<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended January 30, 1999

    [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

             For the transition period from __________ to __________

                           Commission File No. 1-12302

                              Barnes & Noble, Inc.
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its Charter)


           Delaware                                   06-1196501
- -------------------------------------      -------------------------------------
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                      Identification No.)

     122 Fifth Avenue, New York, NY                      10011
- -------------------------------------      -------------------------------------
(Address of principal executive offices)              (Zip Code)


       Registrant's telephone number, including area code: (212) 633-3300

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

Common Stock, $0.001 par value per share           New York Stock Exchange
- ----------------------------------------   -------------------------------------
              (Title of Class)                      (Name of Exchange on
                                                      which registered)



Securities registered pursuant to Section 12(b) of the Act:  None

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

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 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. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,734,867,031 based upon the closing market price
of $32.125 per share of Common Stock on the New York Stock Exchange as of March
31, 1999.

Number of shares of $.001 par value Common Stock outstanding as of March 31,
1999: 69,012,755


                               (Cover Page 1 of 2)

<PAGE>



                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders are incorporated by reference into Part III.

Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended January 30, 1999 are incorporated by reference into Parts II and IV.



                               (Cover Page 2 of 2)



<PAGE>



                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                      Page
<S>                     <C>                                                                           <C>

                                                       PART I


Item            1.      Business ...........................................................             4


Item            2.      Properties .........................................................            14


Item            3.      Legal Proceedings ..................................................            14


Item            4.      Submission of Matters to a Vote of Security Holders ................            15


                                                      PART II


Item            5.      Market for Registrant's Common Equity and Related Stockholder

                        Matters ............................................................            15


Item            6.      Selected Financial Data.............................................            16


Item            7.      Management's Discussion and Analysis of Financial Condition and
                        Results of Operations ..............................................            16


Item            7a.     Quantitative and Qualitative Disclosures About Market Risk..........           N/A


Item            8.      Financial Statements and Supplementary Data ........................            16


Item            9.      Changes in and Disagreements with Accountants on Accounting and
                        Financial Disclosure ...............................................            17


                                                      PART III


Item           10.      Directors and Executive Officers of the Registrant .................            17


Item           11.      Executive Compensation .............................................            17


Item           12.      Security Ownership of Certain Beneficial Owners and Management .....            17


Item           13.      Certain Relationships and Related Transactions .....................            17


                                                      PART IV


Item           14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K ....            18

</TABLE>



                                       3

<PAGE>


                                     PART I


ITEM 1.       BUSINESS

General

         Barnes & Noble, Inc. (Barnes & Noble or the Company), the world's
largest bookseller(*), as of January 30, 1999 operated 1,009 bookstores. Of
these 1,009 stores, 520 operate under the Barnes & Noble Booksellers, Bookstop
and Bookstar trade names, (50 of which were opened in fiscal 1998), and 489
operate under the B. Dalton Booksellers, Doubleday Book Shops and Scribner's
Bookstore trade names. Through its fifty percent interest in barnesandnoble.com
llc (barnesandnoble.com), the Company is also the world's largest bookseller on
the World Wide Web (http://www.barnesandnoble.com) and the exclusive bookseller
on America Online (keyword: bn). Barnes & Noble publishes books under its own
imprint for exclusive sale through its retail stores, mail-order catalogs and
barnesandnoble.com. During fiscal 1998, the Company's share of the consumer book
market was approximately 15%.

         The Company's principal business is the retail sale of trade books
(generally hardcover and paperback consumer titles, excluding educational
textbooks and specialized religious titles), mass market paperbacks (such as
mystery, romance, science fiction and other popular fiction), children's books,
off-price bargain books and magazines. These collectively account for
substantially all of the Company's sales. Bestsellers represent only 3% of the
Barnes & Noble store sales.

         The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday closest to the last day of January. The fiscal year ended January 30,
1999 (fiscal 1998) and the fiscal year ended January 31, 1998 (fiscal 1997)
were comprised of 52 weeks.

        The Company's sales increased 7.5% during fiscal 1998 to $3.006 billion
from $2.797 billion during fiscal 1997. The Company's retail business reported
an operating profit of $188.6 million, up 16.0% from last year's operating
profit of $162.7 million. Expanding gross margins due to the realization of
further distribution center efficiencies and continued leverage on occupancy
expenses combined with solid sales growth were the major drivers of the 1998
operating results. On a consolidated basis, the Company's net earnings increased
42.8% to $92.4 million or $1.29 per diluted share, compared to $0.93 per diluted
share for 1997. Before the effect of barnesandnoble.com, retail earnings before
extraordinary charge increased $23.0 million, or 31.3% to $96.8 million (or
$1.35 per diluted share) from $73.8 million (or $1.06 per diluted share).

Barnes & Noble Stores

         General

        Barnes & Noble is the largest operator of book "super" stores in the
United States(*) with 520 Barnes & Noble stores located in 49 states and the
District of Columbia as of January 30, 1999. With more than 30 years of
bookselling experience, management has a strong sense of customers' changing
needs and the Company leads book retailing with a "community store" concept.
Barnes & Noble's typical store offers a comprehensive title base, a cafe, a
children's section, a music department and a calendar of 

- --------
(*)  Based upon information reported in trade publications and public filings. 


                                       4

<PAGE>

ongoing events, including author appearances and children's activities, that
make each Barnes & Noble store an active part of its community.

         Barnes & Noble stores range in size from 10,000 to 60,000 square feet
depending upon market size. Barnes & Noble stores opened during fiscal 1998
added 1.3 million square feet to the Barnes & Noble base, bringing the total
square footage to 11.9 million square feet, a 10% increase over the prior year.
Barnes & Noble stores contributed more than 84% of the Company's total sales in
fiscal 1998. The Company plans to open approximately 50 Barnes & Noble stores in
1999 which are expected to average 26,000 square feet in size. The Company
believes that the key elements contributing to the success of the Barnes & Noble
stores are:

         Proximity to Customers. The Company's strategy is to increase its share
of the consumer book market, as well as to increase the size of the market.
Since it began its "super" store roll-out, the Company has employed a market
clustering strategy. As of January 30, 1999, Barnes & Noble had stores in 149 of
the total 208 DMA markets (Designated Market Area). In 73 of the 149 markets the
Company has only one Barnes & Noble store. The Company believes its early market
penetration and the stores' proximity to their customers strengthen its market
position and increase its franchise value. Most Barnes & Noble stores are
located in high-traffic areas with convenient access to major commercial
thoroughfares and ample parking. Most stores offer extended shopping hours,
generally 9:00 a.m. to 11:00 p.m., seven days a week.

         Dominant Title Selection. Each Barnes & Noble store features an
authoritative selection of books, ranging between 60,000 to 175,000 titles. The
comprehensive title selection is diverse and reflects local interests. In
addition, Barnes & Noble emphasizes books published by small and independent
publishers and university presses. Bestsellers represent only 3% of Barnes &
Noble store sales. Complementing this extensive on-site selection, all Barnes &
Noble stores provide customers with access to the millions of books available to
online shoppers while offering an option to have the book sent to the store or
shipped directly to the customer. The Company believes that its tremendous
selection, including many otherwise hard-to-find titles, builds customer
loyalty. During fiscal 1999 the Company expects to complete installation of
BookMaster, the Company's new in-store operating system, in all Barnes & Noble
stores. BookMaster enhances the Company's existing merchandise replenishment
systems, resulting in higher in-stock positions and better productivity at the
store level through efficiencies in receiving, cashiering and returns
processing.

         Experienced Booksellers. The Company's culture of outgoing, helpful and
knowledgeable booksellers consists of 29,000 full- and part-time employees
operating over 1,000 stores as of January 30, 1999. Barnes & Noble has created
nearly 2,000 new jobs nationwide during fiscal 1998 primarily due to its Barnes
& Noble store expansion.

         Store Design and Ambiance. Barnes & Noble stores are designed to be
reminiscent of an old world library, with wood fixtures, antique style chairs
and tables, ample public space, a cafe and public restrooms. Barnes & Noble's
literary cafes, for which the Starbucks Coffee Company is the sole provider of
coffee products, further the image of its "super" stores as a community meeting
place.

         Music Departments. As of January 30, 1999, the Company had 203 Barnes &
Noble stores with music departments which range in size from 1,700 to 7,800
square feet. The music departments generally stock over 50,000 titles in
classical music, opera, jazz, blues and pop rock, tailored to the tastes of the
Company's core customers, the 35 to 45 year age group. Listening stations are
available for customers to preview selected compact disks.


                                       5

<PAGE>

         Discount Pricing. Barnes & Noble stores employ a nationwide discount
pricing strategy. Hardcover bestsellers are discounted 30% off the publishers'
suggested retail price, with a 10% discount on most other hardcover books. The
Company believes that its pricing strategies enable the Company to be
competitive.

         Marketing and Community Relations. Barnes & Noble stores are launched
with a major grand opening campaign involving extensive print and radio
advertising, direct-mail marketing and community events. Each store plans its
own community-based calendar of events, including author appearances, children's
storytelling hours, poetry readings and discussion groups. The Company believes
its community focus encourages customer loyalty, significant word-of-mouth
publicity and free media coverage. The Company also supports communities through
efforts on behalf of First Book, a national organization dedicated to providing
books to children with little or no access to them outside of school. The
Company is one of the leading sponsors of Writer's Harvest, an annual series of
readings held across the country sponsored by Share our Strength, one of the
nation's foremost anti-poverty organizations.

         Merchandising and Marketing

         The Company's merchandising strategy for its Barnes & Noble stores is
to be the authoritative community bookstore which carries a dominant selection
of titles in all subjects, including an extensive selection of titles from small
independent publishers and university presses. Each Barnes & Noble store stocks
from 60,000 to 175,000 titles, of which approximately 50,000 titles are common
to all stores; the balance is crafted to reflect the lifestyles and interests of
each store's customers. Before a store opens, the Company's buyers study the
community and customize the title selection with offerings from the store's
local publishers and authors. After the store opens, each Barnes & Noble store
manager is responsible for adjusting the buyers' selection to the interests,
lifestyles and demands of the store's local customers. The Company's proprietary
database, which includes catalogued sales rankings of over 750,000 titles in
over 150 subjects, provides each store with comprehensive title selections in
those subjects in which it seeks to expand. During 1998, the Company continued
rolling out the next generation of its state-of-the-art store system,
BookMaster. The new store system greatly enhances store-level customer service
and productivity with its extremely fast register transactions and its title
database with more than one million titles designed specifically for book
browsing. The roll-out will be completed in 1999.

         Store Locations and Properties

         The Company's experienced real estate personnel select sites for new
Barnes & Noble stores after an extensive review of demographic data and other
information relating to market potential, bookstore visibility and access,
available parking, surrounding businesses, compatible nearby tenants,
competition and the location of other Barnes & Noble stores. Most stores are
located in high-visibility areas adjacent to main traffic corridors in strip
shopping centers or freestanding buildings. The Company has been successful in
converting existing structures into dynamic bookstores in the Barnes & Noble
store format such as conversions of old movie theaters, bowling alleys, power
plants and landmark buildings.


                                       6

<PAGE>

         The number of Barnes & Noble stores located in each state and the
District of Columbia as of January 30, 1999 are listed below:


<TABLE>
<CAPTION>

                                     NUMBER                                                          NUMBER
STATE                               OF STORES                    STATE                            OF STORES
- -----                               ---------                    -----                            ---------
<S>                                 <C>                          <C>                              <C>
Alaska                                    1                      Missouri                               8
Alabama                                   5                      Montana                                3
Arizona                                  11                      Nebraska                               4
Arkansas                                  2                      Nevada                                 5
California                               74                      New Hampshire                          3
Colorado                                 13                      New Jersey                            17
Connecticut                              11                      New Mexico                             2
Delaware                                  1                      New York                              33
Dist. of Columbia                         1                      North Carolina                        15
Florida                                  36                      North Dakota                           2
Georgia                                  10                      Ohio                                  14
Hawaii                                    1                      Oklahoma                               5
Idaho                                     3                      Oregon                                 8
Illinois                                 22                      Pennsylvania                          17
Indiana                                   7                      Rhode Island                           1
Iowa                                      3                      South Carolina                         8
Kansas                                    4                      South Dakota                           1
Kentucky                                  4                      Tennessee                              8
Louisiana                                 5                      Texas                                 52
Maine                                     1                      Utah                                   8
Maryland                                  8                      Vermont                                1
Massachusetts                            16                      Virginia                              13
Michigan                                 14                      Washington                            16
Minnesota                                14                      Wisconsin                              7
Mississippi                               1                      Wyoming                                1

</TABLE>




         Expansion

         The Company believes its Barnes & Noble store format offers the
greatest opportunity to increase its share of the expanding consumer book market
and intends to strengthen its position as the world's leading operator of book
superstores by opening approximately 50 new stores during fiscal 1999.

         All stores will be opened under the Barnes & Noble Booksellers trade
name, and positions in those stores will be filled from within the Company
wherever possible.

         The Company anticipates that its expansion plans will be supported by a
combination of continuing strong demand for consumer books, which has grown over
the past five years at a rate of 5.0% compounded annually according to Veronis,
Suhler & Associates Communications Industry Forecast and incremental sales
generated by new stores.


                                       7

<PAGE>

B. Dalton Stores

         General

         The Company is the second largest operator of mall bookstores in the
United States(*). During fiscal 1998, B. Dalton generated revenues of
approximately $468.4 million, or 15.6% of the Company's total revenues, compared
with 18.2% of total Company revenues during fiscal 1997.

         Most B. Dalton stores range in size from 2,800 to 6,000 square feet.
These stores stock between 15,000 and 25,000 titles, feature new releases,
bestsellers and children's books, and carry a solid selection of titles in
categories such as business, computers, cooking and reference. B. Dalton employs
a market-by-market discount pricing strategy which generally discounts hardcover
bestsellers from 15% to 25% off the publishers' suggested retail prices. B.
Dalton also offers a Book$avers discount card for an annual fee which allows
customers an additional 10% discount on substantially all purchases. The
Company's 15 Doubleday and eight Scribner's bookstores utilize a more upscale
format in select shopping malls and place a greater emphasis on hardcover and
gift books.

         The Company is continuing to execute a strategy to maximize returns
from its B. Dalton stores in response to declining sales attributable primarily
to superstore competition and, to a lesser extent, weaker overall consumer
traffic in shopping malls. Part of the Company's strategy has been to close
underperforming stores, which has resulted in the closing of between 40 to 60
B. Dalton stores per year since 1989 as leases come up for renewal.

         Merchandising and Marketing

           Each B. Dalton store carries a solid selection of core titles within
a variety of subject categories which are supplemented by new releases,
bestsellers and other titles specially selected to meet local demand. B.
Dalton's merchandise strategy is to expand title assortments within categories
it believes have significant growth potential, such as children's books, mass
market paperbacks (such as mystery, romance, science fiction and other popular
fiction), publishers' remainders and other bargain books including the Company's
self-published books. B. Dalton's product offerings are merchandised to attract
shoppers responding to movies, television talk show topics and current events.
Each store has the ability to customize its selection to its local customers
based upon their interests and demands.

         B. Dalton's advertising and promotional programs focus on point-of-sale
and storefront signage and other in-store promotions designed to attract walk-by
mall traffic. B. Dalton takes full advantage of cooperative advertising funds
made available by publishers and generally limits its expenditures and
promotional programs to the amount of such funds. In addition, stores
customarily incur advertising costs, often in amounts equal to a percentage of
their annual sales, for lease-required advertising of mall-related promotional
events.

         Store Locations and Properties

           Approximately 87% of B. Dalton stores are located in enclosed
regional shopping malls. The remaining stores are located in strip shopping
centers and central business districts. Site selections and 


- --------
(*)  Based upon information reported in trade publications and public filings.


                                       8

<PAGE>

lease renewals for all B. Dalton stores are made after an extensive review of
demographic data, mall tenants, location within the mall and competitive
factors.

