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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

|        |  |                                                                                          
|------- |  | -----------------------------------------------------------------------------------------
|(X BOX) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
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|        |  | For the quarterly period ended March 31, 2002                                            
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|        |  | OR                                                                                       
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|        |  |                                                                                          
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|(BOX)   |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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|        |  |                                                                                          
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|        |  | For the transition period from ____________ to ____________                              

Commission File Number: 0-26063

barnesandnoble.com inc.

(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-4048787                          
|                                                              
|                                                              
|                                                              
|                                                              
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (I.R.S. Employer
Identification No.)
|                                                              
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|                                                              
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|                                                               |  |                                     
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|76 Ninth Avenue, New York, NY                                  |  | 10011                               
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|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

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

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

Number of shares of $.001 par value Class A Common Stock, Class B Common Stock
and Class C Common Stock outstanding as of May 9, 2002 was 47,946,566, one and
one, respectively.





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TABLE OF CONTENTS



|                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION       
|                                      | Item 1: Financial Statements                                                                 
|Consolidated Statements of Operations
|Consolidated Balance Sheets          
|Consolidated Statements of Cash Flows
|                                      | Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                      | Item 3: Quantitative and Qualitative Disclosure about Market Risk                            
|PART II  OTHER INFORMATION          
|                                      | Item 1: Legal Proceedings                                                                    
|                                      | Item 2: Changes in Securities and Use of Proceeds                                            
|                                      | Item 3: Defaults upon Senior Securities                                                      
|                                      | Item 4: Submission of Matters to a Vote of Securities Holders                                
|                                      | Item 5: Other Information                                                                    
|                                      | Item 6: Exhibits and Reports on Form 8-K                                                     
|Signatures                           



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##### Table of Contents



barnesandnoble.com inc.

March 31, 2002

Index to Form 10-Q

|          |  |                                                                                       |  |         
|--------- |  | ------------------------------------------------------------------------------------- |  | --------
|          |  |                                                                                       |  | Page No.
|          |  |                                                                                       |  |         
|PART I   |  | FINANCIAL INFORMATION                                                                 |  |         
|         
|         
|         
|         
|          |  |                                                                                       |  |         
|         
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|Item 1:   |  | Financial Statements                                                                  |  | 3       
|         
|         
|         
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|          |  |                                                                                       |  |         
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|         
|Item 2:   |  | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  | 12      
|         
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|          |  |                                                                                       |  |         
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|Item 3:   |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 17      
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|          |  |                                                                                       |  |         
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|PART II  |  | OTHER INFORMATION                                                                     |  | 18      
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|          |  |                                                                                       |  |         
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|Item 1:   |  | Legal Proceedings                                                                     |  | 18      
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|          |  |                                                                                       |  |         
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|Item 2:   |  | Changes in Securities and Use of Proceeds                                             |  | 18      
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|          |  |                                                                                       |  |         
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|Item 3:   |  | Defaults upon Senior Securities                                                       |  | 18      
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|          |  |                                                                                       |  |         
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|Item 4:   |  | Submission of Matters to a Vote of Securities Holders                                 |  | 18      
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|          |  |                                                                                       |  |         
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|Item 5:   |  | Other Information                                                                     |  | 18      
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|Item 6:   |  | Exhibits and Reports on Form 8-K                                                      |  | 18      
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|          |  |                                                                                       |  |         
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|          |  | Signatures                                                                            |  | 19      

2



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##### Table of Contents






PART I  FINANCIAL INFORMATION




Item 1: Financial Statements




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

|                                                     |                                                                                |                               |         |                          |         |                    |         |           |         |   |        | 
|---------------------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------- | ------- | ------------------------ | ------- | ------------------ | ------- | --------- | ------- | - | ------ | 
|                                                     |                                                                                |                               |         |                          |         | Three
Months Ended
|                                                     |                                                                                |                               |         |                          |         |                   
|                                                     |                                                                                |                               |         |                          |         | March 31,          |         | March 31,
|                                                     |                                                                                |                               |         |                          |         | 2002               |         | 2001     
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|Net sales                                            |                                                                                | $                             | 106,535 |                          |         | $                  | 109,041 |          
|                                                    
|                                                    
|                                                    
|                                                    
|Cost of sales                                        |                                                                                |                               | 83,373  |                          |         |                    | 83,914  |          
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|                                                     | Gross profit                                                                   |                               |         | 23,162                   |         |                    |         | 25,127    |        
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|Operating expenses:                                  |                                                                                |                               |         |                          |         |                    |         |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Fulfillment and customer service                                               |                               |         | 9,472                    |         |                    |         | 12,370    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Marketing, sales and editorial                                                 |                               |         | 10,277                   |         |                    |         | 17,434    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Technology and web site development                                            |                               |         | 9,576                    |         |                    |         | 13,947    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | General and administrative                                                     |                               |         | 6,388                    |         |                    |         | 8,353     |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization                                                  |                               |         | 8,092                    |         |                    |         | 9,953     |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Equity in net loss of equity investments including
amortization of intangibles |                               |         | 528                      |         |                    |         | 6,157     |        
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|                                                     |                                                                                |                               |         | Total operating expenses |         |                    | 44,333  |           |         |   | 68,214 | 
|                                                    
|                                                    
|                                                    
|                                                    
|Loss from operations                                 |                                                                                |                               | (21,171 | )                        |         |                    | (43,087 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|Interest income, net                                 |                                                                                |                               | 634     |                          |         |                    | 3,246   |          
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|                                                     |                                                                                | Loss before minority interest |         |                          | (20,537 | )                  |         |           | (39,841 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Minority interest                                    |                                                                                |                               | 14,874  |                          |         |                    | 28,854  |          
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|                                                     |                                                                                | Net loss                      |         | $                        | (5,663  | )                  |         | $         | (10,987 | )
|                                                     |                                                                                |                               |         |                          |         |                    |         |          
|Basic net loss per common share                      |                                                                                |                               | ($0.13  | )                        |         |                    | ($0.25  | )        
|                                                    
|                                                    
|                                                    
|                                                    
|Basic weighted average common shares outstanding (1) |                                                                                |                               | 43,787  |                          |         |                    | 43,787  |          



|(1) |  | Excludes assumed conversion of Membership Units and the elimination of
minority interest, as it is not dilutive.
|--- |  | ----------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.

