,000 and 300,000 shares at a cost of $20,054,000 and $4,436,000 during the fiscal years ended February 2, 2008 and February 3, 2007, respectively. This plan expired on February 23, 2008. On March 26, 2008, the Board of Directors authorized a new common stock repurchase program for up to $5 million. The plan will expire on April 30, 2009.

Additionally, in June 2005 the Company commenced a modified “Dutch Auction” tender offer (the “Tender Offer”) to purchase up to 4,000,000 shares of its outstanding common stock at a price per share of not less than $8.75 nor in excess of $10.00 per share, for an aggregate purchase price of up to $40.0 million. Pursuant to the Tender Offer, the Company purchased 56,406 shares of common stock at a purchase price of $10.00 per share, plus expenses for completing the Tender Offer, for a total cost of $1,040,000.

Disclosure of Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are reflected in the accompanying financial statements at cost, which approximates fair value because of the short-term maturity of these instruments. Investments are reflected in the accompanying financial statements at current market value. Based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities at February 2, 2008 and February 3, 2007, the Company’s debt approximates fair value.

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2008 Annual Report 

Stock-Based Compensation

On January 29, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment,”which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) requires the Company to recognize expense related to the fair value of its stock-based compensation awards, including employee stock options.

Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based compensation awards using the intrinsic value method as required by APB Opinion 25. Accordingly, the Company did not recognize compensation expense in the statement of income for options granted that had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. However, the Company did record compensation expense related to restricted stock units based on the market value of its stock at the date of grant. As required by SFAS No. 123, the Company also provided certain pro forma disclosures for stock-based awards as if the fair-value-based approach of SFAS No. 123 had been applied.

The Company used the modified prospective transition method as permitted by SFAS No. 123(R) and, therefore, has not restated its financial results for prior periods. Under this transition method, the Company applied the provisions of SFAS No. 123(R) to new awards and to awards modified, repurchased or cancelled after January 29, 2006. In addition, the Company will recognize compensation cost for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of January 29, 2006, as the remaining service is rendered. The compensation cost recorded for these awards is based on their grant-date fair value as calculated for the pro forma disclosures required by SFAS No. 123.

Prior to fiscal 2007, the Company accounted for stock-based employee compensation under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost for this plan is reflected in net income, 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. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 148 (“SFAS 148”) “Accounting for Stock-Based Compensation- Transaction and Disclosure – an Amendment of FASB Statement No. 123” to stock-based employee compensation:

	Fiscal Year Ended
(In thousands, except per share amounts)	1/28/06
Net income, as reported	$13,067
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effects	541
Pro forma net income	$12,526
Net income per common share:
Basic – as reported	$ 0.80
Basic – pro forma	$ 0.76
Diluted – as reported	$ 0.77
Diluted – pro forma	$ 0.74

The Company’s pre-tax compensation cost for stock-based employee compensation was $1,466,000 ($904,000 net of taxes), $1,559,000 ($982,000 net of taxes) and $448,000 ($270,000 net of taxes) for the years ended February 2, 2008, February 3, 2007 and January 28, 2006, respectively.

Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. SFAS No. 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as financing cash flows. For the year ended February 2, 2008, $1,638,000 of such excess tax benefits was classified as financing cash flows. Excess tax benefits for the years ended February 3, 2007 and January 28, 2006 were $2,567,000 and $613,000, respectively.

Accounting for Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of FASB Statement No. 133,”and SFAS No. 138, “Accounting for Certain Derivatives and Certain Hedging Activities,” and SFAS No.149, “Amendment of SFAS No. 133 on Derivatives and Hedging Activities.” SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. At February 2, 2008 and February 3, 2007, liabilities related to derivatives were classified as other long-term liabilities of $0 and $0, respectively.

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2008 Annual Report

Comprehensive Income (Loss)

Comprehensive income (loss) is net income or loss, plus certain other items that are recorded directly to stockholders’ equity. The only such items currently applicable to the Company are the unrealized gains (losses) on the derivative instruments explained in Note 3.

Recent Accounting Pronouncements

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN 48, effective February, 4, 2007. As a result of the adoption of FIN 48, the Company recorded an increase of $1,987,000 in other long-term liabilities in its consolidated balance sheet for unrecognized tax benefits, which was accounted for as a cumulative effect adjustment to the February 4, 2007 balance of retained earnings.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 was issued to provide increased consistency and comparability in fair value measurements. Specifically, SFAS No. 157 creates a significant definition of fair value emphasizing fair value as a market-based measurement. The Company is required to adopt SFAS No. 157 as of the beginning of its fiscal year that begins after November 15, 2007. The adoption of SFAS No. 157 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities: Including an amendment of FASB No. 115” (“SFAS No. 159”). SFAS No. 159 permits all entities to elect to measure many financial instruments and certain other items at fair value with changes in fair value reported in earnings. The fair value option is generally applied on an instrument-by-instrument basis and may be elected for a single item without electing other identical items, even if issued in a single transaction. The Company is required to adopt SFAS No. 159 as of the beginning of its fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (“FSP FIN 48-1”). FSP FIN 48-1 amends FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purposes of recognizing previously unrecognized tax benefits. The Company is required to apply the guidance provided in FSP FIN 48-1 upon its adoption of FIN 48 which was as of February 4, 2007. The application of FSP FIN 48-1 has not had a material effect on the Company’s financial position, results of operations, or cash flows.

