<PAGE>   1



                                                                    EXHIBIT 13










                               BOOKS-A-MILLION(R)


<PAGE>   2
                                                                      EXHIBIT 13


                      SELECTED CONSOLIDATED FINANCIAL DATA
                      (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                        Fiscal Year Ended
                                    -------------------------------------------------------
                                     1/31/98    2/1/97     2/3/96      1/28/95     1/29/94
-------------------------------------------------------------------------------------------
<S>                                 <C>        <C>        <C>        <C>          <C>      
STATEMENTS OF INCOME DATA:
   Net sales                        $324,762   $278,613   $229,801   $ 172,366    $ 123,263
     Cost of products sold           238,342    206,269    164,124     124,107       89,379
                                    -------------------------------------------------------
   Gross profit                       86,420     72,344     65,677      48,259       33,884
     Operating, selling and
       administrative expenses        59,260     50,636     43,559      31,580       22,191
     Depreciation and
       amortization                   11,588      9,540      6,833       4,256        2,991
     Store closing charge                 --         --      2,945          --           --
                                    -------------------------------------------------------
   Operating profit                   15,572     12,168     12,340      12,423        8,702
     Interest expense
       (income), net                   4,331      2,826        474        (601)        (382)
                                    -------------------------------------------------------
   Income before income taxes         11,241      9,342     11,866      13,024        9,084
     Provision for income taxes        4,272      3,550      4,390       4,949        3,452
                                    -------------------------------------------------------
   Net income                       $  6,969   $  5,792   $  7,476   $   8,075    $   5,632
                                    -------------------------------------------------------
Weighted average number of
    shares outstanding - basic        17,425     17,405     17,371      17,322       15,272
                                    -------------------------------------------------------
Net income per share - basic (1)    $   0.40   $   0.33   $   0.43   $    0.47    $    0.37
                                    -------------------------------------------------------
Weighted average number of
    shares outstanding - diluted      17,428     17,580     17,641      17,509       15,387
                                    -------------------------------------------------------
Net income per share - diluted(1)   $   0.40   $   0.33   $   0.42   $    0.46    $    0.37
                                    -------------------------------------------------------

<CAPTION>

                                                             As of
                                    -------------------------------------------------------
                                     1/31/98   2/1/97     2/3/96       1/28/95     1/29/94
-------------------------------------------------------------------------------------------
<S>                                 <C>        <C>        <C>        <C>          <C>      
BALANCE SHEET DATA:
Working capital                     $ 82,771   $ 70,629   $ 54,693   $  50,193    $  59,182
Property and equipment, net           65,814     63,147     49,253      35,864       15,599
Total assets                         245,816    233,539    190,933     163,403      119,134
Long-term debt                        45,240     37,645     14,087       4,600            -
Stockholders' investment             103,485     96,420     90,455      82,444       74,222
</TABLE>

(1) Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("EPS"), and restated EPS for
all periods presented.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
   Certain of the statements set forth herein with respect to store openings and
closings, the profitability of certain product lines, capital expenditures and
future liquidity are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are based on
management's current intentions, assumptions and projections and are subject to
risks and uncertainties that could cause actual results to differ materially
from those set forth in the forward-looking statements. Factors that could cause
actual results to differ materially from those in the forward-looking statements
include, among other things, unanticipated increases in merchandise, salary and
distribution costs and the effects of increased competition on specific stores
and the Company generally.


                                       6


<PAGE>   3

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

GENERAL
   The Company was founded in 1917 and currently operates over 165 retail
bookstores, including 108 superstores, concentrated in the southeastern United
States.
   The Company's growth strategy is focused on opening superstores and
combination stores 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 income data expressed as a
percentage of net sales for the periods presented.

<TABLE>
<CAPTION>
                                                                    Fiscal Year Ended
                                                          -----------------------------------
                                                             1/31/98      2/1/97       2/3/96
---------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>          <C>              
Net sales                                                    100.0%       100.0%       100.0%
Gross profit                                                  26.6%        26.0%        28.6%            
 Operating, selling, and administrative expenses              18.2%        18.2%        18.9%
 Depreciation and amortization                                 3.6%         3.4%         3.0%
 Store closing charge                                            -            -          1.3%
Operating profit                                               4.8%         4.4%         5.4%
 Interest expense, net                                         1.3%         1.0%         0.2%
Income before income taxes                                     3.5%         3.4%         5.2%
  Provision for income taxes                                   1.3%         1.3%         1.9%
Net income                                                     2.2%         2.1%         3.3%
</TABLE>

