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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

Commission File Number: 0-26063

barnesandnoble.com inc.

(212) 414-6000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.001 par value per share

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the closing sale price of the Common Stock on June 30, 2003 as reported on the NASDAQ National Market System, was approximately $87,842,624.

      Number of shares of $.001 par value Class A Common Stock, Class B Common Stock and Class C Common Stock outstanding as of March 1, 2004 was 52,476,325, one and one, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report.

This document contains 60 pages.

TABLE OF CONTENTS

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PART I

Item 1.     Business

     General

      barnesandnoble.com inc. (the “Company”) is a holding company whose sole asset is its 29.6% interest in barnesandnoble.com llc (“B&N.com”), and whose sole business is acting as sole manager of B&N.com. Through direct membership interests in B&N.com and ownership of common stock in the Company, as of March 1, 2004 Barnes & Noble, Inc. (“Barnes & Noble”) owned a 72.9% economic interest in B&N.com and a 96.3% voting interest in the Company. Barnes & Noble increased its interest to that level on September 15, 2003 by acquiring the entire 36.8% equity interest of Bertelsmann AG (“Bertelsmann”) in B&N.com for $2.80 per share or membership unit in B&N.com (“Membership Unit”), payable in a combination of cash and notes. On January 8, 2004, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), which sets forth the terms and conditions of the proposed acquisition of the Company by a wholly owned subsidiary of Barnes & Noble. The Merger Agreement provides that at the closing of the merger, the holders of the Company’s outstanding common stock, other than Barnes & Noble and its subsidiaries, will receive $3.05 per share in cash for their shares, and the Company will become a privately held company, wholly owned by Barnes & Noble. The closing of the merger is expected to occur by early second quarter of fiscal 2004.

      B&N.com is a leading internet-based retailer of books, music, DVD/video and online courses. Since opening its online store (www.bn.com) in March 1997, B&N.com has attracted more than 17.0 million customers in 230 countries. B&N.com’s bookstore includes the largest in-stock selection of in-print book titles with access to approximately one million titles for immediate delivery, supplemented by more than 30 million listings from its nationwide network of out-of-print, rare and used book dealers. The Company now receives commissions on sales of used and out of print books, through BookQuest LLC (“BookQuest”), a service that allows independent book dealers to sell their used books on the B&N.com Web site. B&N.com offers its customers fast delivery, easy and secure ordering and rich editorial content.

      According to Jupiter Media Metrix, in December 2003, B&N.com’s Web site was the eleventh most-trafficked shopping site and was among the top 65 largest Web properties on the Internet. Co-marketing agreements with major Web portals such as America Online (“AOL”), Google^TM and Microsoft Network (“MSN”) as well as content sites have extended B&N.com’s brand recognition and increased consumer exposure to its site. B&N.com has also established a network of remote virtual storefronts across the Internet by creating direct links with more than 189,000 affiliate Web sites.

      The Company believes that B&N.com’s relationships with Barnes & Noble, the nation’s largest bookseller, provides B&N.com with meaningful advantages relative to other online retailers in its category, including:

	•	The superior brand recognition of the Barnes & Noble trade name, which is a strong factor in attracting customers;
	•	The use of Barnes & Noble’s distribution center as its primary product supplier, which enables B&N.com to offer approximately one million in-stock book titles for immediate delivery, representing the largest standing inventory of any online bookseller; B&N.com is also able to benefit from the supplier relationships maintained by Barnes & Noble with every significant book publisher;
	•	The use of Barnes & Noble’s book database as the primary source of bibliographic data, which enables B&N.com to provide its customers with the most authoritative and accurate book data available;
	•	The enterprise value of Barnes & Noble, including its network of 842 retail bookstores nationwide, provides significant advantages in attracting strategic partnerships;
	•	Ongoing access to the substantial book selling and direct marketing knowledge and experience of the management of Barnes & Noble; and

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	•	Participation with Barnes & Noble to create and maintain a book buyers’ membership loyalty program, the Barnes & Noble Membership Program (formerly the “Readers’ AdvantageTM card”), which offers discounts and other benefits to members. For a $25 annual membership fee, participating customers receive 10% additional discounts at Barnes & Noble stores and 5% additional discounts at B&N.com. In addition to discounts, member benefits include sign-up premiums and member-only events.