In June 2007, the Emerging Issues Task Force (EITF) of the FASB ratified their consensus position 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 provides guidance on how a company should recognize the income tax benefit received on dividends that are paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options charged to retained earnings under FASB Statement 123(R), “Share-Based Payment.” The Company is required to apply the guidance provided in EITF 06-11 prospectively to income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after September 15, 2007. Early adoption of EITF 06-11 is permitted for the income tax benefit of dividends on equity-classified employee share-based payment awards that are declared in periods for which financial statements have not yet been issued. The Company has elected early adoption of this pronouncement as of the fiscal quarter ending August 4, 2007. The early adoption of EITF 06-11 has not had a material effect on the Company’s financial position, results of operation or cash flows.

In December 2007, the FASB issued SFAS No. 141 revised, Business Combinations. The objective of this Statement is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.   SFAS 141 revised is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.  The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the Noncontrolling interest in a subsidiary and for the decosolation of a subsidiary.  SFAS 160 is effective for the Company on January 1, 2009 and is not expected to have a significant impact on the Company’s financial statements.

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2008 Annual Report 

In March, 2008, the FASB issued FASB Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.

2. Income Taxes

A summary of the components of the income tax provision is as follows (in thousands):

	Fiscal Year Ended
	2/2/08	2/3/07	1/28/06
Current:
Federal	$6,304	$10,089	$6,495
State	314	553	899
	$6,618	$10,642	$7,394
Deferred:
Federal	$2,481	$338	$1,000
State	453	127	162
	2,934	465	1,162
Provision for income taxes	$9,552	$11,107	$8,556

A reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:

	Fiscal Year Ended
	2/2/08	2/3/07	1/28/06
Federal statutory income tax rate	35.0%	35.0%	35.0%
State income tax provision	2.1%	1.7%	3.5%
Nondeductible meals and entertainment expense	0.3%	0.2%	0.3%
Other	0.1%	0.1%	0.8%
Federal tax credits	(0.9%)	--	--
Effective income tax rate	36.6%	37.0%	39.6%

Temporary differences (in thousands) which created deferred tax assets (liabilities) at February 2, 2008 and February 3, 2007, are as follows:

	2/2/08				As of 2/3/07
		Current	Noncurrent	Current		Noncurrent
Depreciation		$ --	$ (628)	$ --		$ (1,215)
Accruals		2,261	--	2,639		--
Inventory		(8,672)	--	(5,769)		--
State net operating loss carry forwards		--	--	--		204
Deferred Rent		695	3,418	822		3,680
Prepaids		(1,435)	--	(1,477)		--
Amortization		--	(358)	--		(303)
Allowance for bad debts		305	--	293		--
State tax		--	19	--		(139)
		(6,846)	2,451	(3,492)		2,227
Less: Valuation allowances		--	--	--		(196)
Deferred tax asset (liability)		$(6,846)	$2,451	$ (3,492)		$ 2,031

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2008 Annual Report

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. The Company adopted the provisions of FIN 48 on February 4, 2007. As a result of the implementation of FIN 48, the Company has recognized an increase of $2.0 million in the liability for unrecognized tax benefits, which was accounted for as a decrease to the balance of retained earnings. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $2.0 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at February 4, 2007	$	2,227
Additions based on tax positions related to current year		350
Expiration of statute of limitation		( 403)
Balance at February 2, 2008	$	2,174

The Company and its subsidiaries are subject to United States federal income tax as well as income tax of multiple state jurisdictions. In many cases these uncertain tax positions are related to tax years that remain subject to examination by the relevant taxing authorities. The Company has operations in various state jurisdictions that are currently under audit for years ranging from 2001 through 2006. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-United States, income tax examinations for years prior to 2004.

It is reasonably possible that the amount of unrecognized tax benefits will increase or decrease in the next twelve months. These changes may be the result of settlement of ongoing state audits. It is expected that certain state audits will be completed in the next 12 months resulting in a reduction of the liability for unrecognized tax benefits of $0.1 million. Depending on the outcome of these audits, the reduction of the liability for unrecognized tax benefits discussed above may affect the effective tax rate.

The Company's policy is to record interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties were $0.68 million and $0.68 million as of February 2, 2008 and February 3, 2007, respectively. During fiscal year 2008 the Company recognized interest and penalties of $0.03 million.

A valuation allowance was established at the end of the previous fiscal year for net deferred taxes for a wholly-owned subsidiary. As of February 2, 2008, that entity was merged out of existence into the parent company. As a result, the net operating losses of that subsidiary are no longer available, and a valuation allowance is deemed unnecessary, as the realization of the remaining net operating losses is considered more likely than not.