         The number of B. Dalton stores located in each state and the District
of Columbia as of January 30, 1999 are listed below:


<TABLE>
<CAPTION>
                                     NUMBER                                                          NUMBER
STATE                               OF STORES                    STATE                             OF STORES
- -----                               ---------                    -----                             ---------
<S>                                 <C>                          <C>                               <C>
Alabama                                   1                      Montana                                3
Arizona                                  12                      Nebraska                               3
Arkansas                                  1                      Nevada                                 3
California                               75                      New Hampshire                          2
Colorado                                 10                      New Jersey                            12
Connecticut                               5                      New Mexico                             2
Dist. Of Columbia                         4                      New York                              19
Florida                                  24                      North Carolina                        11
Georgia                                  12                      North Dakota                           4
Idaho                                     3                      Ohio                                  24
Illinois                                 20                      Oklahoma                               4
Indiana                                   8                      Oregon                                 6
Iowa                                     11                      Pennsylvania                          24
Kansas                                    6                      South Carolina                         5
Kentucky                                  3                      South Dakota                           2
Louisiana                                11                      Tennessee                              4
Maine                                     2                      Texas                                 32
Maryland                                 10                      Utah                                   6
Massachusetts                             8                      Virginia                              13
Michigan                                 22                      Washington                            15
Minnesota                                21                      West Virginia                          1
Mississippi                               1                      Wisconsin                              7
Missouri                                 15                      Wyoming                                2

</TABLE>



         Given the Company's continuing plans to execute its strategy to
maximize returns from its B. Dalton division, the Company anticipates it will
continue to realize a decline in the number of B. Dalton stores during 1999
primarily due to lease expirations. During fiscal 1998, the Company opened 4 B.
Dalton stores and closed 43 stores, primarily as a result of electing not to
renew expiring leases.

barnesandnoble.com

         General

         barnesandnoble.com, a limited liability company created in November
1998 was formed by combining the online bookselling operations of the Company,
which began in early 1997, with funds contributed by the international media
company Bertelsmann AG (Bertelsmann), one of the largest integrated media
companies in the world. barnesandnoble.com has one of the world's largest
selection of books - more than eight million in-print and out-of-print books. As
of December 1998, in less than two years of operations, it has become the fourth
largest e-commerce site and among the top 25 overall sites on the 


                                       9

<PAGE>

World Wide Web, according to Media Metrix. Through the Company,
barnesandnoble.com has access to the largest standing inventory of any online
bookseller with more than 750,000 titles ready for immediate delivery. The
site's database features more than six and one half million out-of-print and
rare books, as well as the largest online selection of bargain books discounted
up to 90 percent. During 1998, many major enhancements were introduced,
including one-click ordering, a powerful and user friendly search engine, e-mail
book reviews and product-notification services, Software and Magazine stores, a
Gift Center and Bargain Book store and online gift certificates. Also during
1998, the site began to add music and video to its product offerings, an
initiative scheduled to be fully rolled out during 1999. barnesandnoble.com is
the exclusive bookseller to America Online (AOL)'s more than 17 million
subscribers. barnesandnoble.com's affiliate network pays the highest commissions
with the best linking and best reporting tools, including daily updated sales
information, and is a leader in business-to-business e-commerce with its unique
Business Solutions program.

Other Strategies

         Proprietary Publishing. With publishing and distribution rights to over
2,000 titles covering a wide range of subject categories, the Company further
differentiates its product offerings from those of its competitors by publishing
books under its own Barnes & Noble Books imprint for exclusive sale in its
retail stores, direct mail catalogs and barnesandnoble.com. As part of this
activity, the Company licenses titles directly from domestic and international
publishers as well as from literary agents, commissions books directly from
authors, reprints classic titles in the public domain and creates collections of
fiction and non-fiction using in-house editors. These books are published under
the Barnes & Noble Books imprint. By self-publishing books, the Company is able
to significantly lower its merchandise costs and pass on a portion of the
savings to its customers. While the prices of these books represent significant
value to customers, they also generate substantially higher gross profit margins
than those realized on sales of non-proprietary books.

         Books published by the Company are featured prominently in the
Company's direct-mail catalogs, in the front of the Company's stores, and on the
barnesandnoble.com Web site. The Company continued to expand its publishing in
the past year, especially our trade and juvenile lines.

         Strategic Investments. The Company maintains an equity investment in
Chapters, Inc., an Ontario corporation which is publicly traded on the Toronto
Stock Exchange. Chapters is the largest book retailer in Canada and the third
largest in North America(*), operating 327 bookstores, including 52 superstores.
The Company also maintains an equity investment in Calendar Club L.L.C., an
operator of seasonal calendar kiosks both in the United States and
internationally.

- --------
(*)  Based upon information reported in trade publications and public filings.


                                       10

<PAGE>

Store Operations

         The Company has seasoned management teams for its Barnes & Noble and B.
Dalton stores, including those for real estate, merchandising and store
operations. Field management includes regional store directors and district
managers supervising multiple store locations. Each B. Dalton store generally
employs a manager, an assistant manager and approximately seven full- and
part-time booksellers. By comparison, each Barnes & Noble store generally
employs a manager, two assistant managers and approximately 40 full- and
part-time booksellers. Most Barnes & Noble stores also employ a full-time
community relations manager. The Company's large employee base provides the
Company with experienced booksellers to fill positions in the Company's new
Barnes & Noble stores. The Company anticipates that a significant percentage of
the personnel required to manage its expanding business will continue to come
from within its existing operations.

         Field management for all of the Company's bookstores, including
regional store directors, district managers and store managers, participate in a
bonus program tied to sales. The Company believes that the compensation of its
field management is competitive with that offered by other specialty retailers
of comparable size.

         The Company has a twelve-week manager training program in which
existing store managers train new store managers in all areas of store
operations. Store managers are generally responsible for training other
booksellers in accordance with detailed procedures and guidelines prescribed by
the Company, utilizing training aids available at each bookstore. In addition,
district managers participate in semi-annual training and merchandising
conferences.

Purchasing

         Barnes & Noble's buyers negotiate terms, discounts and cooperative
advertising allowances with publishers for all of the Company's bookstores. The
Company's increased use of its distribution center enables it to maximize
available discounts and the Company's multiple strategies greatly enhance its
ability to create customized marketing programs with many of its vendors. The
Company has teams of buyers who specialize in customizing inventory for each of
the Company's bookselling strategies. Store inventories are further customized
by the store managers, who may respond to local demand by purchasing a limited
amount of fast-selling titles through a nationwide wholesaling network.

         The Company purchases books on a regular basis from over 1,700
publishers and approximately 50 wholesale distributors. Purchases from the top
five suppliers (including publishers and wholesale distributors) accounted for
approximately 45% of the Company's book purchases during fiscal 1998, and no
single supplier accounted for more than 16% of the Company's purchases during
this period. Consistent with retail book industry practice, substantially all of
the Company's book purchases are returnable for full credit, a practice which
substantially reduces the Company's risk of inventory obsolescence.

         Publishers control the distribution of titles by virtue of copyright
protection, which limits availability on most titles to a single publisher.
Since the retail, or list, prices of titles, as well as the retailers' cost
price, are also generally determined by publishers, the Company has limited
options concerning availability, cost and profitability of its book inventory.
However, these limitations are mitigated by (i) the substantial number of titles
available (over one million), (ii) the Company's ability to maximize available
discounts and (iii) its positive relationships with publishers, which are
enhanced by the Company's significant purchasing volume.


                                       11

<PAGE>

         Publishers periodically offer their excess inventory in the form of
remainder books to book retailers and wholesalers through an auction process
which generally favors booksellers such as the Company who are able to buy
substantial quantities. These books are generally purchased in large quantities
at favorable prices and are then sold to consumers at significant discounts off
publishers' list prices.

Distribution

         Over the past four years, the Company has invested significant capital
in its systems and technology, by building new platforms, implementing new
software applications and opening a new distribution center. During September
1996 the Company opened a new state-of-the-art 344,000 square foot distribution
facility in South Brunswick, New Jersey. Historically, the Company replenished
through its distribution network some of its fast-moving frontlist titles and
bargain and self-published books and had the remaining inventory drop-shipped
directly to the stores from wholesalers and publishers. Significantly more
inventory is now sourced through the Company's new distribution center
increasing direct buying from publishers rather than wholesalers. Improved
just-in-time deliveries to stores and increased inventory turnover provide added
benefits.

         In addition, the Company's distribution network provides a significant
competitive advantage for barnesandnoble.com. By stocking nearly 750,000 titles,
the Company is currently in a position to provide overnight delivery service to
online customers at gross margins which allow barnesandnoble.com to offer very
deep discounts.

Management Information and Control Systems

         The Company has focused a majority of its information resources on
strategically positioning and implementing systems to support store operations,
merchandising and finance. The Company determined that an open-architecture
distributed computing environment would provide the flexibility needed in the
future and as a result a migration to a client server platform was initiated.

         Building on the Company's previous proprietary inventory management
system, during 1996 the Company introduced a new client server store system
(BookMaster). BookMaster is an inventory management system with integrated point
of sale features that utilizes a proprietary data-warehouse-based replenishment
system. It enhances communications and real-time access to our network of
stores, distribution center and wholesalers. In addition, implementation of
just-in-time replenishment has provided for more rapid replenishment of books to
all Barnes & Noble stores, resulting in higher in-stock positions and better
productivity at the store level through efficiencies in receiving, cashiering
and returns processing. During the 52 weeks ending January 29, 2000 (fiscal 99),
the Company expects to complete installation of the BookMaster system.

         The Company continues to implement systems to improve efficiencies in
back office processing in the human resources, finance and merchandising areas.
An offsite business recovery capability has been developed and implemented to
assure uninterrupted systems support.


                                       12

<PAGE>

Competition

         The retail bookselling business is highly competitive. The Company
competes in the superstore business with Borders Group, Inc. and other national
chains which have substantially fewer superstores than the Company, and in the
mall bookstore business with Walden Book Company, Inc., a subsidiary of Borders
Group, Inc. and the largest operator of mall bookstores in the country(*). The
Company also competes with regional chains, as well as independent single store
operators, local multi-store operators, department stores, variety discounters,
drug stores and warehouse clubs. Many of the Company's competitors have been
expanding in both store size and number of outlets. The Company competes with
Internet-based competition from numerous booksellers including online companies,
such as Amazon.com, Inc., traditional book retailers and publishers. The Company
expects future online competition to intensify.

Trademarks and Servicemarks

         B. Dalton Bookseller, Bookstar and Book$avers are Company-owned service
marks registered with the United States Patent and Trademark Office. Barnes &
Noble, Doubleday Book Shops and Scribner's Bookstores are federally registered
service marks which have been licensed to the Company under long-term license
agreements which are royalty-free. These license agreements provide the Company
with the exclusive right to use the Doubleday and Scribner's service marks only
in connection with the retail sale of books.

Seasonality

         The Company's business, like that of many retailers, is seasonal, with
the major portion of sales and operating profit realized during the quarter
which includes the Christmas selling season. The growth in Barnes & Noble stores
continues to reduce such seasonal fluctuation. The Company has now reported
operating profit for eleven consecutive quarters.

Acquisition of Ingram Book Group

         On November 6, 1998, the Company announced an agreement to purchase the
Ingram Book Group, a group of privately held subsidiaries of Ingram Industries
Inc., for $600 million, consisting of approximately $200 million in cash and
approximately $400 million in common stock of the Company. The closing of the
transaction is subject to the satisfaction of certain conditions including the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.

Employees

         The Company currently employs approximately 4,200 full-time salaried,
11,000 full-time hourly and 14,000 part-time hourly employees. The Company's
employees are not represented by unions and the Company believes that its
relationship with its employees is excellent.

- --------
(*)  Based upon information reported in trade publications and public filings.

                                       13

<PAGE>


I
TEM 2.       PROPERTIES

         All but one of the Barnes & Noble stores are leased. The leases
typically provide for an initial term of ten or fifteen years with one or more
renewal options. The terms of the Barnes & Noble store leases for its 519 leased
stores open as of January 30, 1999 expire as follows:

Lease Terms to Expire During                                 Number of
(twelve months ending on or about January 31)                 Stores
                                                           --------------

2000.......................................................       10
2001.......................................................        6
2002.......................................................       28
2003.......................................................       44
2004.......................................................       27
2005 and later.............................................      404

         All B. Dalton stores are leased. The leases generally provide for an
initial ten-year term with no renewal option. The terms of the 489 B. Dalton
leases as of January 30, 1999 expire as follows:

Lease Terms to Expire During                                 Number of
(twelve months ending on or about January 31)                 Stores
                                                           --------------

2000.......................................................       170
2001.......................................................        78
2002.......................................................        45
2003.......................................................        32
2004.......................................................        38
2005 and later.............................................       126

         The Company generally has been able to renew expiring leases on
favorable terms, and believes that renewals of leases expiring in the future
will not have a material adverse effect on the Company's financial condition or
results of operations.


ITEM 3.       LEGAL PROCEEDINGS

         In March 1998, the American Booksellers Association (ABA) and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Borders Group Inc.
(Borders) alleging violations of the Robinson-Patman Act, the California Unfair
Trade Practice Act and the California Unfair Competition Law. The Complaint
seeks injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. In November 1998, six other
independent booksellers instituted an action in the same court against the same
defendants asserting similar claims and seeking similar relief. The Company
intends to vigorously defend both actions.


                                       14

<PAGE>

         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 the Company, Borders, Amazon.com, Inc., certain
publishers and others alleging violation of the Robinson-Patman Act and other
federal law, New York statutes governing trade practices and common law. The
Complaint seeks certification of a class consisting of all retail booksellers in
the United States, whether or not currently in business, which were in business
and were members of the ABA at any time during the four-year period preceding
the filing of the Complaint. The Complaint alleges that the named plaintiffs
have suffered damages of $11.25 million or more and requests treble damages on
behalf of the named plaintiffs and each of the purported class members, as well
as of injunctive and declaratory relief (including an injunction requiring the
closure of all of defendants' stores within 10 miles of any location where
plaintiff either has or had a retail bookstore during the four years preceding
the filing of the Complaint, and prohibiting the opening by defendants of any
bookstore in such areas for the next 10 years), disgorgement of alleged
discriminatory discounts, rebates, deductions and payments, punitive damages,
interest, costs, attorneys fees and other relief. Many of the allegations in the
Complaint are similar to those contained in the ABA action described above. The
Company intends to vigorously defend the action.

         In November 1998, a former bookstore chain in Texas which has filed for
bankruptcy protection, filed an amended complaint in an action in the Bankruptcy
Court for the Northern District of Texas against the Company alleging various
antitrust and related claims. Among other things, the plaintiff alleges that the
Company conspired with national book publishers to obtain lower prices and to
monopolize the Dallas/Fort Worth book retail market. The plaintiff is seeking
$11 million in actual damages, plus treble damages, punitive damages, and
attorneys' fees. The Company intends to vigorously defend this action.

         In addition to the above actions, various claims and lawsuits arising
in the normal course of business are pending against the Company. The subject
matter of these proceedings primarily includes commercial disputes and
employment issues. The results of these proceedings are not expected to have a
material adverse effect on the Company's consolidated financial position or
results of operations.


ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         There were no matters submitted to a vote of security holders during
the 13 weeks ended January 30, 1999.


                                     PART II


ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
             STOCKHOLDER MATTERS

Price Range of Common Stock

         The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "BKS". The following table sets forth, for the periods
indicated, the high and low sales prices of the common stock on the NYSE
Composite Tape (restated to adjust for the two-for-one stock-split effected
September 22, 1997).


                                       15

<PAGE>


                                Fiscal 1998                  Fiscal 1997
                          ------------------------      ----------------------
                             High         Low             High          Low
                          -----------   ---------      -----------   ---------

First Quarter              $39 13/16      30 1/4         $19 15/16     15 3/16
Second Quarter              48            31 15/16        25 1/2       18  1/2
Third Quarter               41 11/16      22 3/16         32 1/4       22  3/8
Fourth Quarter              48            26 3/4          34 1/4       25 13/16

Approximate Number of Holders of Common Equity

                                                  Approximate
                                                   Number of
                                                Record Holders
                                                     as of
Title of Class                                  March 31, 1999
- --------------                                  --------------

Common stock, $0.001 par value                       2,018

Dividends

         The terms of the Company's debt agreements prohibits payment of cash
dividends. During fiscal 1998, the Company did not declare or pay any cash
dividends or make distributions or payments on its common stock.