     Industry Background

      E-Commerce. The arena of e-commerce provides retailers with the opportunity to serve a rapidly growing market, fueled by increased consumer acceptance of the Internet as an alternative shopping channel. According to the January 2004 Forrester US eCommerce report, online shopping for 2003 was $107.0 billion. Online shopping is expected to reach $176.8 billion in the year 2006 (Forrester July 2003 US eCommerce report). In Jupiter Research’s January 2004 population model, the U.S. online buying population will grow by 14 percent in 2004 over 2003, representing 30 percent of the U.S. population. According to Jupiter Research, by 2008, one-half of the U.S. population will make purchases online.

      The Book Industry. The size of the U.S. consumer book market, according to Veronis Suhler & Associates, an investment banking firm specializing in, among other things, the publishing industry, was $18.8 billion in 2002, and is expected to grow to $21.6 billion by 2007. According to the National Association of College Stores, Inc., the college textbook market for the 2001 to 2002 academic year was $7.7 billion with used textbooks representing 14.9%.

      Online Shopping Forecast. Forrester Research forecasts accelerating acceptance of the Internet as a channel that consumers will use to purchase a wide range of products. Within the categories of B&N.com’s focus of books, music and DVD/video, Forrester Research forecasts significant growth in online sales for all the categories. Forrester Research estimates that North American online sales of books will grow from $2.8 billion in 2003 to $5.5 billion by 2008. In addition, Forrester Research estimates online sales in 2008 for music and DVD/video to be $2.5 billion up from $1.2 billion in 2003 and $5.6 billion up from $1.8 billion in 2003, respectively.

      Products that are Well Suited for E-Commerce. The book, music and video businesses are particularly well suited for e-commerce because an online store has virtually unlimited shelf space and can offer consumers anywhere the convenience of browsing through large product information databases. The use of sophisticated search and browse engines enables users to find books and music with convenience and speed and to get advance notice about new titles in their areas of personal interest. Editorial content, such as synopses, excerpts, reviews and recommendations, downloadable music sound samples and over 10,000 movie trailers, make for a more educated and entertaining purchasing decision. In addition, B&N.com’s core categories, books, music and DVD/video, are popular and economical gift items. According to the December 2003 eSpending Report from Goldman Sachs & Co., Harris Interactive, and Nielsen/ Net Ratings, during the holiday 2003 season (November 1, 2003 to December 12, 2003) the books category increased by 33% over holiday 2002 to comprise $1.0 billion in sales or 7.7 percent of U.S. online spending; and DVD/video sales increased by 89% over holiday 2002 to comprise $1.2 billion in sales or 9.2% of U.S. online spending.

      Broadband vs. Dial-up. Currently most households access the Internet through a dial-up connection, which requires use of a phone line and modem, with maximum speeds of 56 kbps. Broadband access does not use a phone line and has speeds up to ten times faster than dial-up connections, which makes the online shopping experience much faster. A December 2003 Report by ComScore Media Metrix reports that the number of home broadband users has increased by more than 30% in the past year, with 34% of home users now using a high-speed connection. ComScore research has shown that broadband users are at least 50% more likely than narrowband users to complete an online purchase in a given month.

     Business Strategy

      B&N.com has aggressively pursued its strategy to be an e-commerce leader in the sale of books, music and DVD/video. It is B&N.com’s goal to be recognized as the most innovative and customer-focused of e-commerce merchants, making online purchasing a simple, secure and gratifying experience that results in

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      B&N.com’s goals are to increase its customers and revenue base by:

	Continually Enhancing the User Experience. B&N.com is committed to making every aspect of browsing and shopping on its Web site an easy and intuitive experience. It makes continual efforts to improve the design, layout and navigation of all elements of its Web site, as well as to ensure that the site’s performance metrics are competitive, especially with regard to page download times and the speed of all search functions. Introduced in 2002, BookBrowserTM, powered by a licensed navigation technology, allows users to easily browse millions of books in more than 400,000 categories using a host of criteria including subject, author, format, price range, award winners, recommended books, bestsellers and more. Additionally, BookBrowserTM enables users to select and combine categories that best match their interests to quickly arrive at a list of very specific and relevant books. B&N.com also strives to make the ordering and checkout process easy, intuitive, fast and secure. In 2002 and 2003, the Company implemented a number of enhancements to both the order checkout process and to the account maintenance function. These improvements continue to assist customers in quickly completing their orders and enable them to easily modify information in their customer accounts. During the first half of 2003, special processing and systems capacity were allocated to handle the hundreds of thousands of pre-orders for the fifth installment in the Harry Potter series.
	Providing Rich Editorial Content. B&N.com strives to provide its users with the most accurate and authoritative online database about books and authors. B&N.com’s online database includes editorial content such as excerpts, synopses, book reviews, author biographies and user reviews on more than one million titles. Included in this content are book reviews from many respected industry sources, such as The New Yorker, Publisher’s Weekly, and the Kirkus Reviews. B&N.com’s in-house editorial experts also write and commission feature articles, columns and interviews with popular authors.
	In 2003, B&N.com introduced the Book Clubs Center, where customers can find reading group recommendations and free, printable reading group guides for thousands of titles. The Book Clubs Center features a book club “Pick of the Week,” and exclusive free online reading groups with contemporary authors and other literary experts.
	In 2003, B&N.com expanded “Meet the Writers”, the exclusive author showcase where users can find comprehensive biographical information, author profiles and interviews, book recommendations and lists of current and forthcoming publications. Meet the Writers also features exclusive audio and video interviews with select authors and a “Writer Alert” program that tells users by e-mail when their favorite authors have published new books.
	Offering a Large Product Selection and Fast Delivery. B&N.com has access to the largest in-stock selection of in-print book titles available for immediate delivery, supplemented by more than 30 million listings from its nationwide network of out-of-print, rare and used book dealers. This includes an extensive selection of English-language books in print as well as millions of out-of-print, rare and used books. B&N.com’s online databases act as a highly searchable catalogue for the full spectrum of English-language books. The Company’s distribution network ensures speedy delivery. B&N.com’s search engine and BookBrowserTM navigation engine allow consumers to search and browse through the Company’s database of approximately one million titles available for immediate delivery.
	Extensive Product Offering. B&N.com is focused on becoming the best place to buy books online as well as the most authoritative source for information about books and authors. While B&N.com’s major focus is and will be selling books, the Company believes that offering complementary information products such as music, DVDs/videos and online courses is a natural extension of bookselling. B&N.com’s Music Store features hundreds of thousands of titles, as well as artist biographies, artist interviews and music reviews. The site also offers free music downloads on selected songs and “The Listening Wall”, where users can listen to song samples. B&N.com’s Video Store features tens of

