<PAGE>   1
                                                                      EXHIBIT 13

[BOOKS-A-MILLION LOGO]

PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS


Selected Consolidated
Financial Data
(For fiscal years 1997-2001)


<TABLE>
<CAPTION>
                                                                  Fiscal Year Ended
(In thousands, except per share amounts)      2/3/01      1/29/00      1/30/99      1/31/98       2/1/97
---------------------------------------------------------------------------------------------------------
<S>                                          <C>          <C>          <C>          <C>          <C>
STATEMENT OF OPERATIONS DATA:
  Net sales                                  $418,606     $404,057     $347,877     $324,762     $278,613
  Cost of products sold                       309,397      296,316      256,793      238,342      206,269
                                             ------------------------------------------------------------
  Gross profit                                109,209      107,741       91,084       86,420       72,344
  Operating, selling and
    administrative expenses                    84,667       80,117       66,394       59,260       50,636
  Depreciation and amortization                14,793       13,830       12,974       11,588        9,540
                                             ------------------------------------------------------------
  Operating profit                              9,749       13,794       11,716       15,572       12,168
  Interest expense, net                         4,804        4,211        4,435        4,331        2,826
                                             ------------------------------------------------------------
  Income before income taxes                    4,945        9,583        7,281       11,241        9,342
  Provision for income taxes                    1,879        3,641        2,767        4,272        3,550
                                             ------------------------------------------------------------
  Net income                                 $  3,066     $  5,942     $  4,514     $  6,969     $  5,792
                                             ============================================================
Weighted average number of
  shares outstanding - basic                   17,955       17,981       17,497       17,425       17,405
                                             ============================================================
Net income per share - basic                 $   0.17     $   0.33     $   0.26     $   0.40     $   0.33
                                             ============================================================
Weighted average number of
  shares outstanding - diluted                 17,991       18,250       17,554       17,428       17,580
                                             ============================================================
Net income per share - diluted               $   0.17     $   0.33     $   0.26     $   0.40     $   0.33
                                             ============================================================
</TABLE>


<TABLE>
<CAPTION>
                                                                         As of
(In thousands)                                2/3/01      1/29/00      1/30/99      1/31/98       2/1/97
---------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
<S>                                          <C>          <C>          <C>          <C>          <C>
  Working capital                            $104,124     $ 93,872     $ 84,022     $ 82,771     $ 70,629
  Property and equipment, net                  60,659       64,232       67,377       65,814       63,147
  Total assets                                292,541      286,785      271,551      245,816      233,539
  Long-term debt                               41,526       35,936       36,944       45,240       37,645
  Stockholders' investment                    123,230      121,405      115,022      103,485       96,420
</TABLE>


SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

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


                                       4
<PAGE>   2
                                                          [BOOKS-A-MILLION LOGO]

                                                         Management's Discussion
                                                                    and Analysis
                                  of Financial Condition & Results of Operations


GENERAL

The Company was founded in 1917 and currently operates 201 retail bookstores,
including 155 superstores, concentrated in the southeastern United States.

The Company's growth strategy is focused on opening superstores in new and
existing market areas, particularly in the Southeast. In addition to opening new
stores, management intends to continue its practice of reviewing the
profitability trends and prospects of existing stores and closing or relocating
underperforming stores or converting stores to different formats.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                                      Fiscal Year Ended
                                                             2/3/01         1/29/00         1/30/99
---------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>             <C>
Net sales                                                    100.0%          100.0%          100.0%
Gross profit                                                  26.1%           26.6%           26.2%
  Operating, selling, and administrative expenses             20.2%           19.8%           19.1%
  Depreciation and amortization                                3.5%            3.4%            3.7%
Operating profit                                               2.4%            3.4%            3.4%
  Interest expense, net                                        1.2%            1.0%            1.3%
Income before income taxes                                     1.2%            2.4%            2.1%
  Provision for income taxes                                   0.5%            0.9%            0.8%
Net income                                                     0.7%            1.5%            1.3%
</TABLE>

FISCAL 2001 COMPARED TO FISCAL 2000

Net sales increased $14.5 million, or 3.6%, to $418.6 million in fiscal 2001
from $404.1 million in fiscal 2000. Comparable store sales decreased 2.9% for
fiscal year 2001. The increase in net sales resulted from net sales generated by
twelve new stores opened during fiscal 2001, and five new stores opened in the
second half of fiscal 2000. In addition, the Company closed seven
underperforming stores in fiscal 2001.

The factors affecting the future trend of comparable store sales include, among
others, overall demand for products the Company sells, the Company's marketing
programs, pricing strategies, store operations and competition.

Gross profit increased $1.5 million, or 1.4%, to $109.2 million in fiscal 2001
from $107.7 million in fiscal 2000. Gross profit as a percentage of net sales
decreased to 26.1% in fiscal 2001 from 26.6% in fiscal 2000, primarily due to
increased occupancy costs and higher warehouse distribution costs as a
percentage of net sales.

Operating, selling and administrative expenses increased $4.6 million, or 5.7%,
to $84.7 million in fiscal 2001, from $80.1 million in fiscal 2000. Operating,
selling and administrative expenses as a percentage of net sales increased to
20.2% in fiscal 2001 from 19.8% in fiscal 2000, primarily due to the lower
comparable store sales for fiscal 2001.