FISCAL 1998 COMPARED TO FISCAL 1997
   Net sales increased $46.2 million, or 16.6%, to $324.8 million in fiscal 1998
from $278.6 million in fiscal 1997. Comparable store sales increased 1.4% for
fiscal 1998. The increase in net sales resulted from net sales generated by 21
new stores opened during fiscal 1998 (including 16 superstores), and 18 new
stores opened in the second half of fiscal 1997. In addition, the Company closed
seven underperforming stores in fiscal 1998.
   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 $14.1 million, or 19.5%, to $86.4 million in fiscal
1998 from $72.3 million in fiscal 1997. Gross profit as a percentage of net
sales increased to 26.6% in fiscal 1998 from 26.0% in fiscal 1997, primarily due
to decreased promotional activity and lower warehouse distribution costs as a
percentage of net sales.
   Operating, selling and administrative expenses increased $8.7 million, or
17.0%, to $59.3 million in fiscal 1998, from $50.6 million in fiscal 1997.
Operating, selling and administrative expenses as a percentage of net sales
remained constant with fiscal 1997 at 18.2%.
   Depreciation and amortization increased $2.1 million, or 21.5%, to $11.6
million in fiscal 1998 from $9.5 million in fiscal 1997. Depreciation and
amortization as a percentage of net sales increased to 3.6% in fiscal 1998 from
3.4% in fiscal 1997, primarily as a result of the significant capital
expenditures for new stores during fiscal 1998 and the second half of fiscal
1997.
   Net interest expense was $4.3 million in fiscal 1998 versus net interest
expense of $2.8 million in fiscal 1997. The increased interest expense resulted
from long-term borrowings incurred primarily to fund capital expenditures and
inventory purchases related to new stores opened during fiscal 1998.


                                        7




<PAGE>   4



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

FISCAL 1997 COMPARED TO FISCAL 1996
   Net sales increased $48.8 million, or 21.2%, to $278.6 million in fiscal 1997
from $229.8 million in fiscal 1996. Comparable store sales decreased 2.0% for
fiscal 1997. The increase in net sales resulted from net sales generated by 27
new stores opened during fiscal 1997 (including 25 superstores), and 13 new
stores opened in the second half of fiscal 1996. In addition, the Company closed
seven underperforming stores (see Note 7 of Notes to Consolidated Financial
Statements).
   Gross profit increased $6.6 million, or 10.2%, to $72.3 million in fiscal
1997 from $65.7 million in fiscal 1996. Gross profit as a percentage of net
sales decreased to 26.0% in fiscal 1997 from 28.6% in fiscal 1996, due to
increased promotional activity, changes in departmental sales mix and higher
occupancy costs as a percentage of sales.
   Operating, selling and administrative expenses increased $7.0 million, or
16.2%, to $50.6 million in fiscal 1997, from $43.6 million in fiscal 1996.
Operating, selling and administrative expenses as a percentage of net sales
decreased to 18.2% in fiscal 1997 from 18.9% in fiscal 1996, primarily due to
strong expense controls related to store selling expenses.
   Depreciation and amortization increased $2.7 million, or 39.6%, to $9.5
million in fiscal 1997 from $6.8 million in fiscal 1996. Depreciation and
amortization as a percentage of net sales increased to 3.4% in fiscal 1997 from
3.0% in fiscal 1996, primarily as a result of the significant capital
expenditures for new stores during fiscal 1997 and the second half of fiscal
1996.
   Net interest expense was $2.8 million in fiscal 1997 versus net interest
expense of $0.5 million in fiscal 1996. The interest expense resulted from
long-term borrowings incurred primarily to fund capital expenditures and
inventory purchases related to new stores opened during fiscal 1997.

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.
   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
   During fiscal 1998, the Company increased borrowing availability under its
revolving credit facility (the "Revolving Facility") to $90.0 million from $50.0
million. The Company also amended its short-term credit agreement (the
"Facility") to $10.0 million of borrowing availability from $20.0 million. As of
January 31, 1998, $37.7 million was outstanding under these facilities combined.
Additionally, as of January 31, 1998, the Company has outstanding borrowings
associated with the issuance of an industrial revenue bond totaling $7.5
million.