ITEM 6.       SELECTED FINANCIAL DATA

         The information included in the Company's Annual Report to Shareholders
for the fiscal year ended January 30, 1999 (the Annual Report) under the
section entitled "Selected Financial Data" is incorporated herein by reference.


ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS

         The information included in the Annual Report under the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is incorporated herein by reference.


ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The information included in the Annual Report under the sections
entitled: "Consolidated Statements of Operations," "Consolidated Balance
Sheets," "Consolidated Statements of Changes in Shareholders' Equity,"
"Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial
Statements" are incorporated herein by reference.


                                       16

<PAGE>


ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE

         None.


                                    PART III


ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information with respect to directors and executive officers of the
Company is incorporated herein by reference to the Company's definitive Proxy
Statement relating to the Company's 1999 Annual Meeting of Shareholders to be
filed with the Securities and Exchange Commission within 120 days of the
Company's fiscal year ended January 30, 1999 (the "Proxy Statement").

         The information with respect to compliance with Section 16(a) of the
Securities Exchange Act is incorporated herein by reference to the Proxy
Statement.


ITEM 11.      EXECUTIVE COMPENSATION

         The information with respect to executive compensation is incorporated
herein by reference to the Proxy Statement.

         The information with respect to compensation of directors is
incorporated herein by reference to the Proxy Statement.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

         The information with respect to security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Proxy Statement.


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information with respect to certain relationships and related
transactions is incorporated herein by reference to the Proxy Statement.


                                       17

<PAGE>


                                     PART IV


ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
              FORM 8-K

(a)  1.  Consolidated Financial Statements:

         (i)   "The Report of Independent Certified Public Accountants" included
               in the Annual Report is incorporated herein by reference.

          (ii) The information included in the Annual Report under the sections
               entitled: "Consolidated Statements of Operations," "Consolidated
               Balance Sheets," "Consolidated Statements of Changes in
               Shareholders' Equity," "Consolidated Statements of Cash Flows"
               and "Notes to Consolidated Financial Statements" are incorporated
               herein by reference.

     2.  Schedules:

         All schedules are omitted because the information is either not
         applicable or is contained in the consolidated financial statements
         incorporated herein by reference.

     3.  Exhibits:

         The following are filed as Exhibits to this form:


 Exhibit
   No.                                 Description
 -------                               -----------

3.1         Amended and Restated Certificate of Incorporation of the Company, as
            amended.(1)

3.2         Amendment to the Amended and Restated Certificate of Incorporation
            of the Company filed May 30, 1996.(2)

3.3         Amended and Restated By-laws of the Company.(1)

3.4         Amendment to the Company's By-laws adopted May 31, 1995.(3)


                                       18

<PAGE>

 Exhibit
   No.                                 Description
 -------                               -----------

3.5         Certificate of Designation of Preferences and Rights of Preferred
            Stock, Series H of Barnes & Noble, Inc. (4)

3.6         Certificate of Amendment of The Amended and Restated Certificate of
            Incorporation of Barnes & Noble, Inc., dated July 17, 1998 and filed
            July 17, 1998.(4)

4.1         Specimen Common Stock certificate. (1)

4.2         Rights Agreement, dated as of July 10, 1998, between Barnes & Noble,
            Inc. and The Bank of New York, as Rights Agent. (4)

10.1        Amended and Restated Credit Agreement, dated as of November 18,
            1997, among the Company, its subsidiaries, The Chase Manhattan Bank
            (National Association), as Administrative Agent (the "Agent") and
            the Banks party thereto. (5)

10.2        Pledge and Security Agreement dated as of March 15, 1996, among 
            the Company, its subsidiaries and the Agent. (6)

10.3        Amendment to the Pledge and Security Agreement dated as of 
            November 18, 1997. (5)

10.4        1996 Incentive Plan as Amended. (10)

10.5        1991 Employee Incentive Plan. (1)

10.6        Extended Savings Plan. (1)

10.7        Amendment to the Extended Savings Plan dated as of 
            December 22, 1995.(6)

10.8        Amended and Restated Employees' Retirement Plan dated as of 
            January 1, 1998. (5)

10.9        Supplemental Compensation Plan. (7)

10.10       License Agreement for "Barnes & Noble" service mark, dated as of 
            February 11, 1987. (1)

10.11       Consents to "Barnes & Noble" License Agreement Assignments, dated
            as of November 18, 1988 and November 16, 1992, respectively. (6)



                                       19

<PAGE>

 Exhibit
   No.                                 Description
 -------                               -----------


10.12       Employment Agreements between the Company and each of Mitchell S.
            Klipper and Stephen Riggio, dated as of April 1, 1993 and July 15,
            1993, respectively (collectively the "Employment Agreements"). (8)

10.13       Amendment to each of the Employment Agreements dated as of April 1,
            1998. (5)

10.14       Formation Agreement dated November 12, 1998 among Barnes & Noble,
            Inc., B&N.com Holding Corp., barnesandnoble.com inc., B&N.com Member
            Corp., Bertelsmann AG and BOL.US Online, Inc.(9)

10.15       Amended and Restated Limited Liability Company Agreement of
            barnesandnoble.com llc among Barnes & Noble, Inc., B&N.com Holding
            Corp., Bertelsmann AG and BOL.US Online, Inc.(9)

10.16       Supply Agreement, dated as of October 31, 1998, between Barnes &
            Noble, Inc. and barnesandnoble.com.(10)

13.1        The sections of the Company's Annual Report entitled: "Selected
            Financial Data", "Management's Discussion and Analysis of Financial
            Condition and Results of Operations", "Consolidated Statements of
            Operations", "Consolidated Balance Sheets", "Consolidated Statements
            of Changes in Shareholders' Equity", "Consolidated Statements of
            Cash Flows", "Notes to Consolidated Financial Statements" and "The
            Report of Independent Certified Public Accountants".(10)

21.1        List of subsidiaries.(10)

23.1        Consent of BDO Seidman, LLP.(10)


                                       20

<PAGE>

(1)         Previously filed as an exhibit to the Company's Registration
            Statement on Form S-4 (Commission File No. 33-59778) and
            incorporated herein by reference.

(2)         Previously filed as an exhibit to the Company's Form 10-Q for the
            fiscal quarter ended April 27, 1996.

(3)         Previously filed as an exhibit to the Company's Form 10-Q for the
            fiscal quarter ended April 29, 1995.

(4)         Previously filed as an exhibit to the Company's Form 8-K dated July
            15, 1998.

(5)         Previously filed as an exhibit to the Company's Form 10-K for the
            fiscal year ended January 31, 1998.

(6)         Previously filed as an exhibit to the Company's Form 10-K for the
            fiscal year ended January 27, 1996.

(7)         Previously filed as an exhibit to the Company's Form 10-Q for the
            fiscal quarter ended July 29, 1995.

(8)         Previously filed as an exhibit to the Company's Registration
            Statement on Form S-1 (Commission File No. 33-50548) and
            incorporated herein by reference.

(9)         Previously filed as an exhibit to the Company's Form 8-K dated
            November 24, 1998.

(10)        Filed herewith.

                                       21

<PAGE>


                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

BARNES & NOBLE, INC.

(Registrant)

By: /s/ Leonard Riggio                      By: /s/ Marie J. Toulantis
    ------------------                          ----------------------
    Leonard Riggio, Chairman                    Marie  J. Toulantis, 
    of the Board and Chief                      Executive Vice President,
    Executive Officer                           Finance and Chief Financial
    April 30, 1999                              Officer
                                                April 30, 1999

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>

Name                                                   Title                                      Date
- ----                                                   -----                                      ----
<S>                                    <C>                                                     <C>

/s/ Leonard Riggio                     Chairman of the Board and Chief Executive               April 30, 1999
- -----------------------------------    Officer
Leonard Riggio                         

/s/ Stephen Riggio                     Vice Chairman                                           April 30, 1999
- -----------------------------------
Stephen Riggio

/s/ Michael N. Rosen                   Secretary and Director                                  April 30, 1999
- -----------------------------------
Michael N. Rosen

/s/ Matthew A. Berdon                  Director                                                April 30, 1999
- -----------------------------------
Matthew A. Berdon

/s/ William Dillard, II                Director                                                April 30, 1999
- -----------------------------------
William Dillard, II

/s/ Jan Michiel Hessels                Director                                                April 30, 1999
- -----------------------------------
Jan Michiel Hessels

/s/ Irene R. Miller                    Director                                                April 30, 1999
- -----------------------------------
Irene R. Miller

/s/ Margaret T. Monaco                 Director                                                April 30, 1999
- -----------------------------------
Margaret T. Monaco

/s/ William Sheluck, Jr.               Director                                                April 30, 1999
- -----------------------------------
William Sheluck, Jr.

</TABLE>


                                       22







<PAGE>

                                                                    EXHIBIT 10.4


                              BARNES & NOBLE, INC.
                              1996 INCENTIVE PLAN*

                  BARNES & NOBLE, INC., a corporation formed under the laws of
the State of Delaware (the "Company"), hereby establishes and adopts the
following 1996 Incentive Plan (the "Plan").

                                    RECITALS

                  WHEREAS, the Company desires to encourage high levels of
performance by those individuals who are key to the success of the Company, to
attract new individuals who are highly motivated and who will contribute to the
success of the Company and to encourage such individuals to remain as directors,
employees, consultants and/or advisors of the Company and its subsidiaries by
increasing their proprietary interest in the Company's growth and success.

                  WHEREAS, to attain these ends, the Company has formulated the
Plan embodied herein to authorize the granting of incentive awards through
grants of stock options ("Options"), grants of stock appreciation rights, grants
of Stock Purchase Awards (hereafter defined), and grants of Restricted Stock
Awards (hereafter defined) to those individuals whose judgment, initiative and
efforts are or have been responsible for the success of the Company.

                  NOW, THEREFORE, the Company hereby constitutes, establishes
and adopts the following Plan
 and agrees to the following provisions:

                                   ARTICLE 1.

                               PURPOSE OF THE PLAN

                  1.1. Purpose. The purpose of the Plan is to assist the Company
in attracting and retaining selected individuals to serve as directors,
officers, consultants, advisors and employees of the Company who will contribute
to the Company's success and to achieve long-term objectives which will inure to
the benefit of all stockholders of the Company through the additional incentive
inherent in the ownership of the Company's shares of common stock ("Shares").
Options granted under the Plan will be either "incentive stock options,"
intended to qualify as such under the provisions of section 422 of the Internal
Revenue Code of 1986, as from time to time amended (the "Code"), or
"nonqualified stock options." For purposes of the Plan, the term "subsidiary"
shall mean "subsidiary corporation," as such term is defined in section 424(f)
of the Code, and "affiliate" shall have the meaning set forth in Rule 12b-2 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For
purposes of the Plan, the term "Award" shall mean a grant of an Option, a grant
of a stock appreciation right, a grant of a Stock Purchase Award, a grant of a
Restricted Stock Award, or any other award made under the terms of the Plan.

- -------------------------------
* Revised to reflect two-for-one stock split effected September 22, 1997 and
5,000,000 share increase in shares available for issuance effected June 3, 1998.


<PAGE>

                                   ARTICLE 2.

                            SHARES SUBJECT TO AWARDS

                  2.1. Number of Shares. Subject to the adjustment provisions of
Section 9.10 hereof, the aggregate number of Shares which may be issued under
Awards under the Plan, whether pursuant to Options, stock appreciation rights,
Stock Purchase Awards or Restricted Stock Awards shall not exceed 11,000,000. No
Options to purchase fractional Shares shall be granted or issued under the Plan.
For purposes of this Section 2.1, the Shares that shall be counted toward such
limitation shall include all Shares:

                  (1) issued or issuable pursuant to Options that have been or 
                      may be exercised;

                  (2) issued or issuable pursuant to Stock Purchase Awards; and

                  (3) issued as, or subject to issuance as, a Restricted Stock
                      Award.

                  2.2. Shares Subject to Terminated Awards. The Shares covered
by any unexercised portions of terminated Options granted under Articles 4 and
6, Shares forfeited as provided in Section 8.2(a) and Shares subject to any
Awards which are otherwise surrendered by the Participant without receiving any
payment or other benefit with respect thereto may again be subject to new Awards
under the Plan. In the event the purchase price of an Option is paid in whole or
in part through the delivery of Shares, the number of Shares issuable in
connection with the exercise of the Option shall not again be available for the
grant of Awards under the Plan. Shares subject to Options, or portions thereof,
which have been surrendered in connection with the exercise of stock
appreciation rights shall not again be available for the grant of Awards under
the Plan.

                  2.3. Character of Shares. Shares delivered under the Plan may
be authorized and unissued Shares or Shares acquired by the Company, or both.

                  2.4. Limitations on Grants to Individual Participant. Subject
to adjustments pursuant to the provisions of Section 9.10 hereof, the number of
Shares which may be granted hereunder to any employee during any fiscal year
under all forms of Awards shall not exceed 700,000 Shares. If an Option is
cancelled, the cancelled Option shall continue to be counted toward the 700,000
limit for the year granted. An Option (or a stock appreciation right) that is
repriced during any fiscal year is treated as the cancellation of the Option (or
stock appreciation right) and a grant of a new Option (or stock appreciation
right), both of which shall be counted toward the 700,000 limit for that fiscal
year.

                                   ARTICLE 3.

                         ELIGIBILITY AND ADMINISTRATION

                  3.1. Awards to Employees and Directors. (a) Participants who
receive (i) Options under Articles 4 and 6 hereof or stock appreciation rights
under Article 5 ("Optionees"), and (ii) Stock Purchase Awards under Article 7 or
Restricted Stock Awards under Article 8 (in either case, a "Participant"), shall
consist of such key officers, employees, consultants, advisors and directors of
the Company or any of its subsidiaries or affiliates as the Committee shall
select from time to time, provided, however, that an Option that is intended to
qualify as an "incentive stock option" may be granted only to an individual that
is an 

                                      -2-

<PAGE>

employee of the Company or any of its subsidiaries. The Committee's designation
of an Optionee or Participant in any year shall not require the Committee to
designate such person to receive Awards or grants in any other year. The
designation of an Optionee or Participant to receive Awards or grants under one
portion of the Plan shall not require the Committee to include such Optionee or
Participant under other portions of the Plan.

                       (b) No Option which is intended to qualify as an  
"incentive stock option" may be granted to any employee who, at the time of such
grant, owns, directly or indirectly (within the meaning of sections 422(b)(6)
and 424(d) of the Code), shares of stock possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or any
of its subsidiaries or affiliates, unless at the time of such grant, (i) the
option price is fixed at not less than 110% of the Fair Market Value (as defined
below) of the Shares subject to such Option, determined on the date of the
grant, and (ii) the exercise of such Option is prohibited by its terms after the
expiration of five years from the date such Option is granted.

                  3.2. Administration. (a) The Plan shall be administered by a
committee (the "Committee") consisting of not fewer than two directors of the
Company (the directors of the Company being hereinafter referred to as the
"Directors"), as designated by the Directors. The Directors may remove from, add
members to, or fill vacancies in the Committee. Each member of the Committee
shall be a "disinterested person" within the meaning of Rule 16b-3(c)(2)(i) of
the Exchange Act and an "outside director" within the meaning of Section
162(m)(4)(C)(i) of the Code, except that if the Directors determine that (i) the
Plan cannot satisfy the requirements of Rule 16b-3 of the Exchange Act (such
that grants of Awards are not exempt from Section 16(b) of the Exchange Act),
then the members of the Committee need not be "disinterested persons," or (ii)
they no longer want the Plan to comply with the requirements of Code Section
162(m), then the members of the Committee need not be "outside directors." Any
Award to a member of the Committee shall be made strictly in accordance with the
terms of Section 4.1(b).