3. Debt and Lines of Credit

The Company’s current credit facility allows for unsecured borrowings up to $100 million which expires in July 2011. Availability under the facility is reduced by outstanding letters of credit issued there under. Interest on borrowings under the credit facility is determined based upon applicable LIBOR rates and the Company’s rate spread, which varies depending on the maintenance of certain covenants. The credit facility contains financial and non-financial covenants, the most restrictive of which is the maintenance of a minimum fixed charge coverage ratio. The Company was in compliance with all covenants for fiscal 2008 and as of February 2, 2008. The outstanding balance under this credit facility as of February 2, 2008 and February 3, 2007, was $28.0 million and $0, respectively, and the face amount of letters of credit issued under the facility was $2.4 million and $2.9 million, respectively. The maximum and average outstanding borrowings under the credit facility (excluding the face amount of letters of credit issued there under) during fiscal 2008 were $55.9 million and $20.7 million, respectively. The outstanding amount is considered short-term in the financial statements because all borrowings under the credit facility are due in 12 months or less.

The Company is subject to interest rate fluctuations on borrowings under its credit facility. To manage this exposure, the Company has used interest rate swaps in the past to fix the interest rate on variable debt. The Company entered into two separate $10.0 million swaps on July 24, 2002. Both expired in August 2005 and, prior to the payoff of the debt, effectively fixed the interest rate on $20.0 million of variable debt at 5.13%. The Company did not replace the swaps at expiration.

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2008 Annual Report 

During fiscal 1996 and fiscal 1995, the Company acquired and constructed certain warehouse and distribution facilities with the proceeds of loans made pursuant to an industrial development revenue bond (the “Bond”), which was secured by a mortgage interest in these facilities. As of February 2, 2008 and February 3, 2007, there was $7.0 million and $7.1 million of borrowings outstanding, respectively, under these arrangements, which bear interest at variable rates (4.25% as of February 2, 2008). The Bond has a maturity date of December 1, 2019, with a purchase provision obligating the Company to repurchase the Bond, unless extended by the bondholder. In fiscal 2007, an unrelated bank purchased the Bond from the existing bondholder, and the new bondholder extended the date of the Company’s purchase obligation of the Bond until July 1, 2011 and did not require a mortgage interest to secure the bond. Such an extension may be renewed annually by the bondholder, at the Company’s request, to a date no more than five years from the renewal date. The Company entered into a $7.5 million interest rate swap in May 1996 that expired on June 7, 2006 and effectively fixed the interest rate on the Bond during that period at 8.73% (the “Bond Hedge”). The Company did not replace the Bond Hedge when it expired.

The Company’s hedges were designated as cash flow hedges because they are interest rate swaps that convert variable payments to fixed payments. Cash flow hedges protect against the variability in future cash outflows of current or forecasted debt and related interest expense. The changes in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to accumulated other comprehensive income (loss) or in earnings, depending on the type of hedging relationship. Over time, the amounts held in accumulated other comprehensive income (loss) were reclassified to earnings if the hedge transaction became ineffective.

Prior to its expiration, the Bond Hedge was reported as a liability in the accompanying consolidated balance sheets at a fair value of $61,000 as of January 28, 2006. For the fiscal years ending February 3, 2007 and January 28, 2006, adjustments of $7,000, and $141,000 were recorded as unrealized gains in accumulated other comprehensive income (loss), after tax. During fiscal 2006, a portion of the bond hedge no longer qualified for hedge accounting under SFAS No. 133. Therefore, the Company de-designated a portion of the hedge resulting in an expense of $47,000 in fiscal 2006. During fiscal 2005, one of the $10 million interest rate swaps no longer qualified for hedge accounting under SFAS No. 133 and the Company de-designated the hedge resulting in an expense of $27,000 in fiscal 2005.

4. Leases

The Company leases the premises for its retail bookstores under operating leases, which expire in various years through the year 2022. Many of these leases contain renewal options and require the Company to pay executory costs (such as property taxes, maintenance, and insurance). In addition to fixed minimum rentals, some of the Company’s leases require contingent rentals based on a percentage of sales. The Company also has minimal operating leases for equipment and trailer trucks.

Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of February 2, 2008 are as follows (in thousands):

Fiscal Year	Future Minimum Rent
2009	$ 30,297
2010	24,752
2011	19,991
2012	14,730
2013	11,521
Subsequent years	31,810
Total	$133,101

Rental expense for all operating leases consisted of the following (in thousands):

	Fiscal Year Ended
	2/2/08	2/3/07	1/28/06
Minimum rentals	$35,347	$33,205	$30,944
Contingent rentals	(25)	53	249
Total	$35,322	$33,258	$31,193

5. Employee Benefit Plans

401(k) Profit-Sharing Plan

The Company and its subsidiaries maintain a 401(k) plan covering all employees who have completed six months of service and who are at least 21 years of age, and permit participants to contribute from 1% to 15% of compensation and participants over 50 years of age are allowed to make catch-up contributions. Limits to contributions by employees are established by the Internal Revenue Code. Company matching and supplemental contributions are made at management’s discretion. Company matching contributions were 50%, 70% and 70% for fiscal 2008, 2007 and 2006, respectively. The employer contributions are made on employee contributions up to a maximum of 6% of the employee’s salary. The expense under this plan was $744,000, $472,000 and $806,000 in fiscal 2008, 2007 and 2006, respectively.