                                       8

<PAGE>   5



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


   The Company's capital expenditures totaled $14.4 million in fiscal 1998.
These expenditures were primarily used to open new stores, perform renovations
and improvements to existing stores, and for investments in management
information systems. Management estimates that capital expenditures for fiscal
1999 will be approximately $22.1 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 1999.

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. As the Company has expanded, the
related-party inventory purchase transactions and related-party sales
transactions have grown proportionately. 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 1998, the Company opened 21 new stores, including 16
superstores. The store openings resulted in increased inventory, property and
equipment balances and long-term debt balances at January 31, 1998, as compared
to February 1, 1997.

YEAR 2000 COMPLIANCE
   The Company is in the process of evaluating its management and information
systems to identify and address Year 2000 issues. Based on present information,
management does not believe that its related costs of Year 2000 compliance will
be material.

                                       9


<PAGE>   6

                          CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)




<TABLE>
<CAPTION>
                                                                                 As of
                                                                       ----------------------
                                                                        1/31/98        2/1/97
---------------------------------------------------------------------------------------------
<S>                                                                    <C>           <C>       
ASSETS
CURRENT ASSETS:
   Cash and temporary cash investments                                 $   3,909     $    4,776
   Accounts receivable                                                    11,732         13,198
   Related party receivables                                               7,559          5,854
   Inventories                                                           151,312        141,430
   Prepayments and other                                                     816            584
   Deferred income taxes                                                   3,098          2,913
                                                                       ------------------------
       TOTAL CURRENT ASSETS                                              178,426        168,755
                                                                       ------------------------
PROPERTY AND EQUIPMENT:
   Land                                                                      628            628
   Buildings                                                               5,367          5,367
   Equipment                                                              28,558         22,690
   Furniture and fixtures                                                 31,894         28,535
   Leasehold improvements                                                 37,552         32,796
   Construction in process                                                   783            804
                                                                       ------------------------
                                                                         104,782         90,820
   Less accumulated depreciation and amortization                         38,968         27,673
                                                                       ------------------------
       NET PROPERTY AND EQUIPMENT                                         65,814         63,147
                                                                       ------------------------
OTHER ASSETS:
   Goodwill, net                                                           1,538          1,581
   Other                                                                      38             56
                                                                       ------------------------
       TOTAL OTHER ASSETS                                                  1,576          1,637
                                                                       ------------------------
       TOTAL ASSETS                                                    $ 245,816     $  233,539
                                                                       ========================

LIABILITIES AND STOCKHOLDERS'
INVESTMENT
CURRENT LIABILITIES:
   Accounts payable:
     Trade                                                             $  71,439    $    79,127
   Related party                                                           7,493          2,270
   Accrued income taxes                                                    2,730          1,961
   Accrued expenses                                                       13,993         14,768
                                                                       ------------------------
       TOTAL CURRENT LIABILITIES                                          95,655         98,126
                                                                       ------------------------
LONG-TERM DEBT                                                            45,240         37,645
                                                                       ------------------------
DEFERRED INCOME TAXES                                                      1,436          1,348
                                                                       ------------------------
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,
     17,427,593 and 17,408,535 shares issued and outstanding at
     January 31, 1998 and February 1, 1997, respectively                     174            174
   Additional paid-in capital                                             62,925         62,829
   Retained earnings                                                      40,386         33,417
                                                                       ------------------------
       TOTAL STOCKHOLDERS' INVESTMENT                                    103,485         96,420
                                                                       ------------------------
       TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT                  $ 245,816     $  233,539
                                                                       ========================
</TABLE>



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


                                       10
<PAGE>   7

                       CONSOLIDATED STATEMENTS OF INCOME
                     (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
                                                         ------------------------------------
                                                           1/31/98       2/1/97      2/3/96
---------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>          <C>      
Net sales                                                $ 324,762     $ 278,613    $ 229,801
Cost of products sold, including warehouse
   distribution and store occupancy costs (1)              238,342       206,269      164,124
                                                         ------------------------------------
     GROSS PROFIT                                           86,420        72,344       65,677

Operating, selling and administrative expenses              59,260        50,636       43,559
Depreciation and amortization                               11,588         9,540        6,833
Store closing charge                                            --            --        2,945
                                                         ------------------------------------
     OPERATING PROFIT                                       15,572        12,168       12,340