                       (b) The Committee is authorized, subject to the 
provisions of the Plan, to establish such rules and regulations as it may deem
appropriate for the conduct of meetings and proper administration of the Plan.
All actions of the Committee shall be taken by majority vote of its members.

                       (c) Subject to the provisions of the Plan, the Committee
shall have authority, in its sole discretion, to grant Awards under the Plan, to
interpret the provisions of the Plan and, subject to the requirements of
applicable law, including Rule 16b-3 of the Exchange Act, to prescribe, amend,
and rescind rules and regulations relating to the Plan or any Award thereunder
as it may deem necessary or advisable. All decisions made by the Committee
pursuant to the provisions of the Plan shall be final, conclusive and binding on
all persons, including the Company, its stockholders, Directors and employees,
and other Plan participants.

                                  ARTICLE 4.

                                   OPTIONS

                  4.1. Grant of Options. (a) Key Individuals, Directors and
Employees. The Committee shall determine, within the limitations of the Plan,
those key individuals and the Directors and employees of the Company and its
subsidiaries and affiliates to whom Options are to be granted under the Plan,
the 

                                      -3-

<PAGE>

number of Shares that may be purchased under each such Option and the option
price, and shall designate such Options at the time of the grant as either
"incentive stock options" or "nonqualified stock options"; provided, however,
that Options granted to employees of an affiliate (that is not also a
subsidiary) or to non-employees of the Company may only be "nonqualified stock
options."

                       (b) Non-Employee Directors. Notwithstanding any provision
of this Plan to the contrary, all persons who are Non-Employee Directors (as
defined below) shall receive Awards under this Plan only as follows: (i) all
Non-Employee Directors on January 16, 1996 shall automatically be granted
Options to purchase 40,000 Shares at their then Fair Market Value, with 25% of
each such Option (covering 10,000 Shares) exercisable immediately (or on such
later date as stockholder approval of this Plan is obtained) and an additional
25% shall become exercisable on each January 1 thereafter through January 1,
1999, at which time 100% of said Options shall be exercisable; and (ii) each
person who thereafter is elected or appointed to membership on the Board of
Directors of the Company and who is a Non-Employee Director on the date of his
election or appointment, shall on such effective date of election or appointment
automatically be granted Options to purchase 40,000 Shares at their then Fair
Market Value, with 25% of each such Option (covering 10,000 Shares) becoming
exercisable on each of the next four anniversaries of said grant date, at which
time (said fourth anniversary) 100% of said Options shall be exercisable. For
purposes of this paragraph (b), a "Non-Employee Director" shall be a Director
who is not otherwise an employee of the Company or any of its affiliates or
subsidiaries on the grant date and has not been employed by the Company or any
of its affiliates or subsidiaries for any part of the twelve months preceding
such date. Each Option granted to a Non-Employee Director hereunder shall be
exercisable for a period of ten years from the date of automatic grant and shall
be subject to the restrictions and limitations set forth in the Plan.
Notwithstanding any provision of this Plan to the contrary, the provisions of
this Section 4.1(b) may not be amended more than once every six (6) months,
other than to comport with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.

                  4.2. Stock Option Agreements; etc. All Options granted
pursuant to Article 4 and Article 6 herein (a) shall be authorized by the
Committee (other than Options to Non-Employee Directors under Section 4.1(b))
and (b) shall be evidenced in writing by stock option agreements ("Stock Option
Agreements") in such form and containing such terms and conditions as the
Committee shall determine which are not inconsistent with the provisions of the
Plan, and, with respect to any Stock Option Agreement granting Options which are
intended to qualify as "incentive stock options," are not inconsistent with
Section 422 of the Code. Granting of an Option pursuant to the Plan shall impose
no obligation on the recipient to exercise such option. Any individual who is
granted an Option pursuant to this Article 4 and Article 6 herein may hold more
than one Option granted pursuant to such Articles at the same time and may hold
both "incentive stock options" and "nonqualified stock options" at the same
time. To the extent that any Option does not qualify as an "incentive stock
option" (whether because of its provisions, the time or manner of its exercise
or otherwise) such Option or the portion thereof which does not so qualify shall
constitute a separate "nonqualified stock option."

                  4.3. Option Price. Subject to Section 3.1(b), the option price
per each Share purchasable under any "incentive stock option" granted pursuant
to this Article 4 and any "nonqualified stock option" granted pursuant to
Article 6 herein shall not be less than 100% of the Fair Market Value (as
hereinafter defined) of such Share on the date of the grant of such Option. The
option price per each Share purchasable under any "nonqualified stock option"
granted pursuant to this Article 4 shall be such amount as the Committee shall
determine at the time of the grant of such Option. Notwithstanding the
foregoing, the option price per each Share purchasable under any Option granted
to a Non-Employee Director 

                                      -4-

<PAGE>

pursuant to Section 4.1(b) shall be equal to 100% of the Fair Market Value of
such Share on the date of grant of such Option.

                  4.4. Other Provisions. Options granted pursuant to this
Article 4 shall be made in accordance with the terms and provisions of Article 9
hereof and any other applicable terms and provisions of the Plan.

                                   ARTICLE 5.

                            STOCK APPRECIATION RIGHTS

                  5.1. Grant and Exercise. Stock appreciation rights may be
granted in conjunction with all or part of any Option granted under the Plan
provided such rights are granted at the time of the grant of such Option. A
"stock appreciation right" is a right to receive cash or Shares, as provided in
this Article 5, in lieu of the purchase of a Share under a related Option. A
stock appreciation right or applicable portion thereof shall terminate and no
longer be exercisable upon the termination or exercise of the related Option,
and a stock appreciation right granted with respect to less than the full number
of Shares covered by a related Option shall not be reduced until, and then only
to the extent that, the exercise or termination of the related Option exceeds
the number of Shares not covered by the stock appreciation right. A stock
appreciation right may be exercised by the holder thereof (the "Holder"), in
accordance with Section 5.2 of this Article 5, by giving written notice thereof
to the Company and surrendering the applicable portion of the related Option.
Upon giving such notice and surrender, the Holder shall be entitled to receive
an amount determined in the manner prescribed in Section 5.2 of this Article 5.
Options which have been so surrendered, in whole or in part, shall no longer be
exercisable to the extent the related stock appreciation rights have been
exercised.

                  5.2. Terms and Conditions. Stock appreciation rights shall be
subject to such terms and conditions, not inconsistent with the provisions of
the Plan, as shall be determined from time to time by the Committee, including
the following:

                       (a) Stock appreciation rights shall be exercisable only
         at such time or times and to the extent that the Options to which they
         relate shall be exercisable in accordance with the provisions of the
         Plan.

                       (b) Upon the exercise of a stock appreciation right, a
         Holder shall be entitled to receive up to, but no more than, an
         amount in cash or whole Shares equal to the excess of the then Fair
         Market Value of one Share over the option price per Share specified in
         the related Option multiplied by the number of Shares in respect of
         which the stock appreciation right shall have been exercised. The
         Holder shall specify in his written notice of exercise, whether payment
         shall be made in cash or in whole Shares; provided, however, in the
         case of a stock appreciation right exercised by a person subject to
         Section 16 of the Exchange Act, the Holder's written notice specifying
         the form of payment is subject to the approval of the Committee. Each
         stock appreciation right may be exercised only at the time and so long
         as a related Option, if any, would be exercisable or as otherwise
         permitted by applicable law; provided, however, that no stock
         appreciation right granted under the Plan to a person then subject to
         Section 16 of the Exchange Act shall be exercised during the first six
         months of its term for cash.

                                      -5-

<PAGE>

                       (c) No stock appreciation right shall be transferable
         by a Holder otherwise than by will or by the laws of descent and
         distribution, and stock appreciation rights shall be exercisable,
         during the Holder's lifetime, only by the Holder.

                       (d) Upon the exercise of a stock appreciation right,
         the Option or part thereof to which such stock appreciation right is
         related shall be deemed to have been exercised for the purpose of the
         limitation of the number of Shares to be issued under the Plan, as set
         forth in Section 2.1 of the Plan.

                       (e) Stock appreciation rights granted in connection
         with an Option may be exercised only when the Fair Market Value of the
         Shares subject to the Option exceeds the option price at which Shares
         can be acquired pursuant to the Option.

                       (f) Stock appreciation rights may be exercised for cash
         by a person subject to Section 16 of the Exchange Act only during the
         period beginning on the third business day, and ending on the twelfth
         business day, following the release of quarterly and annual summary
         statements of sales and earnings, as set forth in Rule 16b-3(e)(1)(ii) 
         of the Exchange Act.

                                   ARTICLE 6.

                                 RELOAD OPTIONS

                  6.1. Authorization of Reload Options. Concurrently with the
award of any Option (such Option hereinafter referred to as the "Underlying
Option") to any participant in the Plan, the Committee may grant a reload option
(a "Reload Option") to such participant to purchase for cash or Shares a number
of Shares as specified below. A Reload Option shall be exercisable for an amount
of Shares equal to (i) the number of Shares delivered by the Optionee to the
Company to exercise the Underlying Option, and (ii) to the extent authorized by
the Committee, the number of Shares used to satisfy any tax withholding
requirement incident to the exercise of the Underlying Option, subject to the
availability of Shares under the Plan at the time of such exercise. The grant of
a Reload Option shall become effective upon the exercise of an Underlying Option
by delivering to the Company Shares held by the Optionee for at least six
months. Notwithstanding the fact that the Underlying Option may be an "incentive
stock option," a Reload Option is not intended to qualify as an "incentive stock
option" under Section 422 of the Code.

                  6.2. Reload Option Amendment. Each Stock Option Agreement
shall state whether the Committee has authorized Reload Options with respect to
the Underlying Option. Upon the exercise of an Underlying Option, the Reload
Option will be evidenced by an amendment to the underlying Stock Option
Agreement.

                  6.3. Reload Option Price. The option price per Share
deliverable upon the exercise of a Reload Option shall be the Fair Market Value
of a Share on the date the grant of the Reload Option becomes effective.

                  6.4. Term and Exercise. Each Reload Option is fully
exercisable six months from the effective date of grant. The term of each Reload
Option shall be equal to the remaining option term of the Underlying Option.

                                      -6-

<PAGE>

                  6.5. Termination of Employment. No Reload Option shall be
granted to an Optionee when Options are exercised pursuant to the terms of this
Plan following termination of the Optionee's employment.

                  6.6. Applicability of Other Sections. Except as otherwise
provided in this Article 6, the provisions of Article 9 applicable to Options
shall apply equally to Reload Options.

                                   ARTICLE 7.

                              STOCK PURCHASE AWARDS

                  7.1. Grant of Stock Purchase Awards. The term "Stock Purchase
Award" means the right to purchase Shares of the Company and to pay for such
Shares through a loan made by the Company to an employee (a "Purchase Loan") as
set forth in this Article 7.

                  7.2. Terms of Purchase Loans. (a) Purchase Loan. Each Purchase
Loan shall be evidenced by a promissory note. The term of the Purchase Loan
shall be a period of years, as determined by the Committee, and the proceeds of
the Purchase Loan shall be used exclusively by the Participant for purchase of
Shares from the Company at a purchase price equal to their Fair Market Value on
the date of the Stock Purchase Award.

                       (b) Interest on Purchase Loan. A Purchase Loan shall be
non-interest bearing or shall bear interest at whatever rate the Committee shall
determine (but not in excess of the maximum rate permissible under applicable
law), payable in a manner and at such times as the Committee shall determine.
Those terms and provisions as the Committee shall determine shall be
incorporated into the promissory note evidencing the Purchase Loan.

                       (c) Forgiveness of Purchase Loan. Subject to Section 7.4 
hereof, the Company may forgive the repayment of up to 100% of the principal
amount of the Purchase Loan, subject to such terms and conditions as the
Committee shall determine and set forth in the promissory note evidencing the
Purchase Loan (the "Conditions"). A Participant's Purchase Loan can be prepaid
at any time, and from time to time, without penalty.

                  7.3. Security for Loans. (a) Stock Power and Pledge. Purchase
Loans granted to Participants shall be secured by a pledge of the Shares
acquired pursuant to the Stock Purchase Award. Such pledge shall be evidenced by
a pledge agreement (the "Pledge Agreement") containing such terms and conditions
as the Committee shall determine. Purchase Loans shall be recourse or
non-recourse with respect to a Participant, as determined from time to time by
the Committee. The share certificates for the Shares purchased by a Participant
pursuant to a Stock Purchase Award shall be issued in the Participant's name,
but shall be held by the Company as security for repayment of the Participant's
Purchase Loan together with a stock power executed in blank by the Participant
(the execution and delivery of which by the Participant shall be a condition to
the issuance of the Stock Purchase Award). The Participant shall be entitled to
exercise all rights applicable to such Shares, including, but not limited to,
the right to vote such Shares and the right to receive dividends and other
distributions made with respect to such Shares. When the Purchase Loan and any
accrued but unpaid interest thereon has been repaid or otherwise satisfied in

                                      -7-

<PAGE>

full, the Company shall deliver to the Participant the share certificates for
the Shares purchased by a Participant under the Stock Purchase Award.

                       (b) Release and Delivery of Share Certificates During 
the Term of the Purchase Loan. The Company shall release and deliver to each
Participant certificates for Shares purchased by a Participant pursuant to a
Stock Purchase Award, in such amounts and on such terms and conditions as the
Committee shall determine, which shall be set forth in the Pledge Agreement.

                       (c) Release and Delivery of Share Certificates Upon 
Repayment of the Purchase Loan. The Company shall release and deliver to each
Participant certificates for the Shares purchased by the Participant under the
Stock Purchase Award and then held by the Company, provided the Participant has
paid or otherwise satisfied in full the balance of the Purchase Loan and any
accrued but unpaid interest thereon. In the event the balance of the Purchase
Loan is not repaid, forgiven or otherwise satisfied within 90 days after (i) the
date repayment of the Purchase Loan is due (whether in accordance with its term,
by reason of acceleration or otherwise), or (ii) such longer time as the
Committee, in its discretion, shall provide for repayment or satisfaction, the
Company shall retain those Shares then held by the Company in accordance with
the Pledge Agreement.

                  7.4. Termination of Employment. (a) Termination of Employment
by Death, Disability or by the Company Without Cause; Change of Control. In the
event of a Participant's termination of employment by reason of death,
"disability" or by the Company without "cause," or in the event of a "change of
control," the Committee shall have the right (but shall not be required) to
forgive the remaining unpaid amount (principal and interest) of the Purchase
Loan in whole or in part as of the date of such occurrence. "Change of Control,"
"disability" and "cause" shall have the respective meanings as set forth in the
promissory note evidencing the Purchase Loan.

                       (b) Termination of Employment by Voluntary Resignation.  
In the event of a Participant's termination of employment for any reason other
than death or "disability," the Participant shall repay to the Company the
entire balance of the Purchase Loan and any accrued but unpaid interest thereon,
which amounts shall become immediately due and payable, unless otherwise
determined by the Committee.

                  7.5. Restrictions on Transfer. No Stock Purchase Award or
Shares purchased through such an Award and pledged to the Company as collateral
security for the Participant's Purchase Loan (and accrued and unpaid interest
thereon) may be otherwise pledged, sold, assigned or transferred (other than by
will or by the laws of descent and distribution).

                                      -8-

<PAGE>

                                   ARTICLE 8.

                             RESTRICTED STOCK AWARDS

                  8.1. Restricted Stock Awards. (a) Grant. A grant of Shares
made pursuant to this Article 8 is referred to as a "Restricted Stock Award."
The Committee may grant to any employee an amount of Shares in such manner, and
subject to such terms and conditions relating to vesting, forfeitability and
restrictions on delivery and transfer (whether based on performance standards,
periods of service or otherwise) as the Committee shall establish (such Shares,
"Restricted Shares"). The terms of any Restricted Stock Award granted under this
Plan shall be set forth in a written agreement (a "Restricted Stock Agreement")
which shall contain provisions determined by the Committee and not inconsistent
with this Plan. The provisions of Restricted Stock Awards need not be the same
for each Participant receiving such Awards.