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barnesandnoble.com inc.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars, except per share data)
(unaudited)

|                              |                                                                                                                  |                           |        |             |         |              |         |           |         | 
|----------------------------- | ---------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | ----------- | ------- | ------------ | ------- | --------- | ------- | 
|                              |                                                                                                                  |                           |        | March 31,   |         | December 31,
|                              |                                                                                                                  |                           |        | 2002        |         | 2001        
|                              |                                                                                                                  |                           |        |             |         |             
|                              |                                                                                                                  |                           |        | (unaudited) |         |              |         |          
|ASSETS                        |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|Current assets:               |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|                              | Cash and cash equivalents                                                                                        |                           | $      | 86,740      |         |              | $       | 105,125   |        
|                             
|                             
|                             
|                             
|                              | Marketable securities                                                                                            |                           |        | 7,000       |         |              |         | 10,141    |        
|                             
|                             
|                             
|                             
|                              | Receivables, net                                                                                                 |                           |        | 11,295      |         |              |         | 15,698    |        
|                             
|                             
|                             
|                             
|                              | Merchandise inventories                                                                                          |                           |        | 32,978      |         |              |         | 48,563    |        
|                             
|                             
|                             
|                             
|                              | Prepaid expenses and other current assets                                                                        |                           |        | 6,001       |         |              |         | 3,874     |        
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|                              |                                                                                                                  | Total current assets      |        |             | 144,014 |              |         |           | 183,401 | 
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|Fixed assets, net             |                                                                                                                  |                           | 78,254 |             |         |              | 85,771  |          
|                             
|                             
|                             
|                             
|Other non-current assets      |                                                                                                                  |                           | 15,082 |             |         |              | 18,204  |          
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|                              |                                                                                                                  | Total assets              |        | $           | 237,350 |              |         | $         | 287,376 | 
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|LIABILITIES AND EQUITY        |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|Current liabilities:          |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|                              | Accounts payable                                                                                                 |                           | $      | 6,521       |         |              | $       | 4,652     |        
|                             
|                             
|                             
|                             
|                              | Accrued liabilities                                                                                              |                           |        | 74,632      |         |              |         | 90,590    |        
|                             
|                             
|                             
|                             
|                              | Due to affiliate                                                                                                 |                           |        | 28,142      |         |              |         | 43,531    |        
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|                              |                                                                                                                  | Total current liabilities |        |             | 109,295 |              |         |           | 138,773 | 
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|Minority interest             |                                                                                                                  |                           | 90,960 |             |         |              | 105,845 |          
|                             
|                             
|                             
|                             
|Stockholders equity:         |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|                              | Preferred Stock: $0.001 par value; 50,000,000 shares
authorized; none issued and outstanding                     |                           |        |            |         |              |         |          |        
|                             
|                             
|                             
|                             
|                              | Common Stock Series A; $0.001 par value; 750,000,000
shares authorized; 43,787,748 shares issued
and outstanding |                           |        | 44          |         |              |         | 44        |        
|                             
|                             
|                             
|                             
|                              | Common Stock Series B; $0.001 par value; 1,000 shares
authorized; 1 share issued and outstanding                 |                           |        |            |         |              |         |          |        
|                             
|                             
|                             
|                             
|                              | Common Stock Series C; $0.001 par value; 1,000 shares
authorized; 1 share issued and outstanding                 |                           |        |            |         |              |         |          |        
|                             
|                             
|                             
|                             
|                              | Paid-in capital                                                                                                  |                           |        | 189,279     |         |              |         | 189,279   |        
|                             
|                             
|                             
|                             
|                              | Accumulated deficit                                                                                              |                           |        | (152,228)   |         |              |         | (146,565) |        
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|                              | Total stockholders equity                                                                                       |                           |        | 37,095      |         |              |         | 42,758    |        
|                              |                                                                                                                  |                           |        |             |         |              |         |          
|Commitments and contingencies |                                                                                                                  |                           |        |             |         |              |         |          
|                             
|                             
|                             
|                             
|                              | Total liabilities and stockholders equity                                                                       |                           | $      | 237,350     |         |              | $       | 287,376   |        
|                              |                                                                                                                  |                           |        |             |         |              |         |          

See accompanying notes to consolidated financial statements.