Interest expense, net                                        4,331         2,826          474
                                                         ------------------------------------
     INCOME BEFORE INCOME TAXES                             11,241         9,342       11,866

Provision for income taxes                                   4,272         3,550        4,390
                                                         ------------------------------------
     NET INCOME                                          $   6,969     $   5,792    $   7,476
                                                         ------------------------------------
Weighted average number of shares
   outstanding - basic                                      17,425        17,405       17,371
                                                         ====================================
NET INCOME PER SHARE - BASIC (2)                         $    0.40     $    0.33    $    0.43
                                                         ====================================
Weighted average number of shares
   outstanding - diluted                                    17,428        17,580       17,641
                                                         ====================================
NET INCOME PER SHARE - DILUTED (2)                       $    0.40     $    0.33    $   0 .42
                                                         ====================================
</TABLE>

(1) Inventory purchases from related parties were $32,303, $23,120 and $17,919,
respectively, for the periods presented above.

(2) Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share, and restated EPS for all
periods presented.





















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

                                       11
<PAGE>   8

                             CONSOLIDATED STATEMENTS
                           OF STOCKHOLDERS' INVESTMENT
                             (Dollars in thousands)




<TABLE>
<CAPTION>
                                                                        Additional
                                                            Common        Paid-In     Retained
                                                             Stock        Capital     Earnings
----------------------------------------------------------------------------------------------
<S>                                                         <C>         <C>           <C>     
BALANCE, JANUARY 28, 1995                                   $  173       $ 62,122     $ 20,149
   Net income                                                   --             --        7,476
   Issuance of stock for employee
     stock purchase plan                                        --             86           --
   Exercise of stock options                                     1            448           --
                                                            ----------------------------------

BALANCE, FEBRUARY 3, 1996                                      174         62,656       27,625
   Net income                                                   --             --        5,792
   Issuance of stock for employee
     stock purchase plan                                        --            102           --
   Exercise of stock options                                    --             71           --
                                                            ----------------------------------

BALANCE, FEBRUARY 1, 1997                                      174         62,829       33,417
   Net income                                                   --             --        6,969
   Issuance of stock for employee
     stock purchase plan                                        --             96           --
                                                            ----------------------------------

BALANCE, JANUARY 31, 1998                                   $  174       $ 62,925     $ 40,386
                                                            ==================================


</TABLE>



























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



                                       12
<PAGE>   9

                      CONSOLIDATED STATEMENTS OF CASH FLOW
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
                                                        --------------------------------------
                                                           1/31/98       2/1/97      2/3/96
----------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>          <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                            $   6,969     $   5,792    $   7,476
                                                         -------------------------------------
   Adjustments to reconcile net income to net
     cash provided by (used in)
     operating activities:
       Depreciation and amortization                        11,588         9,540        6,833
       (Gain) loss on sale of property                          44           114         (269)
       Deferred income tax provision (benefit), net            (97)          (15)         254
       (Increase) decrease in assets:
         Accounts receivable                                 1,466        (4,825)      (3,624)
         Related party receivables                          (1,705)       (1,506)       1,112
         Inventories                                        (9,882)      (19,422)     (36,469)
         Prepayments and other                                (214)          136          (34)
       Increase (decrease) in liabilities:
         Accounts payable                                   (2,465)        9,760        7,822
         Accrued income taxes                                  769         1,400       (2,368)
         Accrued expenses                                     (718)        1,696        4,540
                                                         ------------------------------------
             Total adjustments                              (1,214)       (3,122)     (22,203)
                                                         ------------------------------------
             Net cash provided by (used in)
                 operating activities                        5,755         2,670      (14,727)
                                                         ------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sale of property and equipment                 42           126        3,659
   Capital expenditures                                    (14,355)      (23,674)     (23,901)
                                                         ------------------------------------
              Net cash used in investing activities        (14,313)      (23,548)     (20,242)
                                                         ------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of common stock, net                      96           173          535
   Proceeds from issuance of long-term debt                     --            --        2,900
   Borrowings under credit facilities                      152,296       142,933       56,798
   Repayments under credit facilities                     (144,701)     (119,375)     (50,211)
                                                         ------------------------------------
             Net cash provided by financing activities       7,691        23,731       10,022
                                                         ------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
   CASH INVESTMENTS                                           (867)        2,853      (24,947)
CASH AND TEMPORARY CASH INVESTMENTS AT THE
   BEGINNING OF YEAR                                         4,776         1,923       26,870
                                                         ------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS AT THE
   END OF YEAR                                           $   3,909     $   4,776    $   1,923
                                                         ====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
   Cash paid during the year for:
     Interest                                            $   4,276     $   2,693    $     556
     Income taxes, net of refunds                        $   4,023     $   2,146    $   6,362
                                                         ====================================