                       (b) Issuance of Restricted Shares. As soon as practicable
after the date of grant of a Restricted Stock Award by the Committee, the
Company shall cause to be transferred on the books of the Company, Shares
registered in the name of the Company, as nominee for the Participant,
evidencing the Restricted Shares covered by the Award; provided, however, such
Shares shall be subject to forfeiture to the Company retroactive to the date of
grant, if a Restricted Stock Agreement delivered to the Participant by the
Company with respect to the Restricted Shares covered by the Award is not duly
executed by the Participant and timely returned to the Company. All Restricted
Shares covered by Awards under this Article 8 shall be subject to the
restrictions, terms and conditions contained in the Plan and the Restricted
Stock Agreement entered into by and between the Company and the Participant.
Until the lapse or release of all restrictions applicable to an Award of
Restricted Shares, the share certificates representing such Restricted Shares
shall be held in custody by the Company or its designee.

                       (c) Stockholder Rights. Beginning on the date of grant of
the Restricted Stock Award and subject to execution of the Restricted Stock
Agreement as provided in Sections 8.1(a) and (b), the Participant shall become a
stockholder of the Company with respect to all Shares subject to the Restricted
Stock Agreement and shall have all of the rights of a stockholder, including,
but not limited to, the right to vote such Shares and the right to receive
distributions made with respect to such Shares; provided, however, that any
Shares distributed as a dividend or otherwise with respect to any Restricted
Shares as to which the restrictions have not yet lapsed shall be subject to the
same restrictions as such Restricted Shares and shall be represented by book
entry and held as prescribed in Section 8.1(b).

                       (d) Restriction on Transferability. None of the 
Restricted Shares may be assigned or transferred (other than by will or the laws
of descent and distribution), pledged or sold prior to lapse or release of the
restrictions applicable thereto.

                       (e) Delivery of Shares Upon Release of Restrictions. Upon
expiration or earlier termination of the forfeiture period without a forfeiture
and the satisfaction of or release from any other conditions prescribed by the
Committee, the restrictions applicable to the Restricted Shares shall lapse. As
promptly as administratively feasible thereafter, subject to the requirements of
Section 10.1, the Company shall deliver to the Participant or, in case of the
Participant's death, to the Participant's beneficiary, one or more stock
certificates for the appropriate number of Shares, free of all such
restrictions, except for any restrictions that may be imposed by law.

                                      -9-

<PAGE>

                  8.2. Terms of Restricted Shares. (a) Forfeiture of Restricted
Shares. Subject to Section 8.2(b), all Restricted Shares shall be forfeited and
returned to the Company and all rights of the Participant with respect to such
Restricted Shares shall terminate unless the Participant continues in the
service of the Company as an employee until the expiration of the forfeiture
period for such Restricted Shares and satisfies any and all other conditions set
forth in the Restricted Stock Agreement. The Committee in its sole discretion,
shall determine the forfeiture period (which may, but need not, lapse in
installments) and any other terms and conditions applicable with respect to any
Restricted Stock Award.

                       (b) Waiver of Forfeiture Period. Notwithstanding anything
contained in this Article 8 to the contrary, the Committee may, in its sole
discretion, waive the forfeiture period and any other conditions set forth in
any Restricted Stock Agreement under appropriate circumstances (including the
death, disability or retirement of the Participant or a material change in
circumstances arising after the date of an Award) and subject to such terms and
conditions (including forfeiture of a proportionate number of the Restricted
Shares) as the Committee shall deem appropriate.

                                   ARTICLE 9.

                         GENERALLY APPLICABLE PROVISIONS

                  9.1. Option Period. Subject to Section 3.1(b), the period for
which an Option is exercisable shall not exceed ten years from the date such
Option is granted, provided, however, in the case of an Option that is not
intended to be an "incentive stock option," the Committee may prescribe a period
in excess of ten years. After the Option is granted, the option period may not 
be reduced.

                  9.2. Fair Market Value. If the Shares are listed or admitted
to trading on a securities exchange registered under the Exchange Act, the "Fair
Market Value" of a Share as of a specified date shall mean the per Share closing
price of the Shares for the day immediately preceding the date as of which Fair
Market Value is being determined (or if there was no reported closing price on
such date, on the last preceding date on which the closing price was reported)
reported on the principal securities exchange on which the Shares are listed or
admitted to trading. If the Shares are not listed or admitted to trading on any
such exchange but are listed as a national market security on the National
Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"),
traded in the over-the-counter market or listed or traded on any similar system
then in use, the Fair Market Value of a Share shall be the last sales price for
the day immediately preceding the date as of which the Fair Market Value is
being determined (or if there was no reported sale on such date, on the last
preceding date on which any reported sale occurred) reported on such system. If
the Shares are not listed or admitted to trading on any such exchange, are not
listed as a national market security on NASDAQ and are not traded in the
over-the-counter market or listed or traded on any similar system then in use,
but are quoted on NASDAQ or any similar system then in use, the Fair Market
Value of a Share shall be the average of the closing high bid and low asked
quotations on such system for the Shares on the date in question. If the Shares
are not publicly traded, Fair Market Value shall be determined by the Committee
in its sole discretion using appropriate criteria. An Option shall be considered
granted on the date the Committee acts to grant the Option or such later date as
the Committee shall specify.

                  9.3. Exercise of Options. Options granted under the Plan shall
be exercised by the Optionee thereof (or by his executors, administrators,
guardian or legal representative, as provided in 

                                      -10-

<PAGE>

Sections 9.6 and 9.7 hereof) as to all or part of the Shares covered thereby, by
the giving of written notice of exercise to the Company, specifying the number
of Shares to be purchased, accompanied by payment of the full purchase price for
the Shares being purchased. Full payment of such purchase price shall be made
within five business days following the date of exercise and shall be made (i)
in cash or by certified check or bank check, (ii) with the consent of the
Committee, by delivery of a promissory note in favor of the Company upon such
terms and conditions as determined by the Committee, (iii) with the consent of
Committee, by tendering previously acquired Shares (valued at its Fair Market
Value, as determined by the Committee as of the date of tender), or (iv) with
the consent of the Committee, any combination of (i), (ii) and (iii); provided,
however, that payment may not be pursuant to (iii) above unless the Optionee
shall have owned the Shares being tendered in payment for a period of at least
six months prior to the date of exercise of the Option. Such notice of exercise,
accompanied by such payment, shall be delivered to the Company at its principal
business office or such other office as the Committee may from time to time
direct, and shall be in such form, containing such further provisions consistent
with the provisions of the Plan, as the Committee may from time to time
prescribe. In no event may any Option granted hereunder be exercised for a
fraction of a Share. The Company shall effect the transfer of Shares purchased
pursuant to an Option as soon as practicable, and, within a reasonable time
thereafter, such transfer shall be evidenced on the books of the Company. No
person exercising an Option shall have any of the rights of a holder of Shares
subject to an Option until certificates for such Shares shall have been issued
following the exercise of such Option. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to the date of such
issuance.

                  9.4. Non-Transferability of Options. Except as provided in
Section 9.11, no Option shall be assignable or transferable by the Optionee,
other than by will or the laws of descent and distribution, and may be exercised
during the life of the Optionee only by the Optionee or his guardian or legal
representative.

                  9.5. Termination of Employment. In the event of the
termination of employment of an Optionee or the termination or separation from
service of an advisor or consultant or a Director (who is an Optionee) for any
reason (other than death or disability as provided below), any Option(s) granted
to such Optionee under this Plan and not previously exercised or expired shall
be deemed cancelled and terminated on the day of such termination or separation,
unless the Committee decides, in its sole discretion, to extend the term of the
Option for a period not to exceed three months after the date of such
termination or separation, provided, however, that in no instance may the term
of the Option, as so extended, exceed the maximum term established pursuant to
Section 3.1(b)(ii) or 9.1 above. Notwithstanding the foregoing, in the event of
the termination or separation from service of an Optionee for any reason other
than death or disability, under conditions satisfactory to the Company, the
Committee may, in its sole discretion, allow any "nonqualified stock options"
granted to such Optionee under the Plan and not previously exercised or expired
to be exercisable for a period of time to be specified by the Committee,
provided, however, that in no instance may the term of the Option, as so
extended, exceed the maximum term established pursuant to Section 9.1 above.

                  9.6. Death. In the event an Optionee dies while employed by
the Company or any of its subsidiaries or affiliates or during his term as a
Director of the Company or any of its subsidiaries or affiliates, as the case
may be, any Option(s) granted to him not previously expired or exercised shall,
to the extent exercisable on the date of death, be exercisable by the estate of
such Optionee or by any person who acquired such Option by bequest or
inheritance, at any time within one year after the death of the Optionee, unless
earlier terminated pursuant to its terms, provided, however, that if the term of
such Option would 

                                      -11-

<PAGE>

expire by its terms within six months after the Optionee's death, the term of
such Option shall be extended until six months after the Optionee's death,
provided further, however, that in no instance may the term of the Option, as so
extended, exceed the maximum term established pursuant to Section 3.1(b)(ii) or
9.1 above.

                  9.7. Disability. In the event of the termination of employment
of an Optionee or the separation from service of a Director (who is an Optionee)
due to total disability, the Optionee, or his guardian or legal representative,
shall have the unqualified right to exercise any Option(s) which have not been
previously exercised or expired and which the Optionee was eligible to exercise
as of the first date of total disability (as determined by the Committee), at
any time within one year after such termination or separation, unless earlier
terminated pursuant to its terms, provided, however, that if the term of such
Option would expire by its terms within six months after such termination or
separation, the term of such Option shall be extended until six months after
such termination or separation, provided further, however, that in no instance
may the term of the Option, as so extended, exceed the maximum term established
pursuant to Section 3.1(b)(ii) or 9.1 above. The term "total disability" shall,
for purposes of this Plan, be defined in the same manner as such term is defined
in Section 22(e)(3) of the Code.

                  9.8. Six-Month Holding Period. Notwithstanding anything to the
contrary in the Plan, each Option (or the Shares underlying the Option) granted
to an individual who is subject to Section 16 of the Exchange Act, must be held
by such individual for a combined period of at least six months from the date
the Option is granted (or until such earlier date as satisfies any legal
requirement for exemption under Rule 16b-3 of the Exchange Act and as satisfies
all other applicable law); provided that the sale, transfer or other disposition
of any Shares underlying any Option shall be permitted within such period to the
extent the sale, transfer or other disposition is exempt under Rule 16b-3 of the
Exchange Act and all other applicable law.

                  9.9. Amendment and Modification of the Plan. The Board of
Directors of the Company may, from time to time, alter, amend, suspend or
terminate the Plan as it shall deem advisable, subject to any requirement for
stockholder approval imposed by applicable law or any rule of any stock exchange
or quotation system on which Shares are listed or quoted; provided that the
Board of Directors may not amend the Plan in any manner that would result in
noncompliance with Rule 16b-3 of the Exchange Act or any applicable law, except
as otherwise provided in Sections 3.2 or 9.11 hereof; and further provided that
the Board of Directors may not, without the approval of the Company's
stockholders, amend the Plan to (a) increase the number of Shares that may be
the subject of Options under the Plan (except for adjustments pursuant to
Section 9.10 hereof), (b) reduce the minimum option price specified by Sections
3.1(b) and 4.3 hereof, (c) increase the maximum permissible term of any Option
specified by Section 3.1(b)(ii) or 9.1 hereof, and (d) remove responsibility for
administering the Plan from the Committee. In addition, no amendments to, or
termination of, the Plan shall in any way impair the rights of an Optionee or a
Participant under any Award previously granted without such Optionee's or
Participant's consent.

                  9.10. Adjustments. In the event that the Committee shall 
determine that any dividend or other distribution (whether in the form of cash,
Shares, other securities, or other property), recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Shares or other securities, the issuance
of warrants or other rights to purchase Shares or other securities, or other
similar corporate transaction or event affects the Shares with respect to which
Options have been or may be issued under the Plan, such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits 

                                      -12-

<PAGE>

intended to be made available under the Plan, then the Committee shall, in such
manner as the Committee may deem equitable, adjust any or all of (i) the number
and type of Shares that thereafter may be made the subject of Options, (ii) the
number and type of Shares subject to outstanding Options and stock appreciation
rights, and (iii) the grant or exercise price with respect to any Option, or, if
deemed appropriate, make provision for a cash payment to the holder of any
outstanding Option; provided, in each case, that with respect to "incentive
stock options," no such adjustment shall be authorized to the extent that such
adjustment would cause such options to violate Section 422(b) of the Code or any
successor provision; and provided further, that the number of Shares subject to
any Option denominated in Shares shall always be a whole number.

                  9.11. Other Provisions. Notwithstanding anything in this Plan
to the contrary, if the Board of Directors determine that the Plan cannot, or
that an Award need not, satisfy the requirements of Rule 16b-3 of the Exchange
Act (such that grants of Awards are not exempt from Section 16(b) of the
Exchange Act), then the Committee shall have the authority to waive or modify
those provisions of the Plan which are intended to satisfy such Rule 16b-3
requirements and shall allow an Optionee who has been granted "nonqualified
stock options" to transfer any or all of such options to any one or more of the
following persons: (i) the spouse, parent, issue, spouse of issue, or issue of
spouse ("issue" shall include all descendants whether natural or adopted) of
such Optionee; or (ii) a trust for the benefit of those persons described in
clause (i) above or for the benefit of such Optionee, or for the benefit of any
such persons and such Optionee; provided, however, that such transferee shall be
bound by all of the terms and conditions of this Plan and shall execute an
agreement satisfactory to the Company evidencing such obligation; and provided
further, however, that such Optionee shall remain bound by the terms and
conditions of this Plan. The Company shall cooperate with an Optionee's
transferee and the Company's transfer agent in effectuating any transfer
permitted pursuant to this Section 9.11.

                                   ARTICLE 10.

                                  MISCELLANEOUS

                  10.1. Tax Withholding. The Company shall notify an Optionee or
Participant of any income tax withholding requirements arising as a result of
the grant of any Award, exercise of an Option or stock appreciation rights or
any other event occurring pursuant to this Plan. The Company shall have the
right to withhold from such Optionee or Participant such withholding taxes as
may be required by law, or to otherwise require the Optionee or Participant to
pay such withholding taxes. If the Optionee or Participant shall fail to make
such tax payments as are required, the Company or its subsidiaries or affiliates
shall, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to such Optionee or Participant or to
take such other action as may be necessary to satisfy such withholding
obligations.

                  10.2. Right of Discharge Reserved. Nothing in the Plan nor the
grant of an Award hereunder shall confer upon any employee, Director or other
individual the right to continue in the employment or service of the Company or
any subsidiary or affiliate of the Company or affect any right that the Company
or any subsidiary or affiliate of the Company may have to terminate the
employment or service of (or to demote or to exclude from future Options under
the Plan) any such employee, Director or other individual at any time for any
reason. Except as specifically provided by the Committee, the Company shall not
be liable for the loss of existing or potential profit from an Award granted in
the event of termination of an 

                                      -13-

<PAGE>

employment or other relationship even if the termination is in violation of an
obligation of the Company or any subsidiary or affiliate of the Company to the
employee or Director.

                  10.3. Nature of Payments. All Awards made pursuant to the Plan
are in consideration of services performed or to be performed for the Company or
any subsidiary or affiliate of the Company. Any income or gain realized pursuant
to Awards under the Plan and any stock appreciation rights constitutes a special
incentive payment to the Optionee, Participant or Holder and shall not be taken
into account, to the extent permissible under applicable law, as compensation
for purposes of any of the employee benefit plans of the Company or any
subsidiary or affiliate of the Company except as may be determined by the
Committee or by the Directors or directors of the applicable subsidiary or
affiliate of the Company.

                  10.4. Severability. If any provision of the Plan shall be held
unlawful or otherwise invalid or unenforceable in whole or in part, such
unlawfulness, invalidity or unenforceability shall not affect any other
provision of the Plan or part thereof, each of which remain in full force and
effect. If the making of any payment or the provision of any other benefit
required under the Plan shall be held unlawful or otherwise invalid or
unenforceable, such unlawfulness, invalidity or unenforceability shall not
prevent any other payment or benefit from being made or provided under the Plan,
and if the making of any payment in full or the provision of any other benefit
required under the Plan in full would be unlawful or otherwise invalid or
unenforceable, then such unlawfulness, invalidity or unenforceability shall not
prevent such payment or benefit from being made or provided in part, to the
extent that it would not be unlawful, invalid or unenforceable, and the maximum
payment or benefit that would not be unlawful, invalid or unenforceable shall be
made or provided under the Plan.