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barnesandnoble.com inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |           |         |      |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------ | ----------------------------------------------------- | --------------------------------------------------------- | ------------------------------------------- | ------- | ------------------ | ------- | --------- | ------- | ---- | ------- | -
|                                                 |                                                                                |                                                       |                                                           |                                             |         | Three Months Ended
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                   
|                                                 |                                                                                |                                                       |                                                           |                                             |         | March 31,          |         | March 31,
|                                                 |                                                                                |                                                       |                                                           |                                             |         | 2002               |         | 2001     
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|Cash flows from operating activities:            |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|                                                
|                                                
|                                                
|                                                
|                                                 | Net loss                                                                       |                                                       | $                                                         | (5,663                                      | )       |                    | $       | (10,987   | )      
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net loss to net cash
flows from operating activities: |                                                       |                                                           |                                             |         |                    |         |           |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Depreciation and amortization                         |                                                           |                                             | 8,375   |                    |         |           | 13,265  |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Decrease in receivables, net                          |                                                           |                                             | 4,403   |                    |         |           | 7,067   |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Decrease in merchandise inventories                   |                                                           |                                             | 15,585  |                    |         |           | 4,750   |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Increase in prepaid expenses and other current assets |                                                           |                                             | (2,127  | )                  |         |           | (5,043  | )   
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Increase in accounts payable                          |                                                           |                                             | 1,869   |                    |         |           | 10,958  |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Decrease in due to affiliate                          |                                                           |                                             | (15,389 | )                  |         |           | (9,790  | )   
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Decrease in accrued liabilities                       |                                                           |                                             | (15,957 | )                  |         |           | (22,072 | )   
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Minority interest in loss                             |                                                           |                                             | (14,874 | )                  |         |           | (28,854 | )   
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|                                                 |                                                                                |                                                       |                                                           | Net cash flows used in operating activities |         |                    | (23,778 | )         |         |      | (40,706 | )
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|Cash flows from investing activities:            |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Purchases of fixed assets                             |                                                           |                                             | (872    | )                  |         |           | (3,646  | )   
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Sales of marketable securities                        |                                                           |                                             | 3,141   |                    |         |           | 1,951   |     
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                | Decrease in other non-current assets                  |                                                           |                                             | 3,124   |                    |         |           | 1,512   |     
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|                                                 |                                                                                |                                                       | Net cash flows provided by (used in) investing activities |                                             |         | 5,393              |         |           |         | (183 | )      
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|Net change in cash and cash equivalents          |                                                                                |                                                       | (18,385                                                   | )                                           |         |                    | (40,889 | )        
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                                |                                                       | 105,125                                                   |                                             |         |                    | 179,609 |          
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          
|Cash and cash equivalents at end of period       |                                                                                | $                                                     | 86,740                                                    |                                             |         | $                  | 138,720 |          
|                                                 |                                                                                |                                                       |                                                           |                                             |         |                    |         |          

See accompanying notes to consolidated financial statements.

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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

The unaudited consolidated financial statements include the accounts of
barnesandnoble.com inc. (the Company) and barnesandnoble.com llc (B&N.com).

In the opinion of the Companys management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly its consolidated
financial position as of March 31, 2002 and the results of its operations and
its cash flows for the three months then ended. These consolidated financial
statements are condensed and therefore do not include all of the information
and footnotes required by generally accepted accounting principles. The
consolidated financial statements should be read in conjunction with the
Companys Annual Report on Form 10-K for the year ended December 31, 2001. The
Company followed the same accounting policies in preparation of this report as
in such Annual Report. Operating results for the three months ended March 31,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.



|1. |  | Organization
|-- |  | ------------

The Company is a holding company whose sole asset is a 27.6% equity
interest in B&N.com, an internet-based retailer of books, music, DVD/video and
magazine subscriptions, and whose sole business is to manage the operations of
B&N.com. As the sole manager of B&N.com, the Company controls all of the
affairs of B&N.com and as a result, B&N.com is consolidated with the Company
for financial statement purposes. Barnes & Noble, Inc. (Barnes & Noble) and
Bertelsmann A.G. (Bertelsmann) each beneficially own a 36.2% equity interest
(equivalent to an aggregate of 115 million Membership Units) in B&N.com. Each
Membership Unit held by these companies is convertible into one share of the
Companys Class A Common Stock. As reflected in the consolidated statements of
operations, the loss before minority interest represents the total loss for the
period and the net loss represents the portion of the loss attributable to the
Company.



|2. |  | Reclassifications
|-- |  | -----------------

Certain prior-period amounts have been reclassified for comparative
purposes to conform to the 2002 presentation.



|3. |  | Accrued Special Charges
|-- |  | -----------------------

In connection with the November 16, 2000 acquisition of Fatbrain.com, Inc.
(Fatbrain), B&N.com assessed and formulated plans to restructure certain
operations of Fatbrain. These plans involved the closure of the Fatbrain
fulfillment facility in Kentucky as well as a consolidation of administrative
operations reducing the workforce at Fatbrains office in Santa Clara,
California. The objectives of the plans were to consolidate operations and
leverage overhead expenses. The costs associated with the consolidation effort
were recorded as liabilities in the purchase business combination and consist
of severance and other employee costs of $1,059, all of which has been paid
through the end of the first quarter of 2002, and facility closure costs of
$1,876, of which $1,424 has been paid through the end of the first quarter
2002. Unpaid balances are included in accrued liabilities.

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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

An impairment of fixed assets and other special charges of $88,213 ($0.56
per share assuming conversion of membership units) and $75,051 ($0.51 per share
assuming conversion of membership units) were recorded as a component of
operating expenses during the fourth quarters of 2001 and 2000, respectively.
These charges were primarily related to the impairment of fixed and other
assets, including equity investments, as well as the consolidation of
fulfillment operations and administrative functions. At March 31, 2002, the
accrued liability associated with the special charges was $8,467 and consisted
of the following:

|                                 |  |           |        |          |  |           |       |            |  |           |       |  |  |   |       |  |  |   |       | 
|-------------------------------- |  | --------- | ------ | -------- |  | --------- | ----- | ---------- |  | --------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                                 |  | Balance   |        | 2002     |  | Balance   |       | Due Within |  | Due After
|                                 |  | 31-Dec-01 |        | Payments |  | 31-Mar-02 |       | 12 Months  |  | 12 Months
|                                 |  |           |        |          |  |           |       |            |  |          
|Facility/Lease Termination Costs |  | $         | 6,997  |          |  | $         | 1,236 |            |  | $         | 5,761 |  |  | $ | 1,522 |  |  | $ | 4,239 | 
|                                
|                                
|                                
|                                
|Employee Termination Benefits    |  |           | 4,436  |          |  |           | 2,228 |            |  |           | 2,208 |  |  |   | 2,208 |  |  |   |      | 
|                                
|                                
|                                
|                                
|Other Impairment Charges         |  |           | 2,014  |          |  |           | 1,516 |            |  |           | 498   |  |  |   | 498   |  |  |   |      | 
|                                 |  |           |        |          |  |           |       |            |  |           |       |  |  |   |       |  |  |   |       | 
|                                 |  | $         | 13,447 |          |  | $         | 4,980 |            |  | $         | 8,467 |  |  | $ | 4,228 |  |  | $ | 4,239 | 
|                                 |  |           |        |          |  |           |       |            |  |           |       |  |  |   |       |  |  |   |       | 



|4. |  | Investments in Equity Method Investees
|-- |  | --------------------------------------