                                       5
<PAGE>   3
[BOOKS-A-MILLION LOGO]

Management's Discussion
and Analysis
of Financial Condition & Results of Operations


Depreciation and amortization increased $1.0 million, or 7.0%, to $14.8 million
in fiscal 2001 from $13.8 million in fiscal 2000. Depreciation and amortization
as a percentage of net sales increased to 3.5% in fiscal 2001 from 3.4% in
fiscal 2000, primarily due to increased investment in information systems
technology.

Net interest expense increased $0.6 million, or 14.1%, to $4.8 million in fiscal
2001 from $4.2 million in fiscal 2000, primarily due to increased average
borrowings during fiscal 2001.

FISCAL 2000 COMPARED TO FISCAL 1999

Net sales increased $56.2 million, or 16.1%, to $404.1 million in fiscal 2000
from $347.9 million in fiscal 1999. Comparable store sales increased 8.2% for
fiscal year 2000. The increase in net sales resulted from net sales generated by
twelve new stores opened during fiscal 2000, and eleven new stores opened in the
second half of fiscal 1999. In addition, the Company closed five underperforming
stores in fiscal 2000.

The factors affecting the future trend of comparable store sales include, among
others, overall demand for products the Company sells, the Company's marketing
programs, pricing strategies, store operations and competition.

Gross profit increased $16.6 million, or 18.3%, to $107.7 million in fiscal 2000
from $91.1 million in fiscal 1999. Gross profit as a percentage of net sales
increased to 26.6% in fiscal 2000 from 26.2% in fiscal 1999, primarily due to
decreased occupancy costs and lower warehouse distribution costs as a percentage
of net sales.

Operating, selling and administrative expenses increased $13.7 million, or
20.7%, to $80.1 million in fiscal 2000, from $66.4 million in fiscal 1999.
Operating, selling and administrative expenses as a percentage of net sales
increased to 19.8% in fiscal 2000 from 19.1% in fiscal 1999, primarily due to
costs incurred related to the development of new business opportunities.

Depreciation and amortization increased $0.8 million, or 6.6%, to $13.8 million
in fiscal 2000 from $13.0 million in fiscal 1999. Depreciation and amortization
as a percentage of net sales decreased to 3.4% in fiscal 2000 from 3.7% in
fiscal 1999, primarily the result of lower capital expenditures due to fewer
stores opened in fiscal 2000 than in the previous year.

Net interest expense was relatively constant in fiscal year 2000, at $4.2
million, versus $4.4 million in fiscal year 1999.

SEASONALITY AND QUARTERLY RESULTS

Similar to many retailers, the Company's business is seasonal, with its highest
retail sales, gross profit and net income historically occurring in the fourth
fiscal quarter. This seasonal pattern reflects the increased demand for books
and gifts experienced during the year-end holiday selling season. Working
capital requirements are generally highest during the third fiscal quarter and
the early part of the fourth fiscal quarter due to the seasonality of the
Company's business.


                                       6
<PAGE>   4
                                                          [BOOKS-A-MILLION LOGO]

                                                         Management's Discussion
                                                                    and Analysis
                                  of Financial Condition & Results of Operations


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

LIQUIDITY AND CAPITAL RESOURCES

The Company has a revolving credit facility that allows borrowings up to $90.0
million, for which no principal repayments are due until the facility expires on
June 18, 2003, and an unsecured working capital line of credit for $15.0
million, which is subject to annual renewal. As of February 3, 2001, $33.3
million was outstanding under these facilities combined. Additionally, as of
February 3, 2001, the Company has outstanding borrowings associated with the
issuance of an industrial revenue bond totaling $7.5 million.

The Company's capital expenditures totaled $12.4 million in fiscal 2001. These
expenditures were primarily used to open new stores, perform renovations and
make improvements to existing stores, expand existing warehouse facilities and
invest in management information systems. Management estimates that capital
expenditures for fiscal 2002 will be approximately $14.8 million and that such
amounts will be used primarily for new stores, renovation and improvements to
existing stores and investments in management information systems. Management
believes that existing cash balances and net cash from operating activities,
together with borrowings under the Company's credit facilities, will be adequate
to finance the Company's planned capital expenditures and to meet the Company's
working capital requirements for fiscal 2002.

RELATED-PARTY ACTIVITIES

As discussed in Note 6 of Notes to Consolidated Financial Statements, the
Company conducts business with other entities in which certain officers,
directors and principal stockholders of the Company have controlling ownership
interests. The most significant related-party transactions include inventory
purchases from, and sales to, related parties. Related-party inventory purchases
decreased in fiscal 2001 due to lower magazine purchases. Related-party sales
transactions increased in fiscal 2001 due to higher bargain book sales.
Management believes the terms of these related-party transactions are
substantially equivalent to those available from unrelated parties and,
therefore, have no significant impact on gross profit.

FINANCIAL POSITION

During fiscal 2001, the Company opened twelve new stores. The store openings
resulted in increased inventory balances at February 3, 2001, as compared to
January 29, 2000. Reduced capital expenditures, as compared to fiscal 2000, and
the closing of seven stores during fiscal 2001 resulted in lower net property
and equipment balances at February 3, 2001, as compared to January 29, 2000.