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	thousands of movie titles available in both DVD and VHS formats. Powered by the comprehensive All-Movie Guide database, and organized into 500 genres and more than 800 sub-categories, B&N.com’s Video Store offers an extensive selection of DVD/videos. Users can also access the B&N.com Screening Room featuring over 10,000 of the newest full-length video previews. The Company’s Barnes & Noble University® offers hundreds of non-accredited online free and paid courses each year. Each online course covers a specific book or text and is taught by an author or expert in the field. The course topics include a wide range of subjects from technology and computer skills to literature, writing, business, foreign language and self-help.
	In February 2002, the Company launched Barnes & Noble, Jr., featuring a wide selection of books for children of all ages. Barnes & Noble, Jr. also has extensive video and music selections. Streamlining the shopping experience, the new store features clear links between product lines and age-based recommendations within each product line. The fully cross-merchandised Barnes & Noble, Jr. focuses on new releases, celebrated award winners and classics. New in 2003 was an expansion of non-book products for children, which included games, activity kits, puzzles, plush toys, and interactive reading devices.
	In May 2003, the Company launched a Gift Center, featuring gifts, games, plush toys, and non-book products. The Gift Center was expanded in September 2003 with over 600 items, including exclusive gift and toy products. The wide selection of gift items has been organized to allow easy browsing, with sections for gifts for readers, scrap booking, and children’s gifts. The Gift Center also features several specialty boutiques for gifts by recipient, such as “Gifts for Travelers” and “Gifts for Newborns and Mothers”.
	In September 2003, the Company introduced a Business & Technology and a Medicine & Science store, which merchandise all book titles in these categories. This new feature enables customers to easily find and purchase a comprehensive selection of books especially targeted to professionals. These stores are merchandised by a team of subject category experts in the fields of business, computers, engineering and professional science, law, education, medicine and other health-related professions. Specialized merchandising of these subjects also includes subscription newsletters in medicine, business and computers.
	In September 2003 the Company significantly expanded its selection of books in Spanish and launched Libros en Español. Customers can browse Spanish-language titles in thousands of categories by subject, format and price, and get detailed information including first chapters and excerpts. Libros en Español also offers thousands of Latin-music CDs, DVDs and video titles produced in Spanish or with Spanish language tracks. The area also features weekly bestseller lists for Spanish-language adult and children’s books, and its “Meet the Writers” section will feature profiles and interviews of Hispanic authors.
	During the 2003 holiday season, the Company featured its annual Holiday Gift Guide. This comprehensive guide featured nearly 3,000 guaranteed in-stock products organized into hundreds of subject and interest categories including art and photography, food and wine, fiction and literature, home and garden, religion and science and nature. Also featured were special, handpicked collections, including Christmas and holiday books, coffee table books and gift books. Music and video selections included music and DVD box sets, bestsellers and holiday selections. Children and teen selections were categorized by age and included special interest collections. New in 2003 was an expanded non-book section featuring products in categories such as games, puzzles, plush toys, home and office, and yoga and wellness.
	Building Brand Awareness and Driving Customer Acquisition Through Online Advertising and Promotion. B&N.com will continue to invest in building its online brand through its key relationships. The Company began 2003 with 13.6 million customers and grew this base to more than 17.0 million by year-end. In its advertising and promotion initiatives, B&N.com seeks to continuously drive down the new customer acquisition cost, as well as to get customers to return to the site more frequently and to increase the size of their average purchase per visit. B&N.com has formed significant strategic marketing

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	relations with GoogleTM, AOL and MSN and has established an extensive affiliate network, all designed to build brand awareness and increase customer acquisition.
	Maintaining High Levels of Customer Service. The Company believes that high levels of customer service and support are crucial to retaining and expanding B&N.com’s customer base. For the fourth quarter of 2003, B&N.com received one of the top two scores in customer satisfaction of the 70 companies contained in the latest American Customer Satisfaction Index (ACSI), a quarterly survey of consumer attitudes by the University of Michigan. In addition, B&N.com’s score of 86 out of a possible 100 is an increase of nearly 12.0% since the survey’s inception in 2000. This represents one of the largest gains of any company in the survey. B&N.com monitors orders from the time they are placed through delivery by providing numerous points of electronic, telephonic and personal communication to its customers.

     Marketing and Promotion

      Online Strategic Alliances. Since inception, B&N.com has aggressively pursued strategic alliances with premier online companies and high-traffic Web sites to drive traffic to its own site. The Company has major affiliations with Google^TM as well as with AOL’s proprietary service and MSN which are among the world’s largest online shopping destinations.

      Affiliate Network. In addition to securing alliances with the nation’s three highest-trafficked Internet properties, B&N.com has established an affiliate network of more than 189,000 Web sites operated by third parties, whereby Web site operators can earn referral fees by linking users from their sites to the B&N.com site.

     Technology

      B&N.com believes that it has built a leading interactive e-commerce platform, and plans to continue to invest in technologies that will enable B&N.com to offer its customers the most convenient and user-friendly online shopping experience. B&N.com has licensed existing commercial technology when available and has focused its internal development efforts on those proprietary systems necessary to provide the highest level of value and service to its customers. The overall mix of technologies and applications in use by B&N.com allows it to support a distributed, scalable and secure e-commerce environment.