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

In January 2000, B&N.com acquired a 32% common stock interest in enews,
inc. (enews), the largest retailer of magazine subscriptions on the Internet,
and warrants to acquire additional common stock, for $26,428 in cash and 714
shares of the Companys stock valued at $12,857, to expand its presence in the
growing on-line magazine subscription market. Through March 31, 2002, the
Company increased its investment in enews to approximately 46.2%.



|5. |  | Related Party Transactions
|-- |  | --------------------------

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

B&N.com entered into a Supply Agreement dated October 31, 1998, as
amended, with Barnes & Noble (the Supply Agreement), whereby Barnes & Noble
has agreed to supply inventory to B&N.com through Barnes & Nobles distribution
facilities and purchasing departments. Pursuant to the Supply Agreement,
Barnes

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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

& Noble charges B&N.com its actual cost to acquire the inventory plus any
incremental overhead incurred by Barnes & Noble in connection with providing
such merchandise supply services. The Company purchased $25,581 and $27,557
from Barnes & Noble representing 37% and 44% of the Companys purchases for the
three months ended March 31, 2002 and 2001, respectively. The charges for
incremental overhead for the three months ended March 31, 2002 and 2001 were
$537 and $508, respectively. At March 31, 2002, $28,142 remained payable to
Barnes & Noble in connection with such purchases.

Under a Services Agreement, dated as of October 31, 1998, as amended,
between B&N.com and Barnes & Noble (the Services Agreement), B&N.com receives
various administrative services from Barnes & Noble, including, among other
things, services for payroll processing, benefits administration, insurance
(property and casualty, medical, dental and life) and tax administration. In
accordance with the terms of the Services Agreement, B&N.com reimburses Barnes
& Noble in an amount equal to the third-party expenses it incurs to provide
such services, plus any incremental internal costs. B&N.com was charged $256
and $415 for such services during the periods ended March 31, 2002 and 2001,
respectively.

B&N.com purchased merchandise from Calendar Club, L.L.C. (Calendar
Club), a company engaged in the wholesaling and retailing of calendars, in
which Barnes & Noble owns a 73.9% interest. B&N.coms purchases from Calendar
Club for the three months ended March 31, 2002 totaled $102.

B&N.com subleases from Barnes & Noble approximately one-third of a 300,000
square foot warehouse facility located in New Jersey. B&N.com was charged by
Barnes & Noble $127 and $120 for such subleased space during the periods ended
March 31, 2002 and 2001, respectively. The amount paid to Barnes & Noble by
B&N.com approximates the cost per square foot paid by Barnes & Noble as tenant
pursuant to its lease of the space from an unaffiliated third party.

Since 1999, B&N.com has used AEC One Stop Group, Inc. (AEC), as its sole
music supplier, and as one of its suppliers of DVD/video. AEC is among the
largest wholesale distributors of music, videos and DVDs in the United States.
AEC also provides B&N.com with a music, DVD and video product database.
Subsequent to the initial supply arrangement between AEC and B&N.com, AECs
parent corporation was acquired by an investor group in which Leonard Riggio,
Chairman of the Board of the Company and B&N.com, became a minority investor.
B&N.com was charged by AEC $7,043 and $6,806 in connection with this agreement
for merchandise purchased during the periods ended March 31, 2002 and 2001,
respectively. In addition, B&N.com was charged by AEC $69 and $54 for
database services during the three months ended March 31, 2002 and 2001,
respectively. At March 31, 2002, $4,108 remained payable to AEC.

B&N.com licenses the Barnes & Noble name under a royalty-free license
agreement, dated as of October 31, 1998, as amended, between B&N.com and Barnes
& Noble College Bookstores, Inc. (the License Agreement), of which Leonard
Riggio is the principal stockholder. Pursuant to the License Agreement, the
Company has been granted an exclusive license to use the Barnes & Noble name
and trademark (excluding sales of college textbooks). Under a separate
agreement reached in January 2001, between the Company and Textbooks.com, Inc.
(Textbooks.com) a corporation owned by Leonard Riggio, B&N.com was granted
the right to sell college textbooks on the Internet using the Barnes & Noble
name. Pursuant to this agreement, B&N.com pays Textbooks.com a royalty on
revenues (net of product returns, applicable sales tax and excluding shipping
and handling) realized by the Company from the sale of books designated as
textbooks. The term of

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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

the agreement is for five years and renews annually for additional
one-year periods unless terminated 12 months prior to the end of any given
term. For the periods ended March 31, 2002 and 2001, the Company recorded
royalty expense of $1,442 and $1,817, respectively, under the terms of this
agreement.

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

Barnes & Noble commenced a marketing program in November 2000, whereby a
customer purchases a Readers Advantage Card for a non-refundable annual
membership fee of $25.00. With this card, customers can receive discounts of
10% on all Barnes & Noble store purchases and 5% on all of their purchases
through the B&N.com Web site. B&N.com and Barnes & Noble have agreed to share
the expenses, net of revenue generated from the sale of the cards, related to
this program in proportion to the discounts customers receive on purchases with
each company. B&N.coms net revenue generated from this program for the three
months ended March 31, 2002 was $380. Net revenue generated for the three
months ended March 31, 2001 was negligible.

B&N.com ships, through its fulfillment centers, various customer orders on
behalf of Barnes & Noble to Barnes & Noble retail stores as well as to Barnes &
Noble customers homes. B&N.com charges Barnes & Noble the costs associated
with such shipments plus any incremental overhead incurred by B&N.com to
process these orders. The fees received are recorded as a reduction of
B&N.coms total fulfillment expense. For the periods ended March 31, 2002 and
2001, B&N.com recorded $165 and $203, respectively, for shipping and handling
from Barnes & Noble. In addition, during the year 2001, B&N.com and Barnes &
Noble entered into an agreement whereby B&N.com receives a commission on all
items ordered by customers at Barnes & Noble stores and shipped directly to
customers homes by B&N.com. Commissions for these sales were recorded as
revenue and amounted to $301 for the three months ended March 31, 2002.