</TABLE>







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


                                       13
<PAGE>   10

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


  

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS
   Books-A-Million, Inc. and its subsidiary (the "Company") are principally
engaged in the sale of books, magazines and related items through a chain of
retail bookstores. The Company presently operates over 165 bookstores in 17
states, which are predominantly located in the southeastern United States. The
Company also serves as a wholesale book distributor for certain other retailers
and wholesalers. The Company presently consists of Books-A-Million, Inc. and its
wholly owned subsidiary, American Wholesale Book Company, Inc. ("American
Wholesale"). 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 1996 was a 53-week period, while
fiscal years 1998 and 1997 were 52-week periods.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
   The preparation of financial statements in conformity with generally accepted
accounting principles 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, with cost determined
on a first-in, first-out ("FIFO") basis and market based on the lower of
replacement cost or estimated realizable value.

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 3 to 7 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
January 31, 1998 and February 1, 1997, accumulated amortization of goodwill was
$167,000 and $124,000 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 in the first full month of the stores' operations.



                                       14
<PAGE>   11
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INSURANCE ACCRUALS
   The Company is subject to large deductibles under its workers' compensation
policy. Insurance coverage is maintained for cumulative losses in amounts
management considers adequate. Amounts are accrued currently for the estimated
cost of claims incurred.

INCOME TAXES
   The Company accounts for income taxes using Statement of Financial Accounting
Standards ("SFAS") No. 109, Accounting for Income Taxes, which requires
recognition of 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 cash equivalents.

EARNINGS PER SHARE
   In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, Earnings Per Share. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; earlier adoption is not permitted. This statement requires restatement
for all prior-period earnings per share ("EPS") data presented.
   SFAS No. 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board ("APB") Opinion No. 15, Earnings Per Share, and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with the presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for the Company.
   Basic 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 or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.



                                       15
<PAGE>   12




                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



   The Company adopted SFAS No. 128 effective January 31, 1998 and restated EPS
for all periods presented in the consolidated statements of income. A
reconciliation of the weighted average shares for basic and diluted EPS is as
follows:

<TABLE>
<CAPTION>
                                     Net Income               Shares                 Per Share
 For the Years Ended               (in thousands)         (in thousands)               Amount
-----------------------------------------------------------------------------------------------
<S>                                 <C>                   <C>                        <C>       
January 31, 1998:
   Basic earnings per share         $  6,969                  17,425                 $     0.40
   Dilutive securities                     0                       3
                                    -----------------------------------------------------------
   Diluted earnings per share       $  6,969                  17,428                 $     0.40
                                    -----------------------------------------------------------

February 1, 1997:
   Basic earnings per share         $  5,792                  17,405                 $     0.33
   Dilutive securities                     0                     175
                                    -----------------------------------------------------------
   Diluted earnings per share       $  5,792                  17,580                 $     0.33
                                    -----------------------------------------------------------

February 3, 1996:
   Basic earnings per share         $  7,476                  17,371                 $     0.43
   Dilutive securities                     0                     270
                                    -----------------------------------------------------------
   Diluted earnings per share       $  7,476                  17,641                 $     0.42
                                    -----------------------------------------------------------
</TABLE>

DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
   In the opinion of management, the carrying value of all financial instruments
approximates fair value.

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.

PENDING ACCOUNTING STANDARDS
   The FASB has issued Statement No. 130, Reporting Comprehensive Income, which
will be effective in fiscal 1999. This statement establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The objective of the statement is to
report a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners ("comprehensive income"). Comprehensive income is the total of net
income and all other non-owner changes in equity. The company will adopt this
statement in fiscal 1999. Adoption of the Statement is not expected have a
significant impact on the Company's financial reporting.
   The FASB has issued Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information. This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Generally, financial information is required to
be reported on the basis that it is used by the chief operating decision maker
in deciding how to allocate resources and in assessing performance. This
statement also establishes standards for related disclosures about products and
services, geographic areas, and major customers. The Company is currently
evaluating the impact on financial reporting and will adopt the new rules in
fiscal 1999.
   In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures About
Pensions and


                                       16
<PAGE>   13
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other Post-retirement Benefits. SFAS No. 132, which supersedes SFAS Nos. 87, 88,
and 106, standardizes the disclosure requirements for pensions and other
post-retirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer as useful as they were when SFAS Nos. 87, 88, and 106 were issued.
The Company will adopt the new rules in fiscal 1999. The new rules are not
expected to have a significant impact on the Company's financial reporting.