                  10.5. Gender and Number. In order to shorten and to improve 
the understandability of the Plan document by eliminating the repeated usage of
such phrases as "his or her" and any masculine terminology herein shall also
include the feminine, and the definition of any term herein in the singular
shall also include the plural except when otherwise indicated by the context.

                  10.6. Governing Law. The Plan and all determinations made and
actions taken thereunder, to the extent not otherwise governed by the Code or
the laws of the United States, shall be governed by the laws of the State of
Delaware and construed accordingly.

                  10.7. Effective Date of Plan; Termination of Plan. The Plan 
shall be effective on the date of the approval of the Plan by the holders of a
majority of the shares entitled to vote at a duly constituted meeting of the
stockholders; provided, however, that the adoption of the Plan is subject to
such stockholder approval within 12 months after the date of adoption of the
Plan by the Board of Directors. The Plan shall be null and void and of no effect
if the foregoing condition is not fulfilled and in such event each Award and
related stock appreciation rights shall, notwithstanding any of the preceding
provisions of the Plan, be null and void and of no effect. Awards may be granted
under the Plan at any time and from time to time on or prior to May 28, 2006, on
which date the Plan will expire except as to Awards and related stock
appreciation rights then outstanding under the Plan. Such outstanding Awards and
stock appreciation rights shall remain in effect until they have been exercised
or terminated, or have expired.

                  10.8. Captions. The captions in this Plan are for convenience
of reference only, and are not intended to narrow, limit or affect the substance
or interpretation of the provisions contained herein.






<PAGE>

                                                                  EXHIBIT 10.16

                                SUPPLY AGREEMENT

                  SUPPLY AGREEMENT, dated as of October 31, 1998, between Barnes
& Noble, Inc., Delaware corporation having an office located at 122 Fifth
Avenue, New York, New York 10011 ("B&N"), and barnesandnoble.com llc, a Delaware
limited liability company having an office located at 76 Ninth Avenue, 11th
Floor, New York, New York 10011 (the "LLC"). Capitalized terms used herein
without definition shall have the meanings assigned to such terms in the Amended
and Restated Limited Liability Company Agreement effective as of October 31,
1998 of the LLC, as the same may be amended or modified from time to time (the
"LLC Agreement").

                  WHEREAS, to enable the LLC to obtain the benefits of any
purchasing discounts available to B&N, the parties desire that B&N shall from
time to time order Products (as defined below) on behalf of the LLC, on the
terms and conditions set forth herein.

                  NOW, THEREFORE, in consideration of the mutual promises and
agreements herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:

                  1. Orders. (a) During the term of this Agreement, the LLC may
from time to time, in its sole discretion, place orders for Products with B&N
(each an "Order"). "Products" shall mean books, magazines and other products
generally sold by B&N in its retail stores. Nothing in this Agreement is
intended to limit the LLC from placing orders for Products with any other
entity.

                     (b) Once an Order is placed by the LLC, B&N shall use its 
commercially reasonable efforts to fill such Order as promptly as practical in
accordance with the terms of such Order. Products ordered hereunder by the LLC
shall be delivered to the LLC's warehouse at 308A Herrod Blvd., Dayton, New
Jersey 08810, unless otherwise mutually agreed upon by the parties hereto. B&N
shall give Orders placed by the LLC equal priority with Orders placed by any
other entity, including, without limitation, B&N. B&N shall not be responsible
for any delays by third-party suppliers in the filling of any Order.

                  2. Price. For all Products ordered by the LLC under this
Agreement, B&N shall charge the LLC B&N's cost for such Products plus
Incremental Overhead (as defined below). Payment for Orders shall be due 30 days
from the date of such Order, provided that B&N shall refund any payments made
for Orders which B&N is unable to fill within 30 days of such determination by
B&N. "Incremental Overhead" shall mean the cost incurred by B&N and its
Affiliates to third parties, including, without limitation, costs for shipping
and handling, and any direct labor costs incurred by B&N and its Affiliates in
excess of the cost that would have been incurred in the absence of the
performance by B&N and its Affiliates of B&N's obligations 


<PAGE>

hereunder.

                  3. No Agency. The parties hereto are independent contractors
and nothing in this Agreement is intended to, nor shall it, create any agency,
partnership or joint venture relationship between them. With respect to any
third party, no party hereto, or any of its officers, directors, employees or
agents, shall have the right or authority to bind or otherwise obligate the
other party hereto in any way as a consequence of this Agreement.

                  4. Termination. This Agreement shall terminate on the date
that either B&N and its Affiliates or BAG and its Affiliates cease to own a
Membership Interest of at least 10% of the outstanding Membership Interests, but
may be terminated earlier as follows:

                     (a) the LLC may, in accordance with the provisions of 
Section 4.7(a) of the LLC Agreement, terminate this Agreement on thirty (30)
days' prior written notice to B&N.

                     (b) B&N may terminate this Agreement:

                     (i)   within the sixty (60) day period following the
                  one hundred and eightieth day (180) after a transfer pursuant
                  to Section 7.3 of the LLC Agreement;

                     (ii)  the LLC is in default of the terms of this
                  Agreement and such default continues for more than thirty (30)
                  days after written notice thereof to the LLC and BAG (as such
                  term is defined in the LLC Agreement), provided that such
                  default is not principally as a result of the action or
                  inaction of the BN Managers;

                     (iii) in the event that B&N or the LLC shall (A)
                  apply for or consent to the appointment of, or the taking
                  possession by, a receiver, custodian, trustee, examiner,
                  liquidator or the like of itself or of all or any substantial
                  part of its property, (B) make a general assignment for the
                  benefit of its creditors, (C) commence a voluntary case under
                  the Federal Bankruptcy Code of 1978, as amended, or (D) file a
                  petition as a debtor seeking to take advantage of any other
                  law relating to bankruptcy, insolvency, reorganization,
                  liquidation, dissolution, arrangement or winding-up, or 
                  composition or readjustment of its debts; or

                     (iv)  if a proceeding or case shall be commenced
                  against any of B&N or the LLC, without such party's
                  application or consent, seeking (A) its reorganization,
                  liquidation, dissolution, arrangement or winding-up, or the
                  composition or readjustment of its debts, (B) the appointment
                  of a receiver, custodian, trustee, examiner or liquidator or
                  the like of such party or of all or any substantial part of
                  its property, or (C) similar relief in respect of such party
                  under any law relating to bankruptcy, insolvency,
                  reorganization, liquidation, 

                                      -2-

<PAGE>

                  dissolution, arrangement or winding-up, or composition or 
                  adjustment of debts, and such proceeding or case shall 
                  continue undismissed, or an order, judgment or decree 
                  approving or ordering any of the foregoing shall be entered 
                  and continue unstayed and in effect, for a period of 60 or 
                  more days.

                  5. Miscellaneous. (a) This Agreement shall be governed by the
internal laws of the State of New York without giving effect to the conflict of
law principles thereof.

                     (b) Neither party shall be liable to fulfill its 
obligations hereunder, or for delays in performance, due to causes beyond its
reasonable control, including, but not limited to, acts of God, acts or
omissions of civil or military authority, fires, strikes, floods, epidemics,
riots or acts of war.

                     (c) This Agreement sets forth the entire agreement
between the parties hereto with respect to the subject matter hereof and is
intended to supersede all prior negotiations, understandings and agreements. No
provision of this Agreement may be waived or amended, except by a writing signed
by the parties hereto.

                     (d) This Agreement may be executed in one or more 
counterparts, each of which shall be deemed an original and together which shall
constitute one and the same instrument.

                     (e) The failure of either party to exercise any right or 
remedy provided for herein shall not be deemed a waiver of any right or remedy
hereunder.

                     (f) If any provision of this Agreement is determined by a 
court of competent jurisdiction to be invalid or otherwise unenforceable, such
determination shall not affect the validity or enforceability of any remaining
provisions of this Agreement. If any provision of this Agreement is invalid
under any applicable statute or rule of law, it shall be enforced to the maximum
extent possible so as to effect the intent of the parties, and the remainder of
this Agreement shall continue in full force and effect.

                     (g) Any and all notices or other communications hereunder 
shall be sufficiently given if in writing and sent by hand, telecopier,
reputable overnight courier or by certified mail, return receipt requested,
postage prepaid, addressed to the party to receive the same at its address as
set forth on page 1 hereof, or to such other address as the party to receive the
same shall have specified by written notice given in the manner provided for in
this Section 5(g). Such notices or other communications shall be deemed to have
been given on the date of such delivery. Either party may change its address for
the purpose of this Agreement by notice to the other party given as aforesaid.

                     (h) This Agreement shall be binding upon and inure to the 
benefit of each of the parties hereto and their respective successors and
assigns, provided that the LLC may

                                      -3-

<PAGE>

not assign any of its rights hereunder without the prior written consent of B&N.

                     (i) The section headings used herein are for the 
convenience of the parties only, are not substantive and shall not be used to 
interpret or construe any of the provisions contained herein.

                  IN WITNESS WHEREOF, the parties hereto have executed this 
Agreement on the date first set forth above.

                                           BARNES & NOBLE, INC.

                                           By:
                                              ---------------------------------
                                              Name:
                                              Title:

                                           barnesandnoble.com llc


By: barnesandnoble.com inc., its
    managing member

 By:___________________________
    Name:
    Title:


                                      -4-








<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

     The selected consolidated financial data of Barnes & Noble, Inc. and its
wholly owned subsidiaries (collectively, the Company) set forth on the following
pages should be read in conjunction with the consolidated financial statements
and notes included elsewhere in this report. The Company's fiscal year is
comprised of 52 or 53 weeks, ending on the Saturday closest to the last day of
January. The Statement of Operations Data for the 52 weeks ended January 30,
1999 (fiscal 1998), the 52 weeks ended January 31, 1998 (fiscal 1997) and the 53
weeks ended February 1, 1997 (fiscal 1996) and the Balance Sheet Data as of
January 30, 1999 and January 31, 1998 are derived from, and are qualified by
reference to, audited consolidated financial statements which are included
elsewhere in this report. The Statement of Operations Data for the 52 weeks
ended January 27, 1996 (fiscal 1995) and January 28, 1995 (fiscal 1994) and the
Balance Sheet Data as of February 1, 1997, January 27, 1996 and January 28, 1995
are derived from audited consolidated financial statements not included in this
report. Certain prior-period amounts have been reclassified for comparative
purposes. 

                                      1

<PAGE>


SELECTED CONSOLIDATED
 FINANCIAL DATA CONTINUED



<TABLE>
<CAPTION>
Fiscal Year                                            1998            1997             1996            1995            1994 
(In thousands of dollars, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:

<S>                                                 <C>             <C>             <C>             <C>             <C>
Sales
     Barnes & Noble stores                          $  2,515,352       2,245,531       1,861,177       1,349,830         952,697
     B. Dalton stores                                    468,414         509,389         564,926         603,204         646,876
     barnesandnoble.com                                      --           14,601            --              --              --
     Other                                                21,842          27,331          22,021          23,866          23,158
                                                    ------------    ------------    ------------    ------------    ------------

       Total sales                                     3,005,608       2,796,852       2,448,124       1,976,900       1,622,731
Cost of sales and occupancy                            2,142,717       2,019,291       1,785,392       1,444,555       1,192,123
                                                    ------------    ------------    ------------    ------------    ------------

     Gross profit                                        862,891         777,561         662,732         532,345         430,608
Selling and administrative expenses                      577,195         540,423         465,687         383,692         316,457
Depreciation and amortization                             88,345          76,951          59,806          47,881          36,617
Pre-opening expenses                                       8,795          12,918          17,571          12,160           9,021
Restructuring charge(1)                                     --              --              --           123,768            --
                                                    ------------    ------------    ------------    ------------    ------------

     Operating profit (loss)                             188,556         147,269         119,668         (35,156)         68,513
Interest expense, net and amortization of
     deferred financing fees(2)                          (24,412)        (37,666)        (38,286)        (28,142)        (22,955)
Equity in net loss of barnesandnoble.com llc(3)          (71,334)           --              --              --              --
Gain on formation of barnesandnoble.com llc(4)            63,759            --              --              --              --
                                                    ------------    ------------    ------------    ------------    ------------

     Earnings (loss) before provision (benefit)
       for income taxes and extraordinary charge         156,569         109,603          81,382         (63,298)         45,558
Provision (benefit) for income taxes                      64,193          44,935          30,157         (10,322)         20,085
                                                    ------------    ------------    ------------    ------------    ------------

     Earnings (loss) before extraordinary charge          92,376          64,668          51,225         (52,976)         25,473
Extraordinary charge(5)                                     --            11,499            --              --              --
                                                    ------------    ------------    ------------    ------------    ------------

     Net earnings (loss)                            $     92,376          53,169          51,225         (52,976)         25,473
                                                    ============    ============    ============    ============    ============

Earnings (loss) per common share
     Basic
       Earnings (loss) before extraordinary charge  $       1.35            0.96            0.77           (0.85)           0.42
       Extraordinary charge                         $       --              0.17            --              --              --
       Net earnings (loss)                          $       1.35            0.79            0.77           (0.85)           0.42
     Diluted
       Earnings (loss) before extraordinary charge  $       1.29            0.93            0.75           (0.85)           0.41
       Extraordinary charge                         $       --              0.17            --              --              --
       Net earnings (loss)                          $       1.29            0.76            0.75           (0.85)           0.41
     Weighted average common
       shares outstanding
         Basic                                        68,435,000      67,237,000      66,103,000      62,434,000      59,970,000
         Diluted                                      71,677,000      69,836,000      67,886,000      62,434,000      61,560,000

OTHER OPERATING DATA:

Number of Stores
     Barnes & Noble stores(6)                                520             483             431             358             268
     B. Dalton stores(7)                                     489             528             577             639             698
                                                    ------------    ------------    ------------    ------------    ------------


       Total                                               1,009           1,011           1,008             997             966
                                                    ============    ============    ============    ============    ============

Comparable store sales increase (decrease)(8)
     Barnes & Noble stores                                   5.0%            9.4%            7.3%            6.9%           12.6%
     B. Dalton stores                                       (1.4)           (1.1)           (1.0)           (4.3)           (2.3)

Capital Expenditures                                $    141,388         121,903         171,885         154,913          88,763

BALANCE SHEET DATA:

Working capital                                     $    315,989         264,719         212,692         226,500         155,976
Total assets                                        $  1,807,597       1,591,171       1,446,647       1,315,342       1,026,418
Long-term debt, less current portions               $    249,100         284,800         290,000         262,400         190,000
Shareholders' equity                                $    678,789         531,755         455,989         400,235         358,173
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>




                                       2


<PAGE>


 SELECTED CONSOLIDATED FINANCIAL DATA CONTINUED


(In thousands of dollars)



(1)  Restructuring charge includes restructuring and asset impairment losses
     recognized upon adoption of Statement of Financial Accounting Standards No.
     121, "Impairment of Long-Lived Assets and Assets to be Disposed Of."

(2)  Interest expense for fiscal 1998, 1997, 1996, 1995 and 1994 is net of
     interest income of $976, $446, $2,288, $2,138 and $3,008, respectively.

(3)  On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
     completed the formation of a limited liability company to operate the
     online retail bookselling operations of the Company's wholly owned
     subsidiary, barnesandnoble.com inc. barnesandnoble.com inc. began
     operations in fiscal 1997. As a result of the formation of
     barnesandnoble.com llc (barnesandnoble.com), the Company began accounting
     for its interest in barnesandnoble.com under the equity method of
     accounting as of the beginning of fiscal 1998. Fiscal 1998 reflects a
     one-hundred percent equity interest in barnesandnoble.com for the first
     three quarters ended October 31, 1998 (also the effective date of the
     limited liability company agreement), and a fifty percent equity interest
     beginning on November 1, 1998 through the end of the fiscal year. Had the
     Company reported the results of barnesandnoble.com inc. under the equity
     method of accounting during fiscal 1997, its fiscal 1997 equity in the net
     loss of barnesandnoble.com inc. would have been $15,395.