Barnes & Noble subleased warehouse space from the Company in Reno, Nevada.
B&N.com charged Barnes & Noble $500 and $485 for such subleased space in the
periods ended March 31, 2002 and 2001, respectively. Additionally, B&N.com
sold $6,186 of warehouse equipment from its Reno warehouse to Barnes & Noble in
2001. The equipment was sold to Barnes & Noble at its original cost. B&N.com
recently determined it could not effectively utilize the full capacity of its
Reno, Nevada distribution center. Accordingly, following Board approval on
January 29, 2002, B&N.com agreed to transfer the Reno warehouse lease and sell
B&N.coms inventory located in Reno to Barnes & Noble. Barnes & Noble
purchased the inventory from B&N.com at cost for approximately $9,877. The
Board of Barnes & Noble also approved Barnes & Nobles assumption of the lease
obligation and the hiring of all of the employees at the Reno facility. The
Reno lease assignment and the transfer of the operations of the Reno facility
to Barnes & Noble was completed in April 2002.

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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

In 2000, B&N.com began purchasing new and used textbooks directly from
MBS, a corporation majority-owned by Leonard Riggio. B&N.coms total purchases
for the year ended March 31, 2002 and 2001 were $6,507 and $5,974,
respectively. In addition, B&N.com maintains a link on its Web site called
Sell Your Textbooks which is hosted by MBS and through which B&N.com
customers are able to sell used books directly to MBS. B&N.com is paid a
commission based on the price paid by MBS to the consumer. Total commissions
received for the three months ended March 31, 2002 were $15.

Under a Strategic Relationship Agreement, dated as of May 1, 2001 (the
Strategic Relationship Agreement), between B&N.com and GameStop, Inc.
(GameStop), a majority-owned subsidiary of Barnes & Noble, B&N.coms Web site
refers customers to the GameStop Web site for purchases of video game hardware,
software and accessories and PC entertainment software. GameStop pays B&N.com
a referral fee based on its net sales revenue from certain eligible purchases
made by customers as a result of the redirection from the B&N.com Web site.
Either party may terminate the Strategic Relationship Agreement after May 1,
2002 on 60 days notice. Commissions of $57 were recorded for the three months
ended March 31, 2002 under this agreement.

B&N.com has a 46.2% equity stake in enews, a company engaged in selling
magazine subscriptions on the Internet, and accounts for this investment under
the equity method. Substantially all of the balance of the shares are owned by
Barnes & Noble. B&N.com fulfills a majority of orders for magazine
subscriptions through enews and records a commission on these sales. Beginning
in October 2000, enews subleased space from B&N.com at its New York office for
an annual rent of $95. B&N.com recorded commissions of $148 and $70 for the
periods ended March 31, 2002 and 2001, respectively, and was reimbursed $142
for expenses incurred on behalf of enews for the period ended March 31, 2002.

Michael N. Rosen, a director of the Company, is also the Chairman of
Robinson Silverman Pearce Aronsohn & Berman LLP, outside counsel to the Company
and B&N.com.



|6. |  | Recent Accounting Pronouncements
|-- |  | --------------------------------

In June 2001, the Financial Accounting Standards Board finalized FASB
Statements No. 141, Business Combinations(SFAS 141), and No. 142, Goodwill
and Other Intangible Assets(SFAS 142). SFAS 141 requires the use of the
purchase method of accounting and prohibits the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001.
SFAS 141 also requires that the Company recognize acquired intangible assets
apart from goodwill if the acquired intangible assets meet certain criteria.
SFAS 141 applies to all business combinations initiated after June 30, 2001 and
for purchase business combinations completed on or after July 1, 2001. It also
requires that, upon adoption of SFAS 142, the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.

SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be tested for impairment
in accordance with the

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barnesandnoble.com inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2002 and March 31, 2001
(in thousands of dollars, except per share data)
(unaudited)

guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires the Company to complete a transitional goodwill
impairment test six months from the date of adoption. The Company is also
required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.

The Companys previous business combinations were accounted for using the
purchase method. As of March 31, 2002, the net carrying amount of goodwill is
$13,777. Currently the Company is assessing but has not yet determined how the
adoption of SFAS 142 will impact its financial position and results of
operations.

The effect of adoption of SFAS No. 142 on the reported net loss for the
prior period is as follows:

|                                      |                          |      |        |       |   |   |         |       |  
|------------------------------------- | ------------------------ | ---- | ------ | ----- | - | - | ------- | ----- | -
|For the three months ended March 31,  |                          | 2002 |        | 2001 
|                                      |                          |      |        |      
|Reported net loss                     |                          | $    | (5,663 | )     |   | $ | (10,987 | )    
|                                     
|                                     
|                                     
|                                     
|Add back: Amortization of goodwill    |                          |      |       |       |   |   | 5,032   |      
|                                      |                          |      |        |       |   |   |         |      
|Net loss, as adjusted                 |                          | $    | (5,663 | )     |   | $ | (5,955  | )    
|                                      |                          |      |        |       |   |   |         |      
|Basic net loss per share:             |                          |      |        |       |   |   |         |      
|                                     
|                                     
|                                     
|                                     
|                                      | Reported net loss        |      | $      | (0.13 | ) |   | $       | (0.25 | )
|                                     
|                                     
|                                     
|                                     
|                                      | Amortization of goodwill |      |        |      |   |   |         | 0.11  |  
|                                      |                          |      |        |       |   |   |         |      
|Basic net loss per share, as adjusted |                          | $    | (0.13  | )     |   | $ | (0.14   | )    
|                                      |                          |      |        |       |   |   |         |      

In August 2001, the FASB also issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, that is applicable to financial
statements issued for fiscal years beginning after December 15, 2001. The
FASBs new rules on asset impairment supersede SFAS No. 121, and portions of
Accounting Principles Bulletin Opinion 30, Reporting the Results of
Operations. This new standard provides a single accounting model for
long-lived assets to be disposed of and significantly changes the criteria that
would have to be met to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are not depreciated
and are stated at the lower of fair value and carrying amount. The adoption of
this Statement has not had material impact on the Companys financial position
and operating results.