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2008 Annual Report

2005 Incentive Award Plan

On June 1, 2005, the stockholders of the Company approved the adoption of the Books-A-Million, Inc. 2005 Incentive Award Plan (the “2005 Plan”) for a total of 300,000 shares. On June 8, 2006, the stockholders of the Company approved an additional 300,000 shares to be awarded under the Plan. An aggregate of 600,000 shares of common stock may be awarded under the 2005 Plan. From June 1, 2005 through February 2, 2008, awards under the 2005 Plan consisted solely of awards of restricted stock. Each year the compensation committee makes awards to the Company’s officers and key employees pursuant to the terms of the plan. In addition, directors who have served eleven consecutive months are eligible for awards as well as new directors appointed to the Board. Shares granted under the 2005 Plan (net of cancellations) were 81,475, 161,800 and 78,933 in fiscal 2008, 2007 and 2006, respectively. The compensation expense related to these grants is being expensed over the vesting period for the individual grants. The Company has recorded $1,425,000 and $643,000 of stock-based compensation for the restricted stock grants in fiscal 2008 and 2007, respectively.

There are two types of restricted stock awards to employees. The first type of restricted stock award is “career based shares.” Career based shares are completely unvested until the last day of the fifth fiscal year after the date of the grant whereupon such career based shares vest in full if the employee who received the grant is then employed by the Company. The compensation expense for these shares is recognized ratably over the five-year requisite service period. The second type of restricted stock award is “performance based shares.” Performance based shares are earned based on the achievement of certain performance goals for the fiscal year in which they are granted. If the performance goals are met, the performance based shares vest in 50% increments at the end of the first and second fiscal years after the fiscal year in which they were granted if the employee who received the grant is then employed by the Company. Compensation expense for these shares is recognized ratably over the period beginning on the date the Company determines that it is probable the performance goals will be achieved and ending on the last day of the vesting period.

Additionally, there are annual restricted stock grants to directors. Each director who has served at least eleven consecutive months as of the Company’s annual meeting of stockholders receives a restricted stock grant, which shares of restricted stock vest in one-third increments on each of the first, second and third anniversaries of the grant date. The expense related to the directors’ grants is recognized ratably over the three-year vesting period.

Executive Incentive Plan

The Company maintains an Executive Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for awards to certain executive officers of either cash or shares of restricted stock. The Company has always issued awards in the form of restricted stock. Issuance of awards under the Incentive Plan is based on the Company achieving pre-established performance goals during a three consecutive fiscal year performance period. Awards issued under the Incentive Plan for a particular performance period vest on the third anniversary of the last day of such performance period if the recipient remains employed by the Company on such vesting date. Awards under the Incentive Plan are expensed ratably over the period from the date that the issuance of such awards becomes probable through the end of the restriction period. Awards granted under the Incentive Plan for the two year performance periods ended February 3, 2007 and January 28, 2006 totaled $100,000 (6,707 shares) and $592,000 (50,824 shares), respectively. The final grant for the Incentive Plan was awarded in March 2006 for the January 28, 2006 three year performance period. There will be no future awards under the Incentive Plan.

Restricted Stock Table

A combined summary of the status of restricted stock grants to employees and directors under the 2005 Incentive Award Plan and the Executive Incentive Plan is as follows (shares in thousands):

	Fiscal Year Ended
	February 2, 2008		February 3, 2007
	Shares	Weighted Average Grant Date Fair Value	Shares	Weighted Average Grant Date Fair Value
Shares at beginning of period	281	$11.56	214	$ 9.70
Shares granted	87	$14.16	169	$12.29
Shares vested	(92)	$11.35	(66)	$ 7.82
Shares forfeited	(5)	$13.14	(36)	$10.72
Shares at end of period	271	$12.44	281 271	$11.56

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2008 Annual Report 

Stock Option Plan

In April 1999, the Company adopted the Stock Option Plan which provided for option grants to executive officers, directors, and key employees. Upon the approval of the 2005 Incentive Award Plan by the Company’s stockholders at the Company’s annual meeting held in June 2005, the board determined that no more awards would be made under the Stock Option Plan. Options previously issued under the Stock Option Plan remain valid. All options granted prior to January 9, 2001 vested over a five-year period and expired on the sixth anniversary of the date of grant, and all options granted on and after January 9, 2001 vest over a three-year period and expire on the tenth anniversary of the date of grant. All options have exercise prices equal to the fair market value of the common stock on the date of grant. A summary of the status of the Company’s stock option plan is as follows (shares in thousands):

	Fiscal Year Ended
	February 2, 2008		February 3, 2007		January 28, 2006
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding at beginning of year	270	$5.09	814	$3.77	1,506	$ 5.19
Granted	--	--	--	N/A	--	N/A
Exercised	(226)	5.05	(540)	3.11	(640)	6.82
Forfeited	(1)	5.76	(4)	4.80	(52)	7.13
Outstanding at end of year	43	$5.31	270	$5.09	814	$ 3.77
Exercisable at end of year	43	$5.31	268	$5.08	566	$ 3.30

During fiscal years 2008, 2007 and 2006, the Company recognized tax benefits related to the exercise of stock options in the amount of $1,638,000, $2,567,000 and $613,000, respectively. The tax benefits were credited to paid-in capital in the respective years.