      B&N.com uses Intel-based server technology in a fully redundant configuration to power its Web site, which is hosted in two locations. At these locations, B&N.com maintains computers that store its Web pages in electronic form and transmits them to requesting users. Such storage and transmittal is called hosting. B&N.com operates two hosting locations. Each of the hosting locations is “co-located” within leading edge hosting facilities that are maintained by two different hosting vendors. Either site has sufficient capacity to support the volume of traffic directed toward B&N.com during peak periods. Both hosting locations are configured with excess Internet telecommunications capacity to ensure quick response time and three separate Internet service providers are used. By maintaining redundant host locations, B&N.com has significantly reduced its exposure to downtime and service outages. Additionally, the Company believes its technology investments are scalable.

      B&N.com’s integrated systems and tools provide functionality in the following areas:

Book Database and Search Functionality. B&N.com has seamlessly incorporated the Barnes & Noble book database into the Web site. The Barnes & Noble book database is a comprehensive synthesis of multiple sources of data and content that feeds from publishers and third party sources. B&N.com has also developed a powerful proprietary search engine. Search results can be sorted by user-defined sequences including “bestseller”, “date published”, or in alphabetical sequence. In addition, in 2002 B&N.com introduced BookBrowserTM, a navigation technology that allows customers to easily browse millions of books in more than 400,000 categories. BookBrowserTM also enables customers to select and combine categories that best match their interests to quickly arrive at a list of very specific and relevant books. B&N.com uses licensed technology to power BookBrowserTM.

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	e-Commerce. B&N.com has developed its e-commerce applications using the Microsoft Windows 2000 Server Architecture. B&N.com has created a set of server applications that allow customers to securely establish accounts and to store address books, credit cards and ordering preferences. A customer needs to set up an account only once and then has the ability to easily modify the components of their account setup. When the account has been established, the customer can shop the traditional “e-commerce” path by adding items to their shopping cart. Gift certificates, gift cards, gift-wrap, gift message and the ability to select from a variety of shipping methods are available options.
	Order Processing. B&N.com has created a proprietary application to expedite orders into the fulfillment process. This application has real-time connectivity to B&N.com’s and Barnes & Noble’s distribution centers as well as other third party suppliers. In addition to immediately securing the inventory for customers, application logic determines the best possible choice of shipping warehouse by evaluating purchase margin, postage cost and customer delivery time.
	Order Fulfillment and Customer Service. B&N.com has developed proprietary applications that enable it to receive products and assign them to customers based upon various ordering, handling and shipping criteria. B&N.com utilizes licensed technology and has also developed proprietary applications that are used for customer service.
	Sales Tracking and Analysis. B&N.com licenses technology to support its affiliate program. The software provides sophisticated sales tracking for the members of the affiliate network with real time reporting and analysis tools. B&N.com has built a comprehensive data warehouse to store and analyze customer sales and online activity data.
	Leveraging Technology. B&N.com invested extensively in its Web site, order processing, and fulfillment and customer service technologies through 2000. While the Company continues to invest in technology to maintain its industry-leading technological infrastructure, since 2001 a lower rate of investment has been required, providing opportunities to leverage fixed technology expenses and capital investments.

     Competition

      Both the e-commerce market and retail bookselling business are highly competitive. Following the introduction of e-commerce to the Internet, a significant number of e-commerce Web sites were launched. Despite recent failures in other areas of the e-commerce sector, the Company expects online bookselling competition to remain intense. The Company believes that the primary differentiating factors in e-commerce are brand recognition, ease of use, price, fulfillment speed, customer support, product availability, web site reliability and site content. The Company believes that B&N.com’s success will depend heavily upon its ability to provide a compelling and satisfying shopping experience. The Company believes the other factors that will affect B&N.com’s success include B&N.com’s continued ability to attract experienced marketing, technology, operations and management talent. The nature of the Internet as an electronic marketplace (which may, among other things, facilitate competitive entry and comparison-shopping) may render it inherently more competitive than traditional retailing formats. Despite the Company’s ability to gain market share, increased competitiveness among online retailers may result in reduced operating margins and a potential loss of market share.