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

Overview

The Company is a holding company whose sole asset is its 27.6% equity
interest in B&N.com and whose sole business is acting as sole manager of
B&N.com. B&N.com launched its initial online store in March 1997 and since
that time has become the sixth largest e-commerce Web site, based on the
Jupiter Media Metrix March 2002 report.

B&N.com has pursued a strategy of focusing on the sale of books, music,
DVD/video and magazine subscriptions. Since opening its online store
(www.bn.com) in March 1997, B&N.com has sold products to more than 12 million
customers in 228 countries. B&N.coms online bookstore includes the largest
in-stock selection of in-print book titles with access to 1 million titles for
immediate delivery, supplemented by more than 20 million listings from its
nationwide network of out-of-print, rare and used book dealers. B&N.com offers
its customers fast delivery, easy and secure ordering and rich editorial
content.

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

Results of Operations

Net sales

|          |  |                              |         |      |  |          |         |  |  |  |    |   
|--------- |  | ---------------------------- | ------- | ---- |  | -------- | ------- |  |  |  | -- | --
|          |  | Three Months Ended March 31,
|          |  |                             
|          |  | (in thousands of dollars)   
|          |  | 2002                         |         | 2001 |  | % Change
|          |  |                              |         |      |  |         
|Net sales |  | $                            | 106,535 |      |  | $        | 109,041 |  |  |  | (2 | %)

Net sales are comprised of sales of books, music, video and eBooks and
related products, net of returns and promotional discounts, as well as outbound
shipping and handling charges. Units sold to the Companys consumer customers
increased significantly for the three months ended March 31, 2002, offset by a
decline in units sold to corporate customers. Net sales reflect the impact of
the Companys free shipping promotion, which was not in effect during the first
quarter of 2001. In addition, first quarter 2001 results included $3,521 of
sales from Fatbrain retail stores which were closed in the fourth quarter of
2001 as well as sales from product lines that the Company no longer offers.

Gross profit

|             |  |                              |        |      |  |          |        |   |  |  |    |   
|------------ |  | ---------------------------- | ------ | ---- |  | -------- | ------ | - |  |  | -- | --
|             |  | Three Months Ended March 31,
|             |  |                             
|             |  | (in thousands of dollars)   
|             |  | 2002                         |        | 2001 |  | % Change
|             |  |                              |        |      |  |         
|Gross profit |  | $                            | 23,162 |      |  | $        | 25,127 |   |  |  | (8 | %)
|            
|            
|            
|            
|Gross margin |  |                              | 21.7   | %    |  |          | 23.0   | % |  |  |    |   

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##### Table of Contents



Gross profit is net sales less the cost of sales, which consists of the
cost of merchandise sold to customers as well as inbound and outbound shipping
costs. Gross profit decreased as a result of the Companys introduction of a
free shipping promotion in July 2001, resulting in a reduction of shipping
revenue as a percentage of net sales, which negatively affects the gross
margin.

Fulfillment and customer service

|                                 |  |                              |       |      |  |          |        |   |  |  |     |   
|-------------------------------- |  | ---------------------------- | ----- | ---- |  | -------- | ------ | - |  |  | --- | --
|                                 |  | Three Months Ended March 31,
|                                 |  |                             
|                                 |  | (in thousands of dollars)   
|                                 |  | 2002                         |       | 2001 |  | % Change
|                                 |  |                              |       |      |  |         
|Fulfillment and customer service |  | $                            | 9,472 |      |  | $        | 12,370 |   |  |  | (23 | %)
|                                
|                                
|                                
|                                
|Percentage of net sales          |  |                              | 8.9   | %    |  |          | 11.3   | % |  |  |     |   

Fulfillment and customer service expenses consist primarily of the cost of
operating and staffing distribution and customer service centers. Fulfillment
and customer service expenses decreased on an absolute basis and as a
percentage of net sales primarily as a result of achieving more efficiency in
operations. B&N.com anticipates that its fulfillment and customer service
costs will continue to decrease in absolute dollars and as a percentage of net
sales based on anticipated further productivity improvements.

Marketing, sales and editorial

|                               |  |                              |        |      |  |          |        |   |  |  |     |   
|------------------------------ |  | ---------------------------- | ------ | ---- |  | -------- | ------ | - |  |  | --- | --
|                               |  | Three Months Ended March 31,
|                               |  |                             
|                               |  | (in thousands of dollars)   
|                               |  | 2002                         |        | 2001 |  | % Change
|                               |  |                              |        |      |  |         
|Marketing, sales and editorial |  | $                            | 10,277 |      |  | $        | 17,434 |   |  |  | (41 | %)
|                              
|                              
|                              
|                              
|Percentage of net sales        |  |                              | 9.6    | %    |  |          | 16.0   | % |  |  |     |   

Marketing, sales and editorial expenses consist primarily of advertising
and promotional expenditures, as well as payroll and related expenses for
personnel engaged in marketing and selling activities. Marketing and sales
expenses decreased primarily due to a significant reduction in B&N.coms
advertising and promotional expenditures. Such expenses decreased in absolute
dollars and as a percentage of net sales due to the Companys focus on more
targeted and measurable marketing programs. The Company expects to continue
such focus in order to continue to drive down these expenses as a percentage of
sales. Marketing, sales and editorial expenses are expected to decline both in
dollars and as a percentage of net sales for the remainder of 2002 as further
efficiencies are realized.