The total intrinsic value of stock options exercised during the year ended February 2, 2008 was $2,159,725.

The following table summarizes information about stock options outstanding as of February 2, 2008 (shares in thousands):

	Options Outstanding			Options Exercisable
Range of Exercise Price	Number Oustanding at February 2, 2008	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price	Number Exercisable at February 2, 2008	Weighted Average Exercise Price
$1.69 - $ 2.37	11	4.81	$2.31	11	$2.31
$2.68 - $ 5.85	7	4.00	$3.04	7	$3.04
$6.13 - $9.62	25	6.21	$7.25	25	$7.25
Totals	43	5.50	$5.31	43	$5.31

The aggregate intrinsic values of outstanding options and exercisable options under the Stock Option Plan at February 2, 2008 were $399,000 and $399,000, respectively.

Other Information

As of February 2, 2008 the Company has $2,436,000 of total unrecognized compensation cost related to non-vested awards granted under our various share-based plans, which it expects to recognize over the following fiscal years:

Fiscal Year	Stock-based Compensation Expense
2009	$ 1,276,000
2010	$ 539,000
2011	$ 405,000
2012	$ 216,000
Total	$ 2,436,000

The Company received cash from options exercised during the fiscal years 2008, 2007 and 2006 of $1,139,000, $1,680,000, and $4,347,000 respectively. The impact of these cash receipts is included in financing activities in the accompanying Consolidated Statements of Cash Flows.

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2008 Annual Report

The number of shares of common stock currently reserved under the 2005 Plan for stock-based compensation programs as of February 2, 2008 is 271,852 shares.

Employee Stock Purchase Plan

The Company maintains an employee stock purchase plan under which 400,000 shares of the Company’s common stock are reserved for purchase by employees at 85% of the fair market value of the common stock at the lower of the market value for the Company’s stock as of the beginning of the fiscal year or the end of the fiscal year. Of the total reserved shares, 276,732, 268,167 and 258,902 shares have been purchased as of February 2, 2008, February 3, 2007 and January 28, 2006, respectively.

Executives’ Deferred Compensation Plan

During fiscal 2006, the Board adopted the Books-A-Million, Inc. Executives’ Deferred Compensation Plan (the “Executives’ Deferred Compensation Plan”). The Executives’ Deferred Compensation Plan provides a select group of management or highly compensated employees of the Company and certain of its subsidiaries (the “Participants”) with the opportunity to defer the receipt of certain cash compensation. Each Participant may elect to defer under the Executives’ Deferred Compensation Plan a portion of his or her cash compensation that may otherwise be payable in a calendar year. A Participant’s compensation deferrals are credited to the Participant’s bookkeeping account (the “Account”) maintained under the Executives’ Deferred Compensation Plan. Each Participant’s Account is credited with a deemed rate of interest and/or earnings or losses depending upon the investment performance of the deemed investment option.

With certain exceptions, a Participant’s Account will be paid after the earlier of: (1) a fixed payment date, as elected by the Participant (if any); or (2) the Participant’s separation from service with Company or its subsidiaries. Participants may generally elect that payments be made in a single sum or installments in the year specified by the Participant or upon their separation from service with the Company. Additionally, a Participant may elect to receive payment upon a Change of Control, as defined in, and to the extent permitted by, Section 409A of the Internal Revenue Code of 1986, as amended.

Directors’ Deferred Compensation Plan

During fiscal 2006, the Board adopted the Books-A-Million, Inc. Directors’ Deferred Compensation Plan (the “Directors’ Deferred Compensation Plan”). The Directors’ Deferred Compensation Plan provides the Non-Employee Directors with the opportunity to defer the receipt of certain amounts payable for serving as a member of the Board (the “Fees”). A Non-Employee Director’s Fee deferrals are credited to the Non-Employee Director’s bookkeeping account (the “Account”) maintained under the Directors’ Deferred Compensation Plan. Each participating Non-Employee Director’s Account is credited with a deemed rate of interest and/or earnings or losses depending upon the investment performance of the deemed investment option.

With certain exceptions, a participating Non-Employee Director’s Account will be paid after the earlier of: (1) a fixed payment date, as elected by the participating Non-Employee Director (if any); or (2) the participating Non-Employee Director's separation from service on the Board. The participating Non-Employee Director may generally elect that payments be made in a single sum or installments in the year specified by the participating Non-Employee Director or upon the Non-Employee Director’s separation from service on the Board. Additionally, a participating Non-Employee Director may elect to receive payment upon a Change of Control, as defined in, and to the extent permitted by, Section 409A of the Internal Revenue Code of 1986, as amended.