      With respect to the sale of books, which constitutes B&N.com’s largest source of revenue, B&N.com currently competes with numerous booksellers including other Internet-based companies such as Amazon.com and traditional book retailers. With respect to the sale of music and DVD/video, B&N.com competes with numerous merchants including other Internet-based companies, such as Amazon.com and traditional retailers. B&N.com’s main online competitor, Amazon.com, has a longer online operating history and a larger existing customer base than B&N.com. B&N.com is aware that Amazon.com has and may continue to adopt aggressive pricing and marketing strategies. B&N.com is also aware of other online retailers that offer substantial discounts on products, including books, music and DVD/video, which are subsidized by advertising revenue from their Web sites. An increase in the prevalence of this type of business model could lead to additional pricing pressures on B&N.com’s products.

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     Seasonality

      B&N.com experiences seasonality in its business, reflecting Internet usage fluctuations and traditional retail holiday patterns.

     Government Regulation and Legal Uncertainties

      E-commerce is rapidly changing, and federal and state regulation relating to the Internet and e-commerce is evolving. Currently there are few laws or regulations uniquely applicable to the access of the Internet or e-commerce on the Internet. Laws and regulations may be enacted with respect to the Internet, covering issues such as user privacy, pricing, taxation, content, copyrights, distribution, antitrust and quality of products and services. Additionally, the growth of e-commerce may trigger the development of stricter consumer protection laws. The adoption of such laws or regulations could reduce the rate of growth of the Internet, which could potentially decrease the usage of B&N.com’s Web site or could otherwise have a material adverse effect on B&N.com’s business. In addition, applicability to the Internet of existing laws governing issues such as taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies.

      Further, several telecommunications carriers have requested that the Federal Communications Commission (“FCC”) regulate telecommunications over the Internet. Due to the increasing use of the Internet and the burden it has placed on the current telecommunications infrastructure, telephone carriers have requested that the FCC regulate Internet service providers and online service providers and impose fees on those providers. If the FCC imposes access fees, the costs of using the Internet could increase significantly. This could result in the reduced use of the Internet as a medium for commerce, which could have a material adverse effect on B&N.com’s business, financial condition, results of operations or prospects.

      As of February 27, 2004, B&N.com employed 1,001 full-time and part-time employees. B&N.com also employs independent contractors to perform duties in various departments. B&N.com’s employees are not represented by unions, and B&N.com considers its relationship with its employees to be excellent. B&N.com believes that its success is dependent on its ability to attract and retain qualified personnel in numerous areas.

      Our investor relations Web site is http://www.barnesandnoble.com/ir. We make available on this Web site under “SEC Filings,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file or furnish such material to the U.S. Securities and Exchange Commission (“SEC”).

      B&N.com’s principal administrative, marketing and technical facilities are situated in New York, New York, and are covered by one lease which is for approximately 90,000 square feet of office space and expires in 2015. Additionally, we have 64,750 square feet of vacant office space that we remain obligated under a lease agreement that expires in 2006.

      Barnes & Noble leases a 300,000 square foot facility located in Dayton, New Jersey, of which B&N.com uses approximately 100,000 square feet for its fulfillment operations. This lease expires in February 2005; however, Barnes & Noble has an option to extend the lease for up to two additional successive two-year periods.

      B&N.com leases a 380,000 square foot building in Memphis, Tennessee for distribution purposes. The lease term is five years expiring January 2005.

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      B&N.com leases 30,000 square feet in Secaucus, New Jersey for its customer service operations. The lease term is 10 years expiring June 2009. The lease may be renewed for one five-year period at an agreed upon prevailing fair market value rate.

      We believe that our properties are suitable and adequate for our present and anticipated near term needs.