                                       7
<PAGE>   5
[BOOKS-A-MILLION LOGO]

Consolidated Balance
Sheets
(As of 2/3/01 and 1/29/00)


<TABLE>
<CAPTION>
                                                                                                          As of
(In thousands)                                                                                  2/3/01             1/29/00
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>                 <C>
ASSETS
Current Assets:
  Cash and temporary cash investments                                                          $   5,282           $   4,920
  Accounts receivable, net of allowance for doubtful accounts of
    $787 and $1,489, respectively                                                                  8,417               8,781
  Related party receivables                                                                        2,358               4,161
  Inventories                                                                                    205,986             194,624
  Prepayments and other                                                                            4,521               3,339
  Deferred income taxes                                                                            3,791               5,084
                                                                                               -----------------------------
  Total Current Assets                                                                           230,355             220,909
                                                                                               -----------------------------

Property and Equipment:
  Land                                                                                               628                 628
  Buildings                                                                                        5,986               5,442
  Equipment                                                                                       48,252              40,646
  Furniture and fixtures                                                                          38,350              35,904
  Leasehold improvements                                                                          41,562              42,235
  Construction in process                                                                            123                 599
                                                                                               -----------------------------
                                                                                                 134,901             125,454
  Less accumulated depreciation and amortization                                                  74,242              61,222
                                                                                               -----------------------------
    Net Property and Equipment                                                                    60,659              64,232
                                                                                               -----------------------------

Other Assets:
  Goodwill, net                                                                                    1,410               1,453
  Other                                                                                              117                 191
                                                                                               -----------------------------
    Total Other Assets                                                                             1,527               1,644
                                                                                               -----------------------------
    Total Assets                                                                               $ 292,541           $ 286,785
                                                                                               =============================

LIABILITIES AND STOCKHOLDERS' INVESTMENT
Current Liabilities:
  Accounts payable:
    Trade                                                                                      $  95,006           $  94,090
    Related party                                                                                  7,504               9,415
  Accrued income taxes                                                                               650               2,092
  Accrued expenses                                                                                22,611              20,970
  Current portion of long-term debt                                                                  460                 470
                                                                                               -----------------------------
      TOTAL CURRENT LIABILITIES                                                                  126,231             127,037
                                                                                               -----------------------------
  LONG-TERM DEBT                                                                                  41,526              35,936
                                                                                               -----------------------------
DEFERRED INCOME TAXES                                                                              1,554               2,407
                                                                                               -----------------------------
COMMITMENTS AND CONTINGENCIES                                                                         --                  --
                                                                                               -----------------------------
STOCKHOLDERS' INVESTMENT:
  Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares outstanding                 --                  --
  Common stock, $.01 par value; 30,000,000 shares authorized, 18,092,001
  and 18,080,646 shares issued and outstanding at February 3, 2001
  and January 29, 2000, respectively                                                                 181                 181
Additional paid-in capital                                                                        70,634              70,564
Treasury stock at cost (597,600 shares at February 3, 2001 and
  81,600 shares at January 29, 2000)                                                              (1,563)               (252)
Retained earnings                                                                                 53,978              50,912
                                                                                               -----------------------------
  Total Stockholders' Investment                                                                 123,230             121,405
                                                                                               -----------------------------
  Total Liabilities and Stockholders' Investment                                               $ 292,541           $ 286,785
                                                                                               =============================
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.


                                       8
<PAGE>   6
                                                          [BOOKS-A-MILLION LOGO]

                                                         Consolidated Statements
                                                                   of Operations
                        (For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)


<TABLE>
<CAPTION>
                                                                              Fiscal Year Ended
(In thousands, except per share data)                             2/3/01           1/29/00           1/30/99
-------------------------------------------------------------------------------------------------------------
                                                                 53 Weeks          52 Weeks          52 Weeks

<S>                                                              <C>               <C>               <C>
Net sales                                                        $418,606          $404,057          $347,877
Cost of products sold, including warehouse
  distribution and store occupancy costs(1)                       309,397           296,316           256,793
                                                                 --------------------------------------------
    GROSS PROFIT                                                  109,209           107,741            91,084

Operating, selling and administrative expenses                     84,667            80,117            66,394
Depreciation and amortization                                      14,793            13,830            12,974
                                                                 --------------------------------------------
  OPERATING PROFIT                                                  9,749            13,794            11,716
                                                                 --------------------------------------------

Interest expense, net                                               4,804             4,211             4,435
                                                                 --------------------------------------------
    INCOME BEFORE INCOME TAXES                                      4,945             9,583             7,281

Provision for income taxes                                          1,879             3,641             2,767
                                                                 --------------------------------------------
    NET INCOME                                                   $  3,066          $  5,942          $  4,514
                                                                 ============================================

Weighted average number of shares outstanding - basic              17,955            17,981            17,497
                                                                 --------------------------------------------
NET INCOME PER SHARE - BASIC                                     $   0.17          $   0.33          $   0.26
                                                                 ============================================

Weighted average number of shares outstanding - diluted            17,991            18,250            17,554
                                                                 --------------------------------------------
NET INCOME PER SHARE - DILUTED                                   $   0.17          $   0.33          $   0.26
                                                                 ============================================
</TABLE>

(1) Inventory purchases from related parties were $34,128, $34,548 and $36,836,
    respectively, for the periods presented above.