6. Related Party Transactions

Certain stockholders and directors (including certain officers) of the Company have controlling ownership interests in other entities with which the Company conducts business. Transactions between the Company and these various other entities (“related parties”) are summarized in the following paragraphs:

The Company purchases a substantial portion of its magazines as well as certain seasonal music and newspapers from Anderson Media Corporation (“Anderson Media”), an affiliate through common ownership. During fiscal 2008, 2007 and 2006, purchases of these items from Anderson Media totaled $25,514,000, $24,702,000 and $30,746,000, respectively. The Company purchases certain of its collectibles, gifts and books from Anderson Press, Inc. (“Anderson Press”), an affiliate through common ownership. During fiscal 2008, 2007 and 2006, such purchases from Anderson Press totaled $2,284,000, $1,423,000 and $1,272,000, respectively. The Company purchases certain of its greeting cards and gift products from C.R. Gibson, Inc., an affiliate through common ownership. The purchases of these items in fiscal 2008, 2007 and 2006 were $346,000, $447,000 and $223,000, respectively. The Company utilizes import sourcing and consolidation services from Anco Far East Importers, LTD (“Anco Far East”), an affiliate through common ownership. The total paid to Anco Far East was $2,622,000, $2,391,000 and $2,113,000 for fiscal 2008, 2007 and 2006, respectively. These amounts paid to Anco Far East primarily included the actual cost of the product, as well as fees for sourcing and consolidation services. All other costs, other than the sourcing and consolidation service fees, were passed through from other vendors. Anco Far East fees, net of the passed-through costs, for fiscal years 2008, 2007 and 2006 were $184,000, $167,000 and $148,000, respectively.

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2008 Annual Report 

The Company sold books to Anderson Media in the amounts of $3,653,000, $2,430,000 and $1,017,000 in fiscal 2008, 2007 and 2006, respectively.

The Company leases its principal executive offices from a trust, which was established for the benefit of the grandchildren of Mr. Charles C. Anderson, a former member of the Board of Directors. The lease term is month to month. During fiscal 2008, 2007 and 2006, the Company paid rent of $141,000, $137,000, and $137,000, respectively, to the trust under this lease. Anderson & Anderson LLC (“A&A”), which is an affiliate through common ownership, also leases three buildings to the Company. During fiscal 2008, 2007 and 2006, the Company paid A&A a total of $428,000, $448,000, and $445,000, respectively, in connection with such leases. There were no future minimum rental payments on any of the four leases at February 2, 2008. The Company subleases certain property to Hibbett Sports, Inc. (“Hibbett”), a sporting goods retailer in the southeastern United States. The Company’s Executive Chairman, Clyde B. Anderson, is a member of Hibbett’s board of directors. Effective March 14, 2008, Terry Finley, President Books-A-Million, Inc. Merchandising Group, was appointed to the board of directors of Hibbett. During fiscal 2008, 2007 and 2006, the Company received $236,000, $191,000, and $191,000, respectively, in rental payments from Hibbett.

The Company shares ownership of a plane, which the Company uses in the operations of its business, with an affiliated company. The Company rents the plane to affiliated companies at rates that cover all the variable costs and a portion of the fixed costs of operating the plane. The total amounts received from affiliated companies for use of the plane in fiscal 2008, 2007 and 2006 were $668,000, $388,000 and $146,000, respectively. The Company also occasionally rents a plane from A&A at rates that cover all of the variable costs and a portion of the fixed costs of operating the plane. The amounts paid to A&A for plane rental were $110,000, $47,000 and $70,000 for fiscal 2008, 2007 and 2006, respectively.

7. Income or (Loss) from Discontinued Operations

The Company closed one store in fiscal 2008 in a market located in Georgia and one store in a market located in Indiana where the Company does not expect another of its existing stores to absorb the closed store customers. The store sales and operating results for fiscal 2008 have not been included in discontinued operations because the impact on the financial statements was immaterial. The Company continues to report in discontinued operations stores closed in prior years where the Company does not expect to retain the closed stores’ customers at another store. For fiscal 2008 the closed stores had sales of $1.5 million and pretax operating loss of $382,000.

The Company closed one store in fiscal 2007 in a market located in Georgia where the Company does not expect another of its existing stores to absorb the closed store customers. The store sales and operating results for fiscal 2007 have not been included in discontinued operations because the impact on the financial statements was immaterial. The Company continues to report in discontinued operations stores closed in prior years where the Company does not expect to retain the closed stores’ customers at another store. For fiscal 2007 the closed store had sales of $139,000 and pretax operating loss of $90,000.

Discontinued operations represent the results for the closed stores for the years presented due to the fiscal 2006 closure of two retail stores in markets located in Tennessee and West Virginia where the Company does not expect another of its existing stores to absorb the closed store customers. For fiscal 2006 the closed stores had sales of $689,000 and pretax operating income of $27,000. Also included in the loss on discontinued operations are store closing costs of $20,000 for fiscal 2006.