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Technology and web site development

|                                    |  |                              |       |      |  |          |        |   |  |  |     |   
|----------------------------------- |  | ---------------------------- | ----- | ---- |  | -------- | ------ | - |  |  | --- | --
|                                    |  | Three Months Ended March 31,
|                                    |  |                             
|                                    |  | (in thousands of dollars)   
|                                    |  | 2002                         |       | 2001 |  | % Change
|                                    |  |                              |       |      |  |         
|Technology and web site development |  | $                            | 9,576 |      |  | $        | 13,947 |   |  |  | (31 | %)
|                                   
|                                   
|                                   
|                                   
|Percentage of net sales             |  |                              | 9.0   | %    |  |          | 12.8   | % |  |  |     |   

Technology and web site development expenses consist principally of
payroll and related expenses for Web page production and computer network
operations personnel and consultants, and costs of infrastructure related to
systems and telecommunications. The decrease for the three months ended March
31, 2002 in technology and web site development expenses was primarily
attributable to increased infrastructure efficiency and reduced labor expenses
during the quarter. Technology and web site development expenses are expected
to continue to decrease in dollars and as a percentage of sales for the
remainder of 2002 as further efficiencies are realized.

General and administrative

|                           |  |                              |       |      |  |          |       |   |  |  |     |   
|-------------------------- |  | ---------------------------- | ----- | ---- |  | -------- | ----- | - |  |  | --- | --
|                           |  | Three Months Ended March 31,
|                           |  |                             
|                           |  | (in thousands of dollars)   
|                           |  | 2002                         |       | 2001 |  | % Change
|                           |  |                              |       |      |  |         
|General and administrative |  | $                            | 6,388 |      |  | $        | 8,353 |   |  |  | (24 | %)
|                          
|                          
|                          
|                          
|Percentage of net sales    |  |                              | 6.0   | %    |  |          | 7.7   | % |  |  |     |   

General and administrative expenses primarily consist of payroll and
related expenses for executive, finance and administrative personnel,
recruiting, professional fees and other general corporate expenses including
costs to process credit card transactions. The decrease in general and
administrative expenses was a result of the Companys efforts to consolidate
operations. B&N.com expects general and administrative expenses to decrease as
B&N.com continues its focus on expense control.

Depreciation and amortization

|                              |  |                              |       |      |  |          |       |   |  |  |     |   
|----------------------------- |  | ---------------------------- | ----- | ---- |  | -------- | ----- | - |  |  | --- | --
|                              |  | Three Months Ended March 31,
|                              |  |                             
|                              |  | (in thousands of dollars)   
|                              |  | 2002                         |       | 2001 |  | % Change
|                              |  |                              |       |      |  |         
|Depreciation and amortization |  | $                            | 8,092 |      |  | $        | 9,953 |   |  |  | (19 | %)
|                             
|                             
|                             
|                             
|Percentage of net sales       |  |                              | 7.6   | %    |  |          | 9.1   | % |  |  |     |   

The decrease in depreciation and amortization expenses is the result of
lower capital expenditures in fiscal 2001 as compared with fiscal 2000. Fixed
asset purchases for 2001 totaled $10.5 million as compared with $103.7 million
for 2000.

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

|                                                                                       |  |                              |     |      |  |          |       |   |  |  |     |   
|-------------------------------------------------------------------------------------- |  | ---------------------------- | --- | ---- |  | -------- | ----- | - |  |  | --- | --
|                                                                                       |  | Three Months Ended March 31,
|                                                                                       |  |                             
|                                                                                       |  | (in thousands of dollars)   
|                                                                                       |  | 2002                         |     | 2001 |  | % Change
|                                                                                       |  |                              |     |      |  |         
|Equity in net loss of equity
investments including related
amortization of intangibles |  | $                            | 528 |      |  | $        | 6,157 |   |  |  | (91 | %)
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Percentage of net sales                                                                |  |                              | 0.5 | %    |  |          | 5.6   | % |  |  |     |   

Equity in net loss of equity investments consists of losses from the
Companys equity investments in enews for the first quarter ended March 31,
2002. Equity in net loss of equity investments decreased in the three months
ended March 31, 2002 in comparison with the prior year period as enews realized
lower losses year over year. In addition, the 2001 period included an
investment in MightyWords, Inc. (MightyWords), a provider of digital content,
which the Company no longer holds, as well as goodwill, which is no longer
amortized as a result of the adoption of SFAS No. 142. The carrying balance of
goodwill is assessed for recoverability on a periodic basis.

Interest income, net

|                        |  |                              |     |      |  |          |       |   |  |  |     |   
|----------------------- |  | ---------------------------- | --- | ---- |  | -------- | ----- | - |  |  | --- | --
|                        |  | Three Months Ended March 31,
|                        |  |                             
|                        |  | (in thousands of dollars)   
|                        |  | 2002                         |     | 2001 |  | % Change
|                        |  |                              |     |      |  |         
|Interest income, net    |  | $                            | 634 |      |  | $        | 3,246 |   |  |  | (80 | %)
|                       
|                       
|                       
|                       
|Percentage of net sales |  |                              | 0.6 | %    |  |          | 3.0   | % |  |  |     |   

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

Income Taxes

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

Liquidity and Capital Resources

As of March 31, 2002, the Companys cash, cash equivalents and short-term
marketable securities were $93.7 million, compared to $115.3 million on
December 31, 2001. The Company continues to have a debt-free balance sheet.

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Net cash flows used in operating activities were $23.8 million for the
three months ended March 31, 2002 and $40.7 million for the three months ended
March 31, 2001. Cash used for the three months ended March 31, 2002 was
attributable to a net loss of $5.7 million, a corresponding decrease in
minority interest of $14.9 million, a decrease in accrued liabilities of $16.0
million, a decrease in payables to affiliates of $15.4 million and an increase
in prepaid expenses and other current assets of $2.1 million. This was offset
by a $15.6 million decrease in merchandise inventories, a decrease in
receivables of $4.4 million, depreciation and amortization of $8.4 million and
an increase of $1.9 million in accounts payable. Cash used for the three
months ended March 31, 2001 was attributable to a net loss of $11.0 million and
a corresponding decrease in minority interest of $28.9 million, a decrease in
payables to affiliates of $9.8 million, a decrease in accrued liabilities of
$22.1 million and an increase of $5.0 million in prepaid expenses and other
current assets. This was partially offset by an $11.0 million increase in
accounts payable and depreciation and amortization of $13.3 million. In addition, merchandise inventories decreased $4.8 million
and receivables decreased $7.1 million.