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


                                       9
<PAGE>   7
[BOOKS-A-MILLION LOGO]

Consolidated Statements of
Stockholders' Investment
(As of February 3, 2001)


<TABLE>
<CAPTION>
                                                              Common Stock       Additional        Treasury Stock
                                                          -------------------      Paid-In       -------------------       Retained
(In thousands)                                             Shares      Amount      Capital       Shares       Amount       Earnings
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>       <C>             <C>         <C>           <C>
BALANCE, JANUARY 31, 1998                                  17,428       $174       $ 62,925         --       $    --        $40,386
  Net Income                                                   --         --             --         --            --          4,514
  Issuance of stock for employee stock purchase plan           16         --             78         --            --
  Purchase of treasury stock                                   --         --             --         82          (252)            --
  Exercise of stock options                                   461          5          4,132         --            --             --
  Tax benefit from exercise of stock options                   --         --          2,333         --            --             --
  Issuance of stock for acquisition
    accounted for as pooling of interests                     112          1              2         --            --             70
  Contributions from certain stockholders                      --         --          1,054         --            --             --
  Tax provision for contributions from certain
    stockholders                                               --         --           (400)        --            --             --
                                                           ------------------------------------------------------------------------

BALANCE, JANUARY 30, 1999                                  18,017        180         70,124         82          (252)        44,970
  Net Income                                                   --         --             --         --            --          5,942
  Issuance of stock for employee stock purchase plan           16         --             77         --            --             --
  Exercise of stock options                                    48          1            306         --            --             --
  Tax benefit from exercise of stock options                   --         --             57         --            --             --
                                                           ------------------------------------------------------------------------

BALANCE, JANUARY 29, 2000                                  18,081        181         70,564         82          (252)        50,912
  Net Income                                                   --         --             --         --            --          3,066
  Purchase of treasury stock                                   --         --             --        516        (1,311)            --
  Issuance of stock for employee stock purchase plan           11         --             70         --            --             --
                                                           ------------------------------------------------------------------------
BALANCE, FEBRUARY 3, 2001                                  18,092       $181       $ 70,634        598       $(1,563)       $53,978
                                                           ========================================================================
</TABLE>

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


                                       10
<PAGE>   8
                                                          [BOOKS-A-MILLION LOGO]

                                                         Consolidated Statements
                                                                   of Cash Flows
                        (For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)


<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
(Dollars in thousands)                                             2/3/01       1/29/00       1/30/99
------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                     $   3,066     $   5,942     $   4,514
  Adjustments to reconcile net income to net
    cash provided by operating activities:
      Depreciation and amortization                                 14,793        13,830        12,974
      (Gain) loss on sale of property                                1,237         1,156          (472)
      Deferred income tax provision (credit), net                      440          (103)         (912)
      (Increase) decrease in assets:
        Accounts receivable                                            364         3,501          (550)
        Related party receivables                                    1,803          (163)        3,561
        Inventories                                                (11,362)      (19,413)      (23,899)
        Prepayments and other                                       (1,171)         (444)       (2,223)
      Increase (decrease) in liabilities:
        Accounts payable                                              (995)        2,315        22,258
        Accrued income taxes                                        (1,442)        1,673          (321)
        Accrued expenses                                             1,641         4,178         2,817
                                                                 -------------------------------------
          Total adjustments                                          5,308         6,530        13,233
                                                                 -------------------------------------
          Net cash provided by operating activities                  8,374        12,472        17,747
                                                                 -------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of property and equipment                          66         1,742         1,627
  Capital expenditures                                             (12,417)      (13,462)      (15,682)
                                                                 -------------------------------------
          Net cash used in investing activities                    (12,351)      (11,720)      (14,055)
                                                                 -------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of stock options and
    purchase of shares under employee stock purchase plan               70           384         4,215
  Contributions from certain stockholders                               --            --         1,054
  Purchase of treasury stock                                        (1,311)           --          (252)
  Issuance of other debt                                                --         1,409            --
  Repayments of other debt                                            (262)           --            --
  Borrowings under credit facilities                               176,592       169,103       153,475
  Repayments under credit facilities                              (170,750)     (171,050)     (161,771)
                                                                 -------------------------------------
          Net cash provided by (used in) financing activities        4,339          (154)       (3,279)
                                                                 -------------------------------------
NET INCREASE IN CASH AND TEMPORARY CASH INVESTMENTS                    362           598           413
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR             4,920         4,322         3,909
                                                                 -------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR               $   5,282     $   4,920     $   4,322
                                                                 =====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest                                                     $   4,904     $   4,318     $   4,625
    Income taxes, net of refunds                                 $   2,881     $   1,882     $   4,026
                                                                 =====================================
</TABLE>

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


                                       11
<PAGE>   9

[BOOKS-A-MILLION LOGO]

Notes to Consolidated
Financial Statements
(For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)

1. Summary of Significant Accounting Policies

Business

Books-A-Million, Inc., and its subsidiaries (the "Company") are principally
engaged in the sale of books, magazines and related items through a chain of
retail bookstores. The Company presently operates 201 bookstores in 18 states
and the District of Columbia, which are predominantly located in the
southeastern United States. The Company also serves as a wholesale book
distributor for certain other retailers and wholesalers and operates a retail
Internet website. The Company presently consists of Books-A-Million, Inc., and
its wholly owned subsidiaries, American Wholesale Book Company, Inc. ("American
Wholesale") and American Internet Services, Inc ("AIS"). All significant
intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The Company operates on a 52-53 week year, with the fiscal year ending on the
Saturday closest to January 31. Fiscal year 2001 was a 53-week period. Fiscal
years 2000 and 1999 were 52-week periods.