      In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt, filed a lawsuit in the United States District Court for the Southern District of New York against a predecessor of the Company, Barnes & Noble, Borders Group, Inc. and others, alleging violation of the Robinson-Patman Act and other federal law, New York statutes governing trade practices and common law. In March 2000, a Second Amended Complaint was served on the Company and other defendants alleging a single cause of action for violations of the Robinson-Patman Act. The Second Amended Complaint claims that The Intimate Bookshop, Inc. has suffered damages of $11,250,000 or more and requests treble damages, costs, attorneys’ fees and interest, as well as declaratory and injunctive relief prohibiting the defendants from violating the Robinson-Patman Act. The Company served an Answer in April 2000 denying the material allegations of the Second Amended Complaint and asserting various affirmative defenses. On January 11, 2002, the Company and the other defendants filed a motion for summary judgment. A hearing on that motion was held on March 22, 2002. On September 30, 2003, the court granted defendants’ motion and dismissed all of plaintiff’s claims. Plaintiff filed a notice of appeal of that decision, which was withdrawn on February 10, 2004.

      There is a class action lawsuit entitled In Re Initial Public Offering Securities Litigation pending since April 2002 in the United States District Court for the Southern District of New York (the “Action”). The Action named over one thousand individuals and 300 corporations, including Fatbrain (a Company subsidiary) and its former officers and directors. The Amended Complaints in the Action all allege that the initial public offering registration statements filed by the defendant issuers with the Securities and Exchange Commission, including the one filed by Fatbrain, were false and misleading because they failed to disclose that the defendant underwriters were receiving excess compensation in the form of profit sharing with certain of its customers and that some of those customers agreed to buy additional shares of the defendant issuers’ common stock in the after market at increasing prices. The Amended Complaints also allege that the foregoing constitute violations of: (i) Section 11 of the Securities Act of 1933, as amended (the “1933 Act”) by the defendant issuers, the directors and officers signing the related registration statements, and the related underwriters; (ii) Rule 10b-5 promulgated under the Securities Exchange Act of 1934 (the “1934 Act”) by the same parties; and (iii) the control person provisions of the 1933 and 1934 Acts by certain directors and officers of the defendant issuers. A motion to dismiss by the defendant issuers, including Fatbrain, was denied. After extensive negotiations among representatives of plaintiffs and defendants, a memorandum of understanding (“MOU”), outlining a proposed settlement resolving the claims in the Action between plaintiffs and the defendant issuers, has been entered into. A draft settlement agreement has been prepared and circulated among the defendants and plaintiffs in the action, the terms of which are consistent with the MOU and which, after execution, will be submitted to the court for approval. The proposed settlement is not expected to have any material adverse impact on the Company.

      On August 16, 2002, B&N.com, along with 17 other defendants, was sued in the United States District Court for the Eastern District of Texas by Charles E. Hill Associates for patent infringement of United States Patent Nos. 5,528,490 (the “490 Patent”), 5,761,649 and 6,029,142. On November 7, 2002, B&N.com and the other defendants answered and filed counterclaims for a declaratory judgment of non-infringement, invalidity and unenforceability of all three patents. On November 27, 2002, B&N.com joined the other defendants in filing a motion to change venue to the United States District Court for the Southern District of Indiana, where an earlier filed case against Compuserve, one of the defendants in the Texas case, was pending involving only the 490 Patent. On January 23, 2003, the court granted the motion to transfer and the transferred case was assigned to Judge McKinney in Indianapolis. On November 24, 2003, the Indiana court dismissed the case which Hill had filed against Compuserve alone (Cause no. IP97-0434-C-M/S, Indiana) with prejudice based on the filing of a covenant not to sue by Hill. Consequently, on November 25, 2003, the Indiana court granted Hill’s motion to retransfer the case back to the U.S. District Court for the Eastern

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      On November 19, 2002, Half Price Books, Records, Magazine, Inc. filed a complaint against B&N.com in the United States District Court for the Northern District of Texas. The complaint alleges trademark infringement and related claims against B&N.com for its use of the term “Half Price Books” on its Web site. B&N.com has responded to the complaint denying plaintiff’s claims. The plaintiff’s motion for preliminary injunction was denied. B&N.com’s motion for summary judgment for dismissal of all of plaintiff’s claims is currently pending before the court. Settlement discussions are occurring through a court appointed mediator. B&N.com intends to vigorously defend itself against this action.