Net cash flows from investing activities of $5.4 million for the three
months ended March 31, 2002 were attributable to a decrease of $3.1 million in other
non-current assets and sales of marketable securities of
$3.1 million, offset by purchases of fixed assets totaling
$0.9 million. Net
cash flows used in investing activities of $0.2 million for the three months
ended March 31, 2001 were attributable to purchases of fixed assets totaling
$3.6 million, offset by a $1.5 million decrease in other non-current
assets and sales of marketable securities of $1.9 million.

At March 31, 2002, the Companys principal sources of liquidity consisted
of $86.7 million in cash and cash equivalents and $7.0 million in short-term
marketable securities. As of March 31, 2002, the Companys remaining principal
commitments consisted of obligations outstanding under operating leases. The
Company has pledged a portion of its marketable securities as collateral for
stand-by letters of credit that guarantee certain of the Companys real
property lease obligations. At March 31, 2002, the total amount of collateral
pledged under these agreements was $4.4 million. The Company has no unconsolidated
majority owned subsidiaries and no interests in special purpose entities.

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

Forward-Looking Statements

This report may contain certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to the Company and B&N.com that are based on the beliefs
of the management of the Company as well as assumptions made by and information
currently available to the management of the Company. When used in this
report, the words anticipate, believe, estimate, expect, intend,
plan and similar expressions, as they relate to the Company, B&N.com or the
management of the Company, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events, the outcome of which is subject to certain risks, including among

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




Item 3: Quantitative and Qualitative Disclosure about Market Risk

The Company invested in enews and MightyWords primarily for strategic
purposes. Such investments are accounted for under the equity method if they
give the Company the ability to exercise significant influence, but not
control, over an investee. This is generally defined as an ownership interest
in voting stock of the investee between 20% and 50%, although other factors,
such as representation on the investees Board of Directors and the impact of
commercial arrangements, are considered in determining whether the equity
method is appropriate. The Company regularly reviews the carrying value of its
investments and identifies and records impairment losses when events and
circumstances indicate that such assets are permanently impaired. In December
2001, B&N.com considered the MightyWords investment impaired as the MightyWords
Board of Directors had voted to dissolve the company and distribute the
remaining cash back to investors after obligations of the company were met.
B&N.com recorded an impairment charge of $9.2 million related to equity method
and other investments in December 2001. At March 31, 2002, the Companys
equity-method investments amounted to $0.9 million. No impairment is
considered to exist at March 31, 2002 beyond that which was recorded at
December 31, 2001. These investments are in companies involved in the Internet
and e-commerce industries and their fair values are subject to significant
fluctuations due to volatile market conditions.

B&N.com invests certain of its excess cash in debt instruments of the U.S.
Government and its agencies, and of high quality corporate issuers. All highly
liquid instruments with a remaining maturity of three months or less are
considered cash equivalents; those with remaining maturities greater than three
months and less than one year are classified as marketable securities.
Long-term marketable securities mature within two years. B&N.com is exposed to
interest rate risk on the debt instruments that it holds. The values of the
Companys marketable securities are subject to market price volatility. As of
March 31, 2002, the Companys investments in cash, cash equivalents and
marketable securities totaled approximately $93.7 million.

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PART II  OTHER INFORMATION




Item 1: Legal Proceedings

No material developments have occurred with respect to previously reported
legal proceedings.




Item 2: Changes in Securities and Use of Proceeds

The effective date of the Companys registration statement, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-64211) relating to the
initial public offering of its Class A Common Stock, was May 25, 1999.
Pursuant to the initial public offering, a total of 28,750,000 shares of the
Companys Class A Common Stock were sold to an underwriting syndicate. The
managing underwriters of the initial public offering were Goldman, Sachs & Co.,
Merrill Lynch & Co., Salomon Smith Barney and Wit Capital Corporation. The
initial public offering was completed on May 28, 1999, at an initial public
offering price of $18.00 per share. The initial public offering resulted in
gross proceeds to the Company of $517.5 million, $31.1 million of which were
applied to the underwriting discount and approximately $2.0 million of which
were applied to initial public offering expenses. As a result, net proceeds of
the initial public offering to the Company were approximately $484.4 million.
Such net proceeds were used by the Company to acquire 28,750,000 Membership
Units of B&N.com. As of March 31, 2002, B&N.com has invested approximately $7.0
million of such net proceeds in short-term marketable securities. The remaining
funds have been used to purchase fixed assets and support the operations of
B&N.com. Except as indicated in the Companys prospectus and other reports
filed with the Securities and Exchange Commission, none of the net proceeds of
the initial public offering were paid by the Company or B&N.com, directly or
indirectly, to any director, officer or general partner of the Company or
B&N.com or any of their associates, or to any persons owning ten percent or
more of any class of the Companys equity securities, or any affiliates of the
Company or B&N.com.




Item 3: Defaults upon Senior Securities

None




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

None




Item 5: Other Information

None




Item 6: Exhibits and Reports on Form 8-K



| | (a) |  | No report on 8-K was filed by the Company during the
fiscal quarter for which this report is filed.
| | --- |  | ---------------------------------------------------------------------------------------------------

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SIGNATURES

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

|                   |  |                                      |  |                                                                                                        
|------------------ |  | ------------------------------------ |  | -------------------------------------------------------------------------------------------------------
|                   |  | barnesandnoble.com inc.
(Registrant)
|                  
|                  
|                  
|                  
|                   |  |                                      |  |                                                                                                        
|                  
|                  
|                  
|                  
|Date: May 14, 2002 |  | By:                                  |  | /s/ Kevin M. Frain

Kevin M. Frain
Chief Financial Officer
(Principal Accounting and
Financial Officer)

19