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2008 Annual Report

8. Business Segments

The Company has two reportable segments: retail trade and electronic commerce trade. The retail trade segment is a strategic business segment that is engaged in the retail trade of mostly book merchandise and includes the Company’s distribution center operations, which supplies merchandise predominantly to the Company’s retail stores. The electronic commerce trade segment is a strategic business segment that transacts business over the Internet and is managed separately due to divergent technology and marketing requirements. The Company evaluates performance of the segments based on profit and loss from operations before interest and income taxes. Certain intersegment cost allocations have been made based upon consolidated and segment revenues. Shipping income related to internet sales is included in net sales, and shipping expense is included in cost of sales.

		Fiscal Year Ended
Segment information (in thousands)	2/2/08	2/3/07	1/28/06
Net Sales
Retail Trade	$528,606	$512,967	$496,609
Electronic Commerce Trade	26,992	26,048	27,605
Intersegment Sales Elimination	(20,470)	(18,599)	(20,463)
Net Sales	$535,128	$520,416	$503,751
Operating Profit
Retail Trade	$26,911	$  29,223	$ 22,431
Electronic Commerce Trade	1,462	1,400	1,027
Intersegment Elimination of Certain Costs	(953)	(524)	(421)
Total Operating Profit	$27,420	$  30,099	$ 23,037
Assets
Retail Trade	$283,452	$303,110	$310,447
Electronic Commerce Trade	1,381	927	1,286
Intersegment Sales Elimination	--	--	(74)
Total Assets	$284,833	$304,037	$311,659

9. Commitments and Contingencies

The Company is a party to various legal proceedings incidental to its business. In the opinion of management, after consultation with legal counsel, the ultimate liability, if any, with respect to those proceedings is not presently expected to materially affect the financial position, results of operations or cash flows of the Company.

From time to time, the Company enters into certain types of agreements that require the Company to indemnify parties against third party claims. Generally, these agreements relate to: (a) agreements with vendors and suppliers, under which the Company may provide customary indemnification to its vendors and suppliers in respect of actions they take at the Company’s request or otherwise on its behalf, (b) agreements with vendors who publish books or manufacture merchandise specifically for the Company to indemnify the vendors against trademark and copyright infringement claims concerning the books published or merchandise manufactured on behalf of the Company, (c) real estate leases, under which the Company may agree to indemnify the lessors for claims arising from the Company’s use of the property, and (d) agreements with the Company’s directors, officers and employees, under which the Company may agree to indemnify such persons for liabilities arising out of their relationship with the Company. The Company has Directors and Officers Liability Insurance, which, subject to the policy’s conditions, provides coverage for indemnification amounts payable by the Company with respect to its directors and officers up to specified limits and subject to certain deductibles.

The nature and terms of these types of indemnities vary. The events or circumstances that would require the Company to perform under these indemnities are transaction and circumstance specific. The overall maximum amount of obligations cannot be reasonably estimated. Historically, the Company has not incurred significant costs related to performance under these types of indemnities. No liabilities have been recorded for these obligations on the Company’s balance sheet at each of February 2, 2008 and February 3, 2007, as such liabilities are considered de minimis.

10. Gain on Insurance Recoveries

In fiscal 2006 the Company recognized an insurance gain of $754,000, net of taxes, related to insurance recoveries for hurricane damage suffered at certain stores in fiscal 2005. The insurance recovery amount was finalized with the insurance company during the third quarter of fiscal 2006 (for stores damaged by hurricanes in fiscal 2005), and therefore the gain was recorded in the respective period.

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2008 Annual Report 

11. Cash Dividend

On March 26, 2008, the Board of Directors declared a quarterly dividend of $0.09 per share to be paid on April 23, 2008 to stockholders of record at the close of business on April 9, 2008. The Company intends to pay quarterly dividends in the future, subject to Board approval.

12. Accrued Expenses

Accrued expenses consist of the following (in thousands):

	As of 2/2/08	As of 2/3/07
Accrued expenses:
Salaries, wages and employee benefits	$7,756	$ 7,548
Giftcard liabilities to customers	10,273	9,612
Deferred club card income	6,623	5,399
Taxes, other than income	5,734	4,992
Rent	2,237	2,754
Other	8,916	8,279
	$41,539	$38,584

13. Summary of Quarterly Results (Unaudited)

The following tables set forth certain unaudited financial data for the quarters indicated:

	Fiscal Year Ended February 2, 2008
	First	Second	Third	Fourth		Total
(In thousands, except per share amounts)	Quarter	Quarter	Quarter	Quarter		Year
Net revenue	$116,318	$132,802	$117,696	$168,312		$535,128
Gross profit	33,759	37,692	32,095	55,002		158,548
Operating profit (loss)	3,454	4,865	(524)	19,625		27,420
Net income (loss)	2,111	3,100	(555)	11,866		16,522
Net income (loss) per share – basic	0.13	0.19	(0.03)	0.77		1.03
Net income (loss) per share – diluted	0.13	0.19	(0.03)	0.76		1.01
	Fiscal Year Ended February 3, 2007
	First	Second	Third	Fourth (2)	Total
(In thousands, except per share amounts)	Quarter	Quarter	Quarter	Quarter	Year
Net revenue	$113,887	$121,209	$110,692	$174,628	$520,416
Gross profit	32,610	34,918	29,087	60,113	156,728
Operating profit (loss)	2,592	4,053	(314)	23,768	30,099
Net income (loss)	1,512	2,457	(201)	15,119	18,887
Net income (loss) per share – basic (1)	0.09	0.15	(0.01)	0.92	1.16
Net income (loss) per share – diluted	0.09	0.14	(0.01)	0.90	1.12

(1) The sum of the quarterly amounts are different from the annual per share amounts because of differences in the weighted average number of common and common equivalents shares used in the quarterly and annual computations.