Use of Estimates in the Preparation of Financial Statements

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

Inventories

Inventories are valued at the lower of cost or market, using the retail method,
with cost determined on a first-in, first-out ("FIFO") basis and market based on
the lower of replacement cost or estimated realizable value. The Company
includes certain distribution and other expenses in its inventory costs.

Property and Equipment

Property and equipment are recorded at cost. Depreciation on equipment and
furniture and fixtures is provided on the straight-line method over the
estimated service lives, which range from three to seven years. Depreciation of
leasehold improvements is provided on the straight-line basis over the periods
of the applicable leases.

Maintenance and repairs are charged to expense as incurred. Costs of renewals
and betterments are capitalized by charges to property accounts and depreciated
using applicable annual rates. The cost and accumulated depreciation of assets
sold, retired or otherwise disposed of are removed from the accounts, and the
related gain or loss is credited or charged to income.

Goodwill

The Company amortizes goodwill on a straight-line basis over 40 years. As of
February 3, 2001 and January 29, 2000, accumulated amortization of goodwill was
$295,000 and $252,000, respectively. The Company continually evaluates whether
events or circumstances have occurred that indicate the remaining estimated
useful life of goodwill may warrant revision or that the remaining balance of
goodwill may not be recoverable. When factors indicate that goodwill should be
evaluated for possible impairment, the Company uses an estimate of the related
operating profits over the remaining life of the goodwill in measuring
recoverability.

Store Opening Costs

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

Insurance Accruals

The Company is subject to large deductibles under its workers' compensation
policy. Insurance coverage is maintained in amounts management considers
adequate. Amounts are accrued currently for the estimated cost of claims
incurred, both reported and unreported.


                                       12
<PAGE>   10

                                                          [BOOKS-A-MILLION LOGO]

                                                           Notes to Consolidated
                                                            Financial Statements
                        (For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)

Income Taxes

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

Statements of Cash Flows

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

Earnings Per Share

Basic net income per share ("EPS") excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock are
exercised, converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the Company. Diluted EPS has been
computed based on the average number of shares outstanding including the effect
of outstanding stock options, if dilutive, in each respective year. A
reconciliation of the weighted average shares for basic and diluted EPS is as
follows:

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
(In thousands)                                            2/3/01       1/29/00       1/30/99
--------------------------------------------------------------------------------------------

<S>                                                       <C>          <C>           <C>
Weighted average shares outstanding:
   Basic                                                  17,955        17,981        17,497
   Dilutive effect of stock options outstanding               36           269            57
                                                          ----------------------------------
   Diluted                                                17,991        18,250        17,554
                                                          ==================================
</TABLE>

Options outstanding of 1,391,000, 464,000 and 619,000 for the years ended
February 3, 2001, January 29, 2000 and January 30, 1999, respectively, were not
included in the table above as they were anti-dilutive.

Disclosure of Fair Value of Financial Instruments

Statement of Financial Accounting Standards ("SFAS") No. 107, Disclosure About
Fair Value of Financial Instruments, requires all businesses to disclose the
fair value of financial instruments, both assets and liabilities recognized and
not recognized on the balance sheet, for which it is practicable to estimate
fair value. Based upon their remaining term to maturity and the current interest
rate environment, the estimated fair values of the Company's financial
instruments recognized on the balance sheet at February 3, 2001 and January 29,
2000 approximate their carrying values at those dates.

Legal

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

Accounting for Derivative Instruments and Hedging Activities

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138,
Accounting for Certain Derivatives and Certain Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in


                                       13
<PAGE>   11

[BOOKS-A-MILLION LOGO]

Notes to Consolidated
Financial Statements
(For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)

earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The adoption of these statements may increase
volatility of earnings. The Company adopted these statements on February 4,
2001, which will result in decreasing retained earnings by $465,000 in the first
quarter of fiscal 2002.

Contributions from Certain Stockholders

In fiscal 1999, contributions of short-swing profits from certain stockholders
were received by the Company totaling $1,054,000 with a related tax provision of
$400,000 charged to paid-in capital.

Prior Year Reclassifications

Certain prior year amounts have been reclassified to conform to the current year
presentation.