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
                                                           --------------------------------
                                                           1/31/98       2/1/97      2/3/96
-------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>         <C>    
Current:
   Federal                                                 $ 3,831      $3,325      $ 3,481
   State                                                       538         240          655
                                                           --------------------------------
                                                             4,369       3,565        4,136
                                                           --------------------------------
Deferred taxes arising from:
   Depreciation                                                 61         463          538
   Accruals                                                      4        (330)        (286)
   Inventory                                                  (181)       (436)         109
   Other                                                        19         288         (107)
                                                           --------------------------------
                                                               (97)        (15)         254
                                                           --------------------------------
Provision for income taxes                                 $ 4,272      $3,550     $  4,390
                                                           --------------------------------
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       Fiscal Year Ended
                                                           -----------------------------------
                                                              1/31/98      2/1/97      2/3/96
----------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>         <C>  
Federal statutory income tax rate                               34.0%       34.0%        34.2%
State income tax provision, net                                  3.2%        3.0%         3.9%
Other                                                            0.8%        1.0%        (1.1%)
                                                           -----------------------------------
Effective Income Tax Rate                                       38.0%       38.0%        37.0%
                                                           -----------------------------------

</TABLE>



                                       17
<PAGE>   14


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Temporary differences which created deferred tax assets and liabilities at
January 31, 1998, and February 1, 1997, are detailed below (dollars in
thousands):

<TABLE>
<CAPTION>
                                                   As of 1/31/98            As of 2/1/97
                                            ------------------------------------------------
                                           Current       Noncurrent     Current   Noncurrent
--------------------------------------------------------------------------------------------
<S>                                        <C>           <C>          <C>         <C>     
Depreciation                                $    --      $ (1,326)    $      --     $(1,265)
Accruals                                      2,171            --         2,175          --
Inventory                                       790            --           609          --
Other                                           137          (110)          129         (83)
                                            ------------------------------------------------
Deferred tax asset (liability)              $ 3,098      $ (1,436)     $  2,913     $(1,348)
                                            ------------------------------------------------
</TABLE>

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

INCOME TAX AUDIT
   The Internal Revenue Service completed their audit of the Company's tax
returns for the fiscal years 1993, 1994 and 1995. The audit findings did not
have a material adverse impact on the financial position of the Company.

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 3, 2002, and an unsecured working capital line of credit for $10 million,
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 January 31, 1998, $37.7 million was outstanding under these credit
facilities. The maximum and average outstanding balances during fiscal 1998 were
$66.6 million and $56.0 million, respectively. The outstanding borrowings as of
January 31, 1998, had interest rates ranging from 6.38% to 6.75%.
   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
January 31, 1998 and February 1, 1997, 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 December 1, 2002, 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.
   In the opinion of management, the carrying value of all debt instruments at
January 31, 1998 approximates fair value.

4. LEASES

   The Company leases the premises for its retail bookstores under operating
leases which expire in various years through the year 2011. Many of these leases
contain renewal options and require the Company to pay executory costs (such as
property taxes, maintenance, and insurance). In addition to fixed minimum
rentals, some of the Company's leases require contingent rentals based on a
percentage of sales.
   The Company also leases certain office, warehouse and retail store space from
related parties. Rental expense under these leases was approximately $411,000,
$407,000 and $239,000 in fiscal 1998, 1997 and 1996, respectively. Total minimum
future rental payments under these leases are $405,000.