(4)  As a result of the formation of the limited liability company, the Company
     has recognized a pre-tax gain during fiscal 1998 in the amount of $126,435,
     of which $63,759 has been recognized in earnings based on the $75,000
     received directly from Bertelsmann and $62,676 ($36,351 after taxes) has
     been reflected in additional paid-in capital based on the Company's share
     of the incremental equity of the joint venture resulting from the $150,000
     Bertelsmann contribution.

(5)  Reflects a net extraordinary charge during fiscal 1997 due to the early
     extinguishment of debt, consisting of: (i) a pre-tax charge of $11,281
     associated with the redemption premium on the Company's senior subordinated
     notes; (ii) the associated write-off of $8,209 of unamortized deferred
     finance costs; and (iii) the related tax benefits of $7,991 on the
     extraordinary charge.

(6)  Also includes 15 Bookstop and 25 Bookstar stores as of January 30, 1999.

(7)  Also includes 15 Doubleday Book Shops, eight Scribner's Bookstores and
     seven smaller format bookstores operated under the Barnes & Noble trade
     name representing the Company's original retail strategy as of January 30,
     1999.

(8)  Comparable store sales increase (decrease) is calculated on a 52-week
     basis, and includes sales of stores that have been open for 12 months for
     B. Dalton stores and 15 months for Barnes & Noble stores (due to the high
     sales volume associated with grand openings). Comparable store sales for
     fiscal years 1998, 1997 and 1996 include relocated Barnes & Noble stores
     and exclude B. Dalton stores which the Company has closed or has a formal
     plan to close.


                                       3


<PAGE>


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


     The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday closest to the last day of January. As used in this section, "fiscal
1998" represents the 52 weeks ended January 30, 1999, "fiscal 1997" represents
the 52 weeks ended January 31, 1998 and "fiscal 1996" represents the 53 weeks
ended February 1, 1997.

General

     Barnes & Noble, Inc. (Barnes & Noble or the Company), the world's largest
bookseller*, as of January 30, 1999 operates 1,009 bookstores. Of these 1,009
stores, 520 operate under the Barnes & Noble Booksellers, Bookstop and Bookstar
trade names, (50 of which were opened in fiscal 1998), and 489 operate under the
B. Dalton Bookseller, Doubleday Book Shops and Scribner's Bookstore trade names.
Through its fifty percent interest in barnesandnoble.com llc
(barnesandnoble.com), the Company is also the world's largest bookseller on the
World Wide Web (http://www.barnesandnoble.com) and the exclusive bookseller on
America Online (keyword: bn). Barnes & Noble publishes books under its own
imprint for exclusive sale through its retail stores, mail-order catalogs and
barnesandnoble.com. The Company employed approximately 29,000 full- and
part-time booksellers and created nearly 2,000 new jobs nationwide during fiscal
1998 primarily due to its Barnes & Noble store expansion.

     Barnes & Noble is the largest operator of book "super" stores in the United
States* with 520 Barnes & Noble stores located in 49 states and the District of
Columbia as of January 30, 1999. With more than 30 years of bookselling
experience, management has a strong sense of customers' changing needs and the
Company leads book retailing with a "community store" concept. Barnes & Noble's
typical store offers a comprehensive title base, a cafe, a children's section, a
music department and a calendar of ongoing events, including author appearances
and children's activities, that make each Barnes & Noble store an active part of
its community.

     Barnes & Noble stores range in size from 10,000 to 60,000 square feet
depending upon market size, and each store features a comprehensive selection of
books, ranging from 60,000 to 175,000 titles. The title selection is diverse and
reflects local interests. In addition, Barnes & Noble emphasizes books published
by small and independent publishers and university presses. Bestsellers
represent only 3% of Barnes & Noble store sales. Complementing this extensive
on-site selection, all Barnes & Noble stores provide customers with access to
the millions of books available to online shoppers while offering an option to
have the book sent to the store or shipped directly to the customer. During
fiscal 1999 the Company expects to complete installation of BookMaster, the
Company's new in-store operating system, in all Barnes & Noble stores.
BookMaster enhances our existing merchandise replenishment systems, resulting in
higher in-stock positions and better productivity at the store level through
efficiencies in receiving, cashiering and returns processing.

     Barnes & Noble stores opened during fiscal 1998 added 1.3 million square
feet to the Barnes & Noble base, bringing the total square footage to 11.9
million square feet, a 10% increase over the prior year. Barnes & Noble stores
contributed more than 84% of the Company's total sales in fiscal 1998. The
Company plans to open approximately 50 Barnes & Noble stores in 1999 which are
expected to average 26,000 square feet in size.

     At the end of fiscal 1998, the Company operated 489 B. Dalton stores in 45
states and the District of Columbia. B. Dalton stores employ merchandising
strategies that target the "middle-American" consumer book market, offering a
wide range of bestsellers and general-interest titles. Most B. Dalton stores
range in size from 2,800 to 6,000 square feet, and while they are appropriate to
the size of adjacent mall tenants, the opening of superstores in nearby
locations continues to have a significant impact on B. Dalton stores.

     The Company is continuing to execute its strategy to maximize returns from
its B. Dalton division in response to declining sales attributable to superstore
competition and weaker overall consumer traffic in shopping malls. Part of the
Company's strategy has been to close underperforming stores, which has resulted
in the closing of, on average, between 40 and 60 B. Dalton stores per year since
1989.

     barnesandnoble.com, a limited liability company created in November 1998
(as discussed more fully below) was formed by combining the online bookselling
operations of the Company with funds contributed by the international media
company Bertelsmann AG (Bertelsmann), one of the largest integrated media
companies in the world. barnesandnoble.com has the world's largest selection of
books* -- more than eight million in-print and out-of-print books. In less than
two years of operations, it has become the fourth most-trafficked e-commerce
site and among the top 25 largest overall sites on the Internet, as of December
1998, according to Media Metrix. barnesandnoble.com has access to the largest
standing inventory of any online bookseller with more than 750,000 titles ready
for immediate delivery. The site's database features more than six and one half
million out-of-print and rare books, as well as the largest online selection of
bargain books discounted up to 90 percent. During 1998, many major enhancements
were introduced, including one-click ordering, a powerful and user friendly
search engine, email book reviews and product-notification services, Software
and Magazine stores, a Gift Center and Bargain Book store and online gift
certificates. Also during 1998, the site began to add music and video to its
product offerings, as well as an out-of-print book service. barnesandnoble.com
is the exclusive bookseller to America Online (AOL)'s more than 16 million
subscribers. The Company's affiliate network pays the highest commissions with
the best linking and best reporting 

- --------
(*)  Based upon information reported in trade publications and public filings.

                                       4


<PAGE>


MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED

tools, including daily updated sales information, and is the leader in
business-to-business e-commerce with its unique Business Solutions program.

     The Company further differentiates its product offerings from those of its
competitors by publishing books under its own Barnes & Noble Books imprint for
exclusive sale in its retail stores, direct-mail catalogs and through
barnesandnoble.com. With publishing and distribution rights to over 2,000
titles, Barnes & Noble Books offers customers high-quality books at exceptional
values, while generating attractive gross margins.

     The Company also maintains an investment in Chapters Inc., an Ontario
company which is publicly traded on the Toronto Stock Exchange. Chapters is the
largest book retailer in Canada and the third largest in North America*,
operating 327 bookstores, including 52 superstores, as of the end of fiscal
1998.

Results of Operations

     The Company's sales, operating profit, comparable store sales, store
openings, store closings, number of stores open and square feet of selling space
at year end are set forth below:


<TABLE>
<CAPTION>

Fiscal Year                                                     1998               1997               1996
(In thousands of dollars)
- -------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>                <C>
Sales(1)                                                    $ 3,005,608          2,796,852          2,448,124
Operating Profit(1)                                         $   188,556            147,269            119,668
Comparable Store Sales Increase (Decrease)(2)
Barnes & Noble stores                                               5.0%               9.4%               7.3%
B. Dalton stores                                                   (1.4)              (1.1)              (1.0)
                                                            ===========        ===========        ===========
Stores Opened
Barnes & Noble stores                                                50                 65                 91
B. Dalton stores                                                      4                  4                 10
                                                            -----------        -----------        -----------

     Total                                                           54                 69                101
                                                            ===========        ===========        ===========

Stores Closed
Barnes & Noble stores                                                13                 13                 18
B. Dalton stores                                                     43                 53                 72
                                                            -----------        -----------        -----------

     Total                                                           56                 66                 90
                                                            ===========        ===========        ===========

Number of Stores Open at Year End
Barnes & Noble stores                                               520                483                431
B. Dalton stores                                                    489                528                577
                                                            -----------        -----------        -----------

     Total                                                        1,009              1,011              1,008
                                                            ===========        ===========        ===========

Square Feet of Selling Space at Year End (In millions)
Barnes & Noble stores                                              11.9               10.8                9.3
B. Dalton stores                                                    1.9                2.0                2.2
                                                            -----------        -----------        -----------

     Total                                                         13.8               12.8               11.5
                                                            ===========        ===========        ===========
- -------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  Included in fiscal 1997 are sales and operating losses associated with
     barnesandnoble.com of $14,601 and ($15,395), respectively. Beginning in
     fiscal 1998 the Company's Consolidated Statement of Operations presents its
     equity in the results of operations of barnesandnoble.com as a single line
     item below operating profit in accordance with the equity method of
     accounting. The Company's equity in the net loss of barnesandnoble.com for
     fiscal 1998 was ($71,334).

(2)  Comparable store sales for B. Dalton stores are determined using stores
     open at least 12 months. Comparable store sales for Barnes & Noble stores
     are determined using stores open at least 15 months, due to the high sales
     volume associated with grand openings. Comparable store sales increase
     (decrease) is computed on a 52-week basis for fiscal 1996. 



- --------------------------------------------------------------------------------
* Based upon information reported in trade publications and public filings.


                                       5


<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS CONTINUED


     The following table sets forth, for the periods indicated, the percentage
relationship that certain items bear to total sales of the Company: 


<TABLE>
<CAPTION>
Fiscal Year                                                              1998         1997         1996
- --------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C>   
Sales                                                                    100.0%       100.0%       100.0%
Cost of sales and occupancy                                               71.3         72.2         72.9
                                                                       -------      -------      -------

     Gross margin                                                         28.7         27.8         27.1
Selling and administrative expenses                                       19.2         19.3         19.0
Depreciation and amortization                                              2.9          2.8          2.5
Pre-opening expenses                                                       0.3          0.4          0.7
                                                                       -------      -------      -------

     Operating margin(1)                                                   6.3          5.3          4.9
Interest expense, net and amortization of deferred financing fees         (0.8)        (1.4)        (1.6)
Equity in net loss of barnesandnoble.com llc                              (2.4)        --           --
Gain on formation of barnesandnoble.com llc                                2.1         --           --
                                                                       -------      -------      -------

     Earnings before provision for income taxes
       and extraordinary charge(1)                                         5.2          3.9          3.3
Provision for income taxes(1)                                              2.1          1.6          1.2
                                                                       -------      -------      -------

     Earnings before extraordinary charge(1)                               3.1          2.3          2.1
Extraordinary charge, net                                                 --            0.4         --
                                                                       -------      -------      -------

Net earnings                                                               3.1%         1.9%         2.1%
                                                                       =======      =======      =======
- --------------------------------------------------------------------------------------------------------
</TABLE>


(1)  If operating margin, earnings before provision for income taxes and
     extraordinary charge, provision for income taxes and earnings before
     extraordinary charge were presented without barnesandnoble.com during
     fiscal 1997, the percentage relationship that these items would bear to
     total sales of the Company would be 5.8%, 4.5%, 1.8% and 2.7%

52 Weeks Ended January 30, 1999 Compared with 
52 Weeks Ended January 31, 1998

Sales

     The Company's sales increased 7.5% during fiscal 1998 to $3.006 billion
from $2.797 billion during fiscal 1997. Fiscal 1998 sales from Barnes & Noble
stores, which contributed 83.7% of total sales, increased 12.0% to $2.515
billion from $2.246 billion in fiscal 1997.

     The increase in sales was primarily due to the 5.0% increase in Barnes &
Noble comparable store sales and the opening of an additional 50 Barnes & Noble
stores during 1998. This increase was slightly offset by declining sales of B.
Dalton, due to 43 store closings and a comparable store sales decline of 1.4%.
In addition, fiscal 1997 includes barnesandnoble.com sales of $14.6 million
whereas fiscal 1998 does not include sales for barnes-andnoble.com due to the
conversion to the equity method of accounting as of the beginning of the year.
Excluding barnesandnoble.com sales in fiscal 1997, retail sales increased 8.0%
during fiscal 1998.

Cost of Sales and Occupancy

     The Company's cost of sales and occupancy includes costs such as rental
expense, common area maintenance, merchant association dues, lease-required
advertising and adjustments for LIFO.

     Cost of sales and occupancy increased to $2.143 billion in fiscal 1998 from
$2.019 billion in fiscal 1997. The Company's gross margin rate increased to
28.7% in fiscal 1998 from 27.8% in fiscal 1997. Excluding barnesandnoble.com in
fiscal 1997 the retail gross margin rate was 27.9%. The current year improvement
in gross margin reflects more direct buying, increased distribution center
efficiencies, better shrinkage control, and a more-favorable merchandise mix.


                                       6


<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED

Selling and Administrative Expenses

     Selling and administrative expenses increased $36.8 million, or 6.8% to
$577.2 million in fiscal 1998 from $540.4 million in fiscal 1997. Selling and
administrative expenses decreased slightly to 19.2% of sales during fiscal 1998
from 19.3% during fiscal 1997 primarily as a result of the start-up expenses
from barnesandnoble.com included in the fiscal 1997 results. Excluding
barnesandnoble.com, retail selling and administrative expenses would have been
18.9% of sales in fiscal 1997 and total retail selling and administrative
expenses would have increased 9.9% in fiscal 1998. The current year increase in
retail selling and administrative expenses reflects the opening of an additional
50 Barnes & Noble stores, the full year implementation of a new wage plan, and
expenses associated with new store system enhancements.

Depreciation and Amortization

     Depreciation and amortization increased $11.3 million, or 14.8%, to $88.3
million in fiscal 1998 from $77.0 million in fiscal 1997. The increase was
primarily the result of the new Barnes & Noble stores opened during fiscal 1998
and fiscal 1997, as well as new store system enhancements made during fiscal
1998.

Pre-Opening Expenses

     Pre-opening expenses declined in fiscal 1998 to $8.8 million from $12.9
million in fiscal 1997 reflecting fewer new stores compared with prior years.

Operating Profit

     Operating profit increased to $188.6 million in fiscal 1998 from $147.3
million in fiscal 1997. Excluding the $15.4 million operating loss for
barnesandnoble.com included in fiscal 1997, retail operating margin improved to
6.3% of sales during fiscal 1998 from 5.8% of sales in fiscal 1997.

Interest Expense, Net and Amortization
of Deferred Financing Fees

     Interest expense, net of interest income, and amortization of deferred
financing fees decreased 35.2% or $13.3 million in fiscal 1998 to $24.4 million
from $37.7 million in fiscal 1997. The decline was the result of the retirement
of $190 million in 11-7/8% senior subordinated notes on January 15, 1998 as well
as the more-favorable rate environment and lower spreads over the London
Interbank Offer Rate (LIBOR) in effect since the November 1997 refinancing.

Equity in Net Loss of barnesandnoble.com llc

     As a result of the formation of the limited liability company with
Bertelsmann, the Company began accounting for its interest in barnesandnoble.com
under the equity method of accounting as of the beginning of fiscal 1998. The
Company's equity in the net loss of barnesandnoble.com for fiscal 1998 was $71.3
million. This reflects a one-hundred percent equity interest for the first three
quarters ended October 31, 1998 (also the effective date of the limited
liability company agreement), and a fifty percent equity interest beginning on
November 1, 1998 through the end of the fiscal year. Had the Company reported
the results of barnesandnoble.com under the equity method of accounting during
fiscal 1997, its fiscal 1997 equity in the net loss of barnesandnoble.com would
have been $15.4 million.