2. Income Taxes

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

<TABLE>
<CAPTION>
                                                      Fiscal Year Ended
                                            2/3/01          1/29/00         1/30/99
-----------------------------------------------------------------------------------

<S>                                        <C>             <C>             <C>
Current:
  Federal                                  $  1,386        $  3,448        $  3,337
  State                                          53             296             342
                                           ----------------------------------------
                                              1,439           3,744           3,679
                                           ----------------------------------------
Deferred taxes arising from:
  Depreciation                                 (871)          1,270            (321)
  Accruals                                      593            (522)           (443)
  Inventory                                    (110)           (113)             25
  Other                                         828            (738)           (173)
                                           ----------------------------------------
                                                440            (103)           (912)
                                           ----------------------------------------
Provision for income taxes                 $  1,879        $  3,641        $  2,767
                                           ========================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                     Fiscal Year Ended
                                               2/3/01     1/29/00     1/30/99
-----------------------------------------------------------------------------

<S>                                            <C>        <C>         <C>
Federal statutory income tax rate               34.0%       34.0%       34.0%
State income tax provision                       1.0%        2.8%        3.1%
Other                                            3.0%        1.2%        0.9%
                                                ----------------------------
Effective income tax rate                       38.0%       38.0%       38.0%
                                                ============================
</TABLE>

Temporary differences which created deferred tax assets and liabilities at
February 3, 2001 and January 29, 2000, are detailed below (dollars in
thousands):

<TABLE>
<CAPTION>
                                                 As of 2/3/01                    As of 1/29/00
                                           --------------------------------------------------------
                                           Current        Noncurrent       Current       Noncurrent
----------------------------------------------------------------------------------------------------

<S>                                        <C>            <C>              <C>           <C>
Depreciation                               $     --        $ (1,404)       $     --        $ (2,275)
Accruals                                      2,543              --           3,136              --
Inventory                                       988              --             878              --
Other                                           260            (150)          1,070            (132)
                                           --------------------------------------------------------
Deferred tax asset (liability)             $  3,791        $ (1,554)       $  5,084        $ (2,407)
                                           ========================================================
</TABLE>

No valuation allowance is deemed necessary by management, as the realization of
recorded deferred tax assets is considered more likely than not.


                                       14
<PAGE>   12

                                                          [BOOKS-A-MILLION LOGO]

                                                           Notes to Consolidated
                                                            Financial Statements
                        (For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)

3. Debt and Lines of Credit

The Company has a revolving credit facility that allows borrowings up to $90
million for which no principal repayments are due until the facility expires on
June 18, 2003, and an unsecured working capital line of credit for $15 million,
increased from $10 million in September, 2000, which is subject to annual
renewal. Both credit facilities have certain financial and non-financial
covenants with which the Company is in compliance. As of February 3, 2001 and
January 29, 2000, $33.3 million and $27.5 million, respectively, were
outstanding under these credit facilities. The maximum and average outstanding
balances during fiscal 2001 were $81.0 million and $64.1 million, respectively.
The outstanding borrowings as of February 3, 2001, had interest rates ranging
from 6.41% to 7.20%.

The Company is subject to interest rate fluctuations involving its credit
facilities. However, the Company uses both fixed and variable debt to manage
this exposure. On February 9, 1998, the Company entered into an interest rate
swap agreement with a five year term that carries a notional principal amount of
$30.0 million. The swap effectively fixes the interest rate on $30.0 million of
variable rate debt at 6.78%. The swap agreement expires on February 11, 2003.
The counter party to the interest rate swap is one of the Company's primary
banks. The Company believes the credit and liquidity risk of the counter party
failing to meet its obligation is remote as the Company settles its interest
position with the bank on a quarterly basis.

During fiscal 1996 and fiscal 1995, the Company financed the acquisition and
construction of certain warehouse and distribution facilities through loans,
obtained from the proceeds of an industrial development revenue bond (the
"Bond"), which are secured by a mortgage interest in these facilities. As of
February 3, 2001 and January 29, 2000, there was $7.5 million of borrowings
outstanding under these arrangements, at variable rates. The Bond has a maturity
date of December 1, 2019, with a purchase provision obligating the Company to
repurchase the Bond on May 11, 2005, unless extended by the bondholder. Such an
extension may be renewed annually by the bondholder, at the Company's request,
to a date no more than five years from the renewal date. The Company maintains a
$7.5 million interest rate swap that effectively fixes the interest rate on the
Bond at 7.98%. The swap was entered into in May 1996 and has a term of ten
years.

4. Leases

The Company leases the premises for its retail bookstores under operating
leases, which expire in various years through the year 2013. Many of these
leases contain renewal options and require the Company to pay executory costs
(such as property taxes, maintenance, and insurance). In addition to fixed
minimum rentals, some of the Company's leases require contingent rentals based
on a percentage of sales, which the Company records throughout the year based
upon best available information.

The Company also leases certain office, warehouse and retail store space from
related parties. Rental expense under these leases was approximately $658,000,
$674,000 and $624,000 in fiscal 2001, 2000 and 1999, respectively. Total minimum
future rental payments under these leases are $1,479,000.

Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of February 3, 2001, are as follows (in
thousands):

<TABLE>
<CAPTION>
              Fiscal Year
              -------------------------------------------------
              <S>                                     <C>
              2002                                    $  27,728
              2003                                       24,168
              2004                                       22,364
              2005                                       20,981
              2006                                       18,408
              Subsequent years                           42,124
                                                       --------
              Total                                    $155,773
                                                       ========
</TABLE>


                                       15
<PAGE>   13

[BOOKS-A-MILLION LOGO]

Notes to Consolidated
Financial Statements
(For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)

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

<TABLE>
<CAPTION>
                                             Fiscal Year Ended

                                  2/3/01          1/29/00         1/30/99
-------------------------------------------------------------------------

<S>                              <C>             <C>             <C>
Minimum rentals                  $ 26,084        $ 23,458        $ 21,151
Contingent rentals                    496             596             425
                                 ----------------------------------------
Total                            $ 26,580        $ 24,054        $ 21,576
                                 ========================================
</TABLE>

5. Employee Benefit Plans

401(k) Profit-Sharing Plan

The Company and its subsidiaries maintain a 401(k) plan covering all employees
who have completed 12 months of service and who are at least 21 years of age,
and permit participants to contribute from 2% to 15% of compensation to the
plan. Company matching and supplemental contributions are made at management's
discretion. The expense under this plan was $335,000, $554,000 and $333,000 in
fiscal 2001, 2000 and 1999, respectively.

Stock Option Plan

The Company maintains a stock option plan reserving 3,300,000 shares of the
Company's common stock for grants to executive officers, directors, and key
employees. Prior to January 9, 2001, all options granted to employees become
exercisable in equal annual increments over a five-year period and expire on the
sixth anniversary of the date of grant. On January 9, 2001, the Compensation
Committee approved an amendment to the Stock Option Plan that allows all options
granted after that date to vest in equal annual increments over a three-year
period and expire on the tenth anniversary of the date of the grant. All stock
options have exercise prices generally equal to the fair market value of the
common stock on the date of grant. A summary of the status of the Company's
stock option plan is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
                                            -------------------------------------------------------------------------------
                                               February 3, 2001            January 29, 2000            January 30, 1999
                                            -----------------------     -----------------------     -----------------------
                                                   Weighted                    Weighted                    Weighted
                                                    Average                     Average                     Average
                                            -----------------------     -----------------------     -----------------------
                                            Shares   Exercise Price     Shares   Exercise Price     Shares   Exercise Price
                                            -----------------------     -----------------------     -----------------------

<S>                                         <C>      <C>                <C>      <C>                <C>      <C>
Outstanding at beginning of year            1,562        $ 8.26         1,335        $ 8.25         1,571        $ 7.57
Granted                                       804          1.87           632          8.21           432         10.83
Exercised                                      --            --           (49)         6.31          (461)         8.98
Forfeited                                    (174)         9.84          (356)         8.44          (207)         7.25
                                            -------------------         -------------------         -------------------
Outstanding at end of year                  2,192        $ 5.79         1,562        $ 8.20         1,335        $ 8.25
                                            -------------------         -------------------         -------------------
Exercisable at end of year                    736        $ 7.57           363        $ 8.62           315        $ 8.58
                                            -------------------         -------------------         -------------------
Weighted average fair value
  of options granted                                     $ 1.75                      $ 7.33                      $ 9.30
                                            ===================         ===================         ===================
</TABLE>

During fiscal years 2001, 2000 and 1999, the Company recognized tax benefits
related to the exercise of stock options in the amount of $0, $57,000 and
$2,333,000, respectively. The tax benefits were credited to paid-in capital in
the respective years.

The following table summarizes information about stock options outstanding at
February 3, 2001 (shares in thousands):

<TABLE>
<CAPTION>
                                     Options Outstanding                         Options Exercisable
                     -----------------------------------------------   -------------------------------
                                        Weighted
                         Number          Average                           Number
                     Outstanding at     Remaining        Weighted      Exercisable at      Weighted
   Range of            February 3,     Contractual        Average        February 3,        Average
Exercise Price             2001        Life (Years)   Exercise Price        2001        Exercise Price
------------------------------------------------------------------------------------------------------

<S>                  <C>               <C>            <C>              <C>              <C>
$ 1.38 - $ 6.50           1,252            6.93           $ 3.28             377           $ 5.80
$ 6.51 - $13.00             940            4.30           $ 9.13             359           $ 9.44
</TABLE>


                                       16
<PAGE>   14

                                                          [BOOKS-A-MILLION LOGO]

                                                           Notes to Consolidated
                                                            Financial Statements
                        (For the fiscal years ended 2/3/01, 1/29/00 and 1/30/99)

In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 established financial accounting and reporting
standards for stock-based compensation and for transactions in which an entity
issues its equity instruments to acquire goods and services for non-employees.
In accordance with SFAS No. 123, the Company continues to account for and record
compensation expense under APB No. 25. However, the Company adopted the
disclosure only provisions of SFAS No. 123, as required. If the Company had
recorded compensation expense in accordance with SFAS No. 123 under the fair
value based method, the Company's net income and net income per share would have
been as indicated below:

<TABLE>
<CAPTION>
                                                                         Fiscal Year Ended

(In thousands except per share data)                           2/3/01         1/29/00        1/30/99
----------------------------------------------------------------------------------------------------

<S>                                                           <C>            <C>            <C>
Net income-as reported                                        $  3,066       $  5,942       $  4,514
Net income-pro forma                                             2,024          5,307          4,257
Net income per share-diluted, as reported                         0.17           0.33           0.26
Net income per share-diluted, pro forma                           0.11           0.29           0.24
</TABLE>

For the purposes of the foregoing calculation, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model. The assumptions used in connection with this model show no expected
dividend yield, a five-year or ten-year expected life of the options, and an
expected stock price volatility rate of 1.20 with risk-free interest rates
ranging from 4.99% to 6.76%.