                                       18
<PAGE>   15
                   NOTES TO CONSOLIDATED FINANICAL STATEMENTS


   Minimum future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of January 31, 1998, are as follows (in
thousands):

<TABLE>
<CAPTION>

                      Fiscal Year
                    -----------------------------------------------------
                    <S>                                       <C> 
                         1999                                 $    18,762
                         2000                                      17,473
                         2001                                      16,881
                         2002                                      16,058
                         2003                                      14,972
                    Subsequent years                               51,759
                                                              -----------
                                                              $   135,905
                                                              ===========
</TABLE>

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

<TABLE>
<CAPTION>
                                                                   Fiscal Year Ended
                                                          ---------------------------------
                                                           1/31/98       2/1/97      2/3/96
-------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>         <C>     
Minimum rentals                                           $ 18,171     $ 14,627    $ 10,852
Contingent rentals                                             690          493         560
                                                          ---------------------------------
                                                          $ 18,861     $ 15,120    $ 11,412
                                                          =================================
</TABLE>

5. EMPLOYEE BENEFIT PLANS

401(K) PROFIT-SHARING PLAN
   The Company and its subsidiary 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 $238,000, $341,000 and $214,000 in
fiscal 1998, 1997 and 1996, respectively.

STOCK OPTION PLAN
   The Company maintains a stock option plan reserving 1,800,000 shares of the
Company's common stock for grants to executive officers, directors, and key
employees. Options granted generally vest over a five-year period, expire on the
sixth anniversary of the date of grant, and 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:

<TABLE>
<CAPTION>

                                                                   Fiscal Year Ended
                                            -------------------------------------------------------
                                                 January 31, 1998            February 1, 1997
---------------------------------------------------------------------------------------------------
                                                            Weighted                   Weighted
                                                             Average                    Average
                                              Shares      Exercise Price   Shares    Exercise Price
---------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>            <C>        <C>       
Outstanding at beginning of year             1,164,060     $    8.32      834,730    $     9.61
Granted                                        458,250          5.80      389,200          5.81
Exercised                                           --            --       (6,600)         7.94
Forfeited                                      (51,180)         9.20      (53,270)        12.13
                                            -------------------------------------------------------

Outstanding at end of year                   1,571,130     $    7.57    1,164,060    $     8.32
                                            -------------------------------------------------------

Exercisable at end of year                     573,448     $    8.86      408,336    $     9.35
                                            -------------------------------------------------------
</TABLE>







                                       19



<PAGE>   16
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



   The following table summarizes information about stock options outstanding at
January 31, 1998:

<TABLE>
<CAPTION>
                                     Options Outstanding                 Options Exercisable
                     ----------------------------------------------- -------------------------------
                                          Weighted
                         Number            Average                       Number
                     Outstanding at       Remaining      Weighted    Exercisable at     Weighted
    Range of           January 31,       Contractual      Average      January 31,       Average
 Exercise Price           1998          Life (Years)  Exercise Price      1998        Exercise Price
----------------------------------------------------------------------------------------------------
<C>                  <C>                <C>           <C>            <C>              <C>
$4.63 to 16.88         1,571,430            4.1        $    7.57         573,448        $    8.86
</TABLE>

   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 nonemployees. 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
                                                          ----------------------------------
                                                           1/31/98       2/1/97      2/3/96
--------------------------------------------------------------------------------------------
<S>                                                       <C>          <C>          <C>     
Net income-as reported                                    $  6,969     $  5,792     $  7,476
Net income-pro forma                                         6,788        5,727        7,475
Net income per share-diluted, as reported                     0.40         0.33         0.43
Net income per share-diluted, pro forma                       0.39         0.33         0.43
</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 expected life of the options, and an expected stock
price volatility rate of .49 with risk-free interest rates ranging from 5.39% to
6.84%. Based upon these assumptions, the weighted average fair value of options
granted was $2.89, $5.34 and $3.94 in fiscal 1998, 1997 and 1996, respectively.

EMPLOYEE STOCK PURCHASE PLAN
   The Company maintains an employee stock purchase plan under which 100,000
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,
51,868 shares have been purchased as of January 31, 1998.

6. RELATED PARTY TRANSACTIONS

   Certain majority 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 $32,303,000, $23,120,000, and $17,919,000 in
fiscal 1998, 1997, and 1996, respectively. The Company sells a portion of its
inventories to related parties; such sales amounted to $10,273,000, $ 9,819,000,
and $7,261,000, in fiscal 1998, 1997 and 1996, respectively.

                                       20

<PAGE>   17

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company purchases promotional marketing material from a related party; such
purchases amounted to $202,000, $47,000 and $6,000 in fiscal 1998, 1997 and 1996
respectively.
   During fiscal 1996, the Company sold one of its distribution facilities to a
related party. The sales price for the facility was $1,650,000, which resulted
in a gain of $221,000. Management believes the terms of this transaction were
substantially equivalent to those available from unrelated parties.