      Following the November 7, 2003 announcement of Barnes & Noble’s proposal to purchase all of the outstanding shares of the Company’s common stock at a price of $2.50 per share in cash, fifteen substantially similar putative class action lawsuits were filed by individual stockholders of the Company against the Company, the Company’s directors and Barnes & Noble in the Delaware Court of Chancery. The complaints in these actions, which purported to be brought on behalf of all of the Company’s stockholders excluding the defendants and their affiliates, generally alleged (i) breaches of fiduciary duty by Barnes & Noble and the Company’s directors, (ii) that the consideration offered by Barnes & Noble was inadequate and constituted unfair dealing and (iii) that Barnes & Noble, as controlling stockholder, breached its duty to the Company’s remaining stockholders by acting to further its own interests at the expense of the Company’s remaining stockholders. The complaints sought to enjoin the proposal or, in the alternative, damages in an unspecified amount and rescission in the event a merger occurred pursuant to the proposal. The complaints were eventually consolidated under the caption In re BarnesandNoble.com, Inc. Shareholders Litigation, Consolidated Civil Action No. 042-N.

      On January 8, 2004, the parties executed a Memorandum of Understanding reflecting the parties’ agreement to settle the action. Pursuant to the terms of the Memorandum of Understanding, the parties agreed in good faith to execute as soon as practicable a Stipulation of Settlement providing for, among other things, the release of all claims of the plaintiffs and other members of the class against defendants that were or could have been asserted in the action or in any way arise out of or in connection with the merger. The Stipulation of Settlement also is to expressly provide that the defendants in the action deny that they have committed any violation of law whatsoever and are entering into the Stipulation of Settlement solely to eliminate the burden, expense and distraction of further litigation and to permit the merger to proceed as scheduled.

      The parties subsequently agreed that plaintiffs’ counsel will apply to the court for an award of attorney’s fees and costs in the amount of $600,000 and that defendants will not object to a fee award up to that amount. It was further agreed that defendants would pay or reimburse the costs of mailing. The settlement is contingent upon, among other things, court approval, the merger consideration being $3.05 per share in cash and consummation of the merger.

      In addition to the litigations described above, the Company and B&N.com are involved in various legal proceedings incidental to the conduct of their business. The Company does not believe that any of those legal proceedings will have a material adverse effect on the financial condition, results of operations or cash flows of the Company or B&N.com.

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      None.

PART II

      The Company’s Class A Common Stock is listed on the NASDAQ National Market under the symbol “BNBN” and began trading on May 25, 1999. On March 1, 2004, the Company had 1,190 shareholders of record for the Class A Common Stock. The Company’s Class A Common Stock price at the close of business on March 1, 2004 was $3.04 per share. The Company’s Class B Common Stock and Class C Common Stock, owned by Barnes & Noble, are not listed or traded on any securities exchange.

      The table below sets forth the high and low sale prices of the Company’s Class A Common Stock for the periods indicated, as reported by the NASDAQ National Market.

      The Company has not declared or paid any dividends on its Common Stock and B&N.com has not made any distributions to its members, since their respective dates of initial contribution. Neither the Company nor B&N.com anticipates paying any dividends or distributions, except for amounts that may be distributed by B&N.com to cover income tax liabilities, if any, of its members arising from the taxable income of B&N.com. Cash distributions by B&N.com may also be restricted by future debt covenants. The Company has not had any recent sales of unregistered securities. The Company intends to cause B&N.com to retain future earnings, if any, to finance the expansion of the business of B&N.com.

      For equity compensation plan information, see note 12 to the consolidated financial statements.

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Item 6.     Selected Financial Data

      The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated Financial Statements and consolidated notes thereto appearing elsewhere in this Form 10-K. Historical results are not necessarily indicative of future results.