Employee Stock Purchase Plan

The Company maintains an employee stock purchase plan under which 200,000 shares
of the Company's common stock are reserved for purchase by employees at 85% of
the fair market value of the common stock. Of the total reserved shares, 90,414
shares have been purchased as of February 3, 2001.

6. Related Party Transactions

Certain stockholders of the Company have controlling ownership interests in
other entities with which the Company conducts business. Transactions between
the Company and these various other entities ("related parties") are summarized
in the following paragraphs and Note 4.

The Company purchases a portion of its inventories for resale from related
parties; such purchases amounted to $34,128,000, $34,548,000 and $36,836,000 in
fiscal 2001, 2000 and 1999, respectively. The Company sells a portion of its
inventories to related parties; such sales amounted to $ 3,940,000, $2,841,000
and $5,301,000 in fiscal 2001, 2000 and 1999, respectively. The Company also
purchases logistics services from a related party that amounted to $250,000,
$445,000 and $128,000 in fiscal 2001, 2000 and 1999, respectively.

7.Subsequent Events (Unaudited)

During March 2001, the Company acquired the assets and assumed the leases of 18
retail bookstores from Crown Books Corporation. The stores are located in the
Washington, D.C. and Chicago metropolitan areas. The results of operations for
the acquired stores will be reflected in the consolidated financial statements
for the Company beginning in the first quarter of fiscal 2002.


                                       17
<PAGE>   15

[BOOKS-A-MILLION LOGO]

Report of Independent
Accountants
Arthur Andersen LLP

To Books-A-Million, Inc.:

We have audited the accompanying consolidated balance sheets of Books-A-Million,
Inc. (a Delaware corporation), and its subsidiaries as of February 3, 2001, and
January 29, 2000, and the related consolidated statements of operations,
stockholders' investment, and cash flows for each of the three fiscal years in
the period ended February 3, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Books-A-Million, Inc. and its
subsidiaries as of February 3, 2001, and January 29, 2000, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 3, 2001, in conformity with accounting principles
generally accepted in the United States.

                                                             ARTHUR ANDERSEN LLP

Birmingham, Alabama
March 19, 2001


                                       18
<PAGE>   16

                                                          [BOOKS-A-MILLION LOGO]

                                                            Summary of Quarterly
                                                             Results (Unaudited)
                                 (For the fiscal years ended 2/3/01 and 1/29/00)

<TABLE>
<CAPTION>
                                                        Fiscal Year Ended February 3, 2001
                                                ----------------------------------------------------------------
                                                 First         Second         Third         Fourth
(In thousands, except per share amounts)        Quarter       Quarter        Quarter       Quarter       Total
----------------------------------------------------------------------------------------------------------------

<S>                                             <C>           <C>            <C>           <C>          <C>
Net sales                                       $ 93,099      $ 93,629       $ 90,133      $141,745     $418,606
Gross profit                                      24,700        24,344         22,235        37,930      109,209
Operating profit (loss)                            1,793           342         (1,295)        8,909        9,749
Net income (loss)                                    471          (568)        (1,637)        4,800        3,066
Net income (loss) per share - basic(1)              0.03         (0.03)         (0.09)         0.27         0.17
Net income (loss) per share - diluted(1)            0.03         (0.03)         (0.09)         0.27         0.17

<CAPTION>
                                                             Fiscal Year Ended January 29, 2000
                                              ----------------------------------------------------------------
                                               First         Second        Third         Fourth
(In thousands, except per share amounts)      Quarter       Quarter       Quarter       Quarter        Total
----------------------------------------------------------------------------------------------------------------

<S>                                           <C>           <C>           <C>           <C>           <C>
Net sales                                     $ 85,127      $ 89,878      $ 91,162      $137,890      $404,057
Gross profit                                    22,357        23,364        22,081        39,939       107,741
Operating profit (loss)                          1,517         1,196          (319)       11,400        13,794
Net income (loss)                                  310            19          (924)        6,537         5,942
Net income (loss) per share - basic               0.02          0.00         (0.05)         0.36          0.33
Net income (loss) per share -diluted              0.02          0.00         (0.05)         0.36          0.33
</TABLE>

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


                                       19
<PAGE>   17

Market and Dividend Information

Common Stock

The Common Stock of Books-A-Million, Inc., is traded in the Nasdaq National
Market under the symbol BAMM. The chart below sets forth the high and low stock
prices for each quarter of the fiscal years ending February 3, 2001, and January
29, 2000.

<TABLE>
<CAPTION>
Quarter Ended                 High      Low
---------------------------------------------

<S>                          <C>       <C>
January 2001                 $ 3.25    $ 1.38
October 2000                   3.75      2.25
July 2000                      4.75      3.13
April 2000                     8.25      4.00

January 2000                 $12.00    $ 7.63
October 1999                  12.19      7.50
July 1999                     16.63      7.00
April 1999                    17.00      8.00
</TABLE>

The closing price on April 17, 2001, was $2.36. No cash dividends have been
declared since completion of the Company's initial public offering in 1992. As
of April 17, 2001, Books-A-Million, Inc. had approximately 13,600 stockholders
based on the number of individual participants represented by security position
listings.