7. STORE CLOSING CHARGE

   During fiscal 1996, the Company recorded a charge of $2.9 million for costs
associated with the anticipated closings of 24 bookstores. The consolidated
statements of income for the fifty-three week period ended February 3, 1996,
reflect this store closing charge. The charge includes amounts for lease
termination costs ($977,000), asset write-downs ($990,000) and other disposition
costs such as warehouse processing and store closing expenses ($978,000). As of
the end of fiscal 1998, all 24 anticipated closings have been completed,
resulting in lease termination costs of $886,000, asset write-downs of
$1,005,000 and other disposition costs of $1,021,000. The remaining balance of
the store closing reserve as of January 31, 1998, was $33,000, which is
reflected in accrued expenses in the accompanying consolidated balance sheet.
The remaining liabilities are expected to be paid or settled within the 1999
fiscal year.


                                       21

<PAGE>   18


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




   To Books-A-Million, Inc.: We have audited the accompanying consolidated
balance sheets of Books-A-Million, Inc. (a Delaware corporation) and its
subsidiary as of January 31, 1998 and February 1, 1997, and the related
consolidated statements of income, stockholders' investment, and cash flows for
each of the three fiscal years in the period ended January 31, 1998. 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 generally accepted auditing
standards. 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
subsidiary as of January 31, 1998 and February 1, 1997, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 31, 1998, in conformity with generally accepted accounting
principles.



                                                ARTHUR ANDERSEN LLP


Birmingham, Alabama
March 17, 1998





                                       22

<PAGE>   19

                          SUMMARY OF QUARTERLY RESULTS
                                   (Unaudited)
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                 Fiscal Year Ended January 31, 1998
                                       --------------------------------------------------------
                                         First       Second      Third     Fourth
                                        Quarter     Quarter     Quarter    Quarter      Total
-----------------------------------------------------------------------------------------------
<S>                                    <C>        <C>         <C>        <C>          <C>      
Net sales                              $ 68,237   $  71,867   $ 71,613   $  113,045   $ 324,762
Gross profit                             17,541      18,686     17,480       32,713      86,420
Operating profit                          1,606       2,024        652       11,290      15,572
Net income (loss)                           369         527       (300)       6,373       6,969
Net income (loss) per share - basic (1)    0.02        0.03      (0.02)        0.37        0.40
Net income (loss) per share - diluted (1)  0.02        0.03      (0.02)        0.37        0.40
</TABLE>



<TABLE>
<CAPTION>
                                                    Fiscal Year Ended February 1, 1997
                                       --------------------------------------------------------
                                         First       Second      Third     Fourth
                                        Quarter     Quarter     Quarter    Quarter      Total
-----------------------------------------------------------------------------------------------
<S>                                    <C>        <C>         <C>       <C>           <C>      
Net sales                              $ 56,589   $  60,455   $ 64,505  $    97,064   $ 278,613
Gross profit                             14,689      15,615     15,643       26,397      72,344
Operating profit                          1,988       1,482        878        7,820      12,168
Net income                                  981         508         21        4,282       5,792
Net income per share - basic (1)           0.06        0.03       0.00         0.25        0.33(2)
Net income per share - diluted (1)         0.06        0.03       0.00         0.25        0.33(2)
</TABLE>



(1) Effective January 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share and restated EPS for all
periods presented. 
(2) The sum of quarterly net income per share is different from annual net 
income per share because of differences in rounding.





                                       23
<PAGE>   20



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 ended January 31, 1998 and February
1, 1997.

<TABLE>
<CAPTION>
Quarter Ended            High          Low
-------------------------------------------------
<S>                     <C>          <C>
January 31, 1998        $7 3/8       $5 3/8
November 1, 1997         7 1/4        4 33/64
August 2, 1997           5 3/8        4 1/2
May 3, 1997              5 7/8        4 1/8
February 1, 1997         7 5/8        5 1/2
November 2, 1996         8 3/8        6 5/8
August 3, 1996          12 1/4        6 1/2
May 4, 1996             11 3/8        9 3/4
</TABLE>

   The closing price on April 14, 1998, was $5.69. No cash dividends have been
declared since completion of the Company's initial public offering. As of April
14, 1998, Books-A-Million, Inc., had approximately 6,180 stockholders based on
the number of individual participants represented by security position listings.