(2) The Company changed its estimate of gift card liabilities which resulted in recognition of $2.3 million in gift card breakage income during the fourth quarter of fiscal 2007 as disclosed in note 1.

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2008 Annual Report

DIRECTORS AND CORPORATE OFFICERS

Board of Directors	Corporate Officers
Clyde B. Anderson	Clyde B. Anderson
Executive Chairman of the Board	Executive Chairman of the Board
Sandra B. Cochran	Sandra B. Cochran
President, Chief Executive Officer and Secretary	President and Chief Executive Officer
Terry C. Anderson	Terrance G. Finley
Chief Executive Officer and President,	President, Books-A-Million, Inc. Merchandising Group
American Promotional Events, Inc.
	Douglas G. Markham
Ronald G. Bruno	Chief Financial Officer and Secretary
President,
Bruno Capital Management Corporation
Albert C. Johnson
Independent Financial Consultant and Retired Partner, Arthur Andersen LLP
Dr. J. Barry Mason,
Dean, Culverhouse College of Commerce
The University of Alabama
William H. Rogers, Jr.
Executive Vice President,
SunTrust Banks, Inc.

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2008 Annual Report 

CORPORATE INFORMATION

Corporate Office

Books-A-Million, Inc.

402 Industrial Lane

Birmingham, Alabama 35211

(205) 942-3737

Transfer Agent

Wells Fargo Shareowner Services

(800) 468-9716

Stockholder Inquiries Address:

161 North Concord Exchange

South St. Paul, Minnesota 55075

E-Mail address: stocktransfer@wellsfargo.com

Wells Fargo Stock Transfer Website: www.wellsfargo.com/com/shareowner_services/index

Certificates for Transfer and Address Changes to:

Shareowner Services

Post Office Box 64854

St Paul, Minnesota 55164-0854

Fax: (651) 450-4033

Independent Registered Public Accounting Firm

Grant Thornton LLP

Atlanta, Georgia

Form 10-K and Investor Contact

A copy of the Company’s Annual Report on Form 10-K for the fiscal year ended February 2, 2008, as filed with the Securities and Exchange Commission, as well as key committee charters and code of conduct, are available without charge to stockholders upon written request. Such requests and other investor inquiries should be directed to Douglas G. Markham, the Company’s Chief Financial Officer, or you can view those items at www.booksamillioninc.com.

Market and Dividend Information

Common Stock

The Common Stock of Books-A-Million, Inc., is traded in the NASDAQ Global Select Market under the symbol BAMM. The chart below sets forth the high and low stock prices for each quarter of the fiscal years ending February 2, 2008 and February 3, 2007.

Quarter Ended	High	Low	Dividends Declared
January 2008	$13.72	$10.05	$0.09
October 2007	14.78	11.95	0.09
July 2007	20.37	15.03	3.09
April 2007	19.04	13.88	0.09
January 2007	22.69	18.65	0.09
October 2006	20.11	14.64	0.08
July 2006	18.49	14.00	0.08
April 2006	13.45	10.62	0.08

The closing price on March 28, 2008 was $9.05. As of that date Books-A-Million, Inc. had approximately 6,718 stockholders based on the number of individual participants represented by security position listings.

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2008 Annual Report

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN*

Among Books-A-Million, Inc., The NASDAQ Composite Index and The NASDAQ Retail Trade Stock Index

The following indexed line graph indicates the Company’s total return to stockholder’s from January 31, 2003 to February 1, 2008, the last trading day prior to the Company’s 2008 fiscal year end, as compared to the total return for the NASDAQ Composite Index and the NASDAQ Retail Trade Stock Index for the same period.

	Jan 31,	Jan 30,	Jan 28,	Jan 27,	Feb 2,	Feb 1,
	2003	2004	2005	2006	2007	2008
Books-A-Million, Inc.	$100	$213	$306	$373	$613	$454
NASDAQ Composite Index	$100	$109	$107	$122	$131	$183
NASDAQ Retail Trade Stocks	$100	$119	$143	$155	$168	$185

This graph is being furnished and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. This graph shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise noted in such filing.

ANNUAL MEETING OF STOCKHOLDERS

The annual meeting of stockholders will be held on May 29, 2008, at 10:00 a.m. central time, at the corporate offices of the company, 402 Industrial Lane, Birmingham, Alabama 35211. Stockholders of record as of March 28, 2008, are invited to attend this meeting.

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2008 Annual Report 

402 Industrial Lane

Birmingham, Alabama 35211

www.booksamillioninc.com

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