Gain on Formation of barnesandnoble.com llc

     As a result of the formation of the limited liability company, resulting in
the receipt of $75 million by the Company from Bertelsmann, a gain was recorded
in fiscal 1998 in the amount of $63.8 million. The gain represents the excess of
the amount received over the portion of the net assets of barnesandnoble.com
sold by the Company to Bertelsmann.

Provision for Income Taxes

     Barnes & Noble's effective tax rate was 41.0% during both fiscal 1998 and
fiscal 1997.

Earnings

     Fiscal 1998 earnings before extraordinary charge increased $27.7 million,
or 42.8%, to $92.4 million (or $1.29 per diluted share) from $64.7 million (or
$0.93 per diluted share) during fiscal 1997. Before the effect of
barnesandnoble.com, retail earnings before extraordinary charge increased $23.0
million, or 31.3% to $96.8 million (or $1.35 per diluted share) from $73.8
million (or $1.06 per diluted share).

                                       7

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED


52 Weeks Ended January 31, 1998 Compared 
with 53 Weeks Ended February 1, 1997

Sales

     The Company's sales increased 14.2% during fiscal 1997 to $2.797 billion
from $2.448 billion during fiscal 1996. Fiscal 1996 includes 53 weeks; excluding
the impact of the 53rd week, sales increased 16.0%. Fiscal 1997 sales from
Barnes & Noble stores, which contributed 80.3% of total sales, increased 20.7%
to $2.246 billion from $1.861 billion in fiscal 1996.

     The increase in sales was primarily due to the 9.4% increase in Barnes &
Noble comparable store sales and the opening of an additional 65 Barnes & Noble
stores during 1997. This increase was slightly offset by declining sales of B.
Dalton stores which closed 53 stores and posted a comparable store sales decline
of 1.1%. The inclusion of barnesandnoble.com as a consolidated wholly owned
subsidiary also contributed to the increase in sales, posting $14.6 million of
sales during its first year of operations.

Cost of Sales and Occupancy

     The Company's cost of sales and occupancy includes costs such as rental
expense, common area maintenance, merchant association dues, lease-required
advertising and adjustments for LIFO.

     Cost of sales and occupancy increased 13.1% during fiscal 1997 to $2.019
billion from $1.785 billion in fiscal 1996. The Company's gross margin rate
increased to 27.8% in fiscal 1997 from 27.1% in fiscal 1996. The gross margin
expansion reflects more direct buying, reduced costs of shipping and handling,
and improvements in merchandise mix.

Selling and Administrative Expenses

     Selling and administrative expenses increased $74.7 million, or 16.0% to
$540.4 million in fiscal 1997 from $465.7 million in fiscal 1996. Selling and
administrative expenses increased to 19.3% of sales during fiscal 1997 from
19.0% during fiscal 1996 primarily as a result of the start-up expenses from
barnesandnoble.com. Excluding barnesandnoble.com, selling and administrative
expenses would have declined to 18.9% of sales, reflecting operating leverage
improvement.

Depreciation and Amortization

     Depreciation and amortization increased $17.2 million, or 28.8%, to $77.0
million in fiscal 1997 from $59.8 million in fiscal 1996. The increase was
primarily the result of the new Barnes & Noble stores opened during fiscal 1997
and fiscal 1996.

Pre-Opening Expenses

     Pre-opening expenses declined in fiscal 1997 to $12.9 million from $17.6
million in fiscal 1996 reflecting fewer new stores compared with prior years.

Operating Profit

     Operating profit increased to $147.3 million in fiscal 1997 from $119.7
million in fiscal 1996. Despite the $15.4 million operating loss from
barnesandnoble.com, operating margin improved to 5.3% of sales during fiscal
1997 from 4.9% of sales during fiscal 1996. Excluding barnesandnoble.com, retail
operating margin improved to 5.8% of sales.

Interest Expense, Net and Amortization of Deferred 
Financing Fees

     Interest expense, net of interest income, and amortization of deferred
financing fees decreased $0.6 million in fiscal 1997 to $37.7 million from $38.3
million in fiscal 1996. The decline was primarily due to lower borrowings under
the Company's senior credit facilities.

Provision for Income Taxes

     Barnes & Noble's effective tax rate was 41.0% during fiscal 1997 compared
with 37.1% during fiscal 1996. The fiscal 1996 provision reflected a
non-recurring $3.0 million rehabilitation tax credit.

Extraordinary Charge

     As a result of obtaining a new senior credit facility during fiscal 1997,
the Company called its outstanding $190 million, 11-7/8% senior subordinated
notes on January 15, 1998, at a call premium of 5.9375%. The extraordinary
charge reflects (on an after-tax basis) such call premium along with the
write-off of related deferred financing fees.

Earnings

     Fiscal 1997 earnings before extraordinary charge increased $13.4 million,
or 26.2%, to $64.7 million (or $0.93 per diluted share) from $51.2 million (or
$0.75 per diluted share) during fiscal 1996. The extraordinary charge in fiscal
1997 of $11.5 million equated to $0.17 per diluted share resulting in net
earnings during fiscal 1997 of $53.2 million (or $0.76 per diluted share).

     All fiscal 1997 and 1996 share and per-share amounts contained in this
annual report have been restated to reflect a two-for-one split of the Company's
common stock in September of 1997, and the adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Implementation of
SFAS 128 did not have a material effect on the Company's diluted earnings per
share. SFAS 128 requires the disclosure of basic earnings per share in addition
to diluted earnings per share.

Seasonality

     The Company's business, like that of many retailers, is seasonal, with the
major portion of sales and operating profit realized during the quarter which
includes the Christmas selling season. The growth in Barnes & Noble stores
continues to reduce such seasonal fluctuation. The Company has now reported
operating profit for eleven consecutive quarters.



                                       8


<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED

Liquidity and Capital Resources

     Working capital requirements are generally at their highest during the
Company's fiscal quarter ending on or about January 31 due to the higher
payments to vendors for holiday season merchandise purchases and the
replenishment of merchandise inventories following this period of increased
sales. In addition, the Company's sales and merchandise inventory levels will
fluctuate from quarter-to-quarter as a result of the number and timing of new
store openings, as well as the amount and timing of sales contributed by new
stores.

     Cash flows from operating activities, funds available under its revolving
credit facility and vendor financing continue to provide the Company with
liquidity and capital resources for store expansion, seasonal working capital
requirements and capital investments.

     Cash Flow Cash flows provided from operating activities were $181.1
million, $169.2 million and $119.5 million during fiscal 1998, 1997 and 1996,
respectively. Fiscal 1997 cash flows from operating activities without
barnesandnoble.com were $181.9 million. The slight decrease in retail operating
cash flows in fiscal 1998 was due to a strategic increase in the distribution
center standing inventory, the implementation of a new wage plan in fiscal 1998
and increased operating expenses associated with implementing the Company's new
store system enhancements. In fiscal 1997, the improvement in cash flows was
primarily due to the improvement in net earnings.

     Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased $52.7 million or 23.5% to $276.9 million in fiscal 1998 from $224.2
million in fiscal 1997. Without barnesandnoble.com fiscal 1997 EBITDA was $236.9
million resulting in a retail increase in EBITDA in fiscal 1998 of 16.9%. In
addition, total debt to retail EBITDA decreased from 1.20 times in fiscal 1997
to .90 times in fiscal 1998. This significant improvement in EBITDA is the
result of the continued maturation of the Barnes & Noble stores. The
weighted-average age per square foot of the Company's 520 Barnes & Noble stores
was 3.3 years as of January 30, 1999 and is expected to increase to
approximately 3.9 years by January 29, 2000. As the relatively young Barnes &
Noble stores mature, and as the number of new stores opened during the fiscal
year decreases as a percentage of the existing store base, the increasing
operating profits of Barnes & Noble stores are expected to generate a greater
portion of cash flows required for working capital, including new store
inventories as well as capital expenditures and other initiatives. Additionally,
due to the formation of the joint venture with Bertelsmann as discussed below,
retail cash flows are now fully available to support the Company's working
capital requirements.

     Capital Structure Continued strong cash flows from operations and a
continued emphasis on working capital management, once again strengthened the
Company's balance sheet in fiscal 1998. Including the effect of the Bertelsmann
contribution to barnesandnoble.com (as discussed more fully below),
shareholders' equity increased 27.7% to $678.8 million as of January 30, 1999,
from $531.8 million as of January 31, 1998, and increased 20.8% as of January
30, 1999 before the Bertelsmann contribution. Return on average equity increased
to 15.3% in fiscal 1998 from 13.1% during fiscal 1997.

     The Company has an $850 million senior credit facility (the Facility),
obtained in November 1997, with a syndicate led by The Chase Manhattan Bank. The
Facility is structured as a five-year revolving credit. The Facility permits
borrowings at various interest rate options based on the prime rate or LIBOR
depending upon certain financial tests. In addition, the agreement requires the
Company to pay a commitment fee up to 0.25% of the unused portion depending upon
certain financial tests. The Facility contains covenants, limitations and events
of default typical of credit facilities of this size and nature.

     The amount outstanding under the Facility has been classified as long-term
debt in the accompanying consolidated balance sheets due to both its terms and
the Company's intent and ability to maintain principal amounts outstanding
through November 2002.

     Borrowings under the Company's senior credit facilities averaged $380.3
million, $184.5 million and $186.6 million and peaked at $535.0 million, $304.9
million and $292.8 million during fiscal 1998, 1997 and 1996, respectively. The
increase in average and peak borrowings in fiscal 1998 is primarily the result
of utilizing the Facility to retire $190 million in 11-7/8% senior subordinated
notes on January 15, 1998 as well as the Company's funding of the operations of

barnesandnoble.com. As a result of this retirement and the more favorable rates
contained in the current facility as compared with the facility existing until
November 1997, interest expense decreased 35% from $37.7 million to $24.4
million. The ratio of debt to equity improved significantly to 0.37:1.00 as of
January 30, 1999 from 0.54:1.00 as of January 31, 1998.

                                       9

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS CONTINUED


     Capital Investment Capital expenditures totaled $141.4 million, $121.9
million and $171.9 million during fiscal 1998, 1997 and 1996, respectively.
Capital expenditures in fiscal 1999, primarily for the opening of approximately
50 new Barnes & Noble stores as well as computer hardware and software
associated with the Company's new store point-of-sale system, are expected to be
between $100 million and $120 million, although commitment to such expenditures
has not yet been made.

     Based on current operating levels and the store expansion planned for the
next fiscal year, management believes cash flows generated from operating
activities, short-term vendor financing and its borrowing capacity under its
revolving credit facility will be sufficient to meet the Company's working
capital and debt service requirements, and support the development of its short-
and long-term strategies for at least the next 12 months.

     At the Company's Annual Meeting of Stockholders held on June 3, 1998, the
Company's shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of Common Stock,
par value $.001 per share, that the Company is authorized to issue, from
100,000,000 to 300,000,000.

     On July 10, 1998, the Board of Directors of the Company declared a dividend
of one Preferred Share Purchase Right (a Right) for each outstanding share of
the Company's common stock (Common Stock). The distribution of the Rights was
automatically made on July 21, 1998 to stockholders of record on that date. Each
Right entitles the holder to purchase from the Company one four-hundredth of a
share of a new series of preferred stock, designated as Series H Preferred
Stock, par value $.001 per share (the Preferred Stock), at a price of $225 per
one four-hundredth of a share. For a discussion of the terms of such preferred
stock see Note 8 of Notes to Consolidated Financial Statements. The Rights will
be exercisable only if a person or group acquires 15% or more of the Company's
outstanding Common Stock or announces a tender offer or exchange offer, the
consummation of which would result in such person or group owning 15% or more of
the Company's outstanding Common Stock. For a further discussion of the terms of
the Rights see Note 8 of Notes to Consolidated Financial Statements.

Formation of barnesandnoble.com llc
- --------------------------------------------------------------------------------
     On November 12, 1998, the Company and Bertelsmann completed the formation
of a joint venture to operate the online retail bookselling operations of the
Company's wholly owned subsidiary, barnesandnoble.com inc. The new entity is
structured as a limited liability company under the name barnesandnoble.com llc.
Under the terms of the relevant agreements, effective as of October 31, 1998,
the Company and Bertelsmann (through their respective subsidiaries) each have a
50% membership interest in barnesandnoble.com. barnesandnoble.com inc.
contributed substantially all of its assets and liabilities to the joint venture
and Bertelsmann paid $75 million to the Company and made a $150 million cash
contribution to the joint venture. Bertelsmann also agreed to contribute an
additional $50 million to the joint venture for future working capital
requirements. In addition, if in an initial public offering of the business of
the joint venture prior to December 31, 2001, the value of Bertelsmann's
interest exceeds the value of Bertelsmann's investment, Bertelsmann will pay the
Company such excess amount, up to $25 million. As a consequence of the above
transactions the Company has recognized a pre-tax gain during fiscal 1998 in the
amount of $126.4 million of which $63.8 million has been recognized in earnings
based on the $75 million received directly and $62.6 million ($36.4 million
after taxes) has been reflected in additional paid-in capital based on the
Company's share of the incremental equity of the joint venture resulting from
the $150 million Bertelsmann contribution.

     The accompanying consolidated financial statements, in accordance with the
equity method of accounting, reflect the Company's investment in
barnesandnoble.com as a single line item in the consolidated balance sheet as of
January 30, 1999 and reflect the Company's interest in the net loss of
barnesandnoble.com as a single line item in the consolidated statement of
operations for the fiscal year ended January 30, 1999, as if the formation of
the joint venture had occurred at the beginning of the fiscal year.
Consequently, the $71.3 million equity in net loss of barnesandnoble.com shown
in the accompanying consolidated statement of operations reflects the Company's
one-hundred percent interest throughout the period ending at the date of the
formation of the joint venture, October 31, 1998, and the Company's fifty
percent interest from that point through the end of the fiscal year ending
January 30, 1999. The accompanying consolidated financial statements reflect the
financial position and results of operations of barnesandnoble.com as a
consolidated wholly owned subsidiary for all other periods presented.

     In March 1999, the Company announced the filing of a registration 
statement with the Securities and Exchange Commission (SEC) for an initial
public offering of Class A common stock in barnesandnoble.com inc. Prior to the
offering the Company and Bertelsmann will each own a fifty percent interest in
barnesandnoble.com inc. via high voting Class B and high voting Class C common
shares, respectively. barnesandnoble.com inc. will use the proceeds of the
offering to purchase a fifteen to twenty percent interest in barnesandnoble.com
llc. In March 1999, the limited liability company agreement was amended to also
provide for the additional $50 million cash contribution by Bertelsmann to be
made to barnesandnoble.com in the event of the completion of the initial public
offering.



                                      10

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS CONTINUED


Acquisition of Ingram Book Group
- -------------------------------------------------------------------------------
     On November 6, 1998, the Company announced an agreement to purchase the
Ingram Book Group, a group of subsidiaries of privately held Ingram Industries
Inc., for $600 million, consisting of approximately $200 million in cash and
approximately $400 million in common stock of the Company. The closing of the
transaction is subject to the satisfaction of certain conditions including the
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976.

Newly Issued Accounting Pronouncements

- --------------------------------------------------------------------------------
     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities, as
defined, when incurred. The Company has historically amortized costs associated
with the opening of new stores over the respective store's first 12 months of
operations. In accordance with SOP 98-5, the Company will adopt its provisions
effective for the fiscal year ending January 29, 2000, and will record a
one-time charge reflecting the cumulative effect of a change in accounting
principle in the first quarter of fiscal year 1999, in an amount estimated to be
$4,500 after taxes, representing such start-up costs capitalized as of the
beginning of that fiscal year. In addition, the Company will, on a prospective
basis, expense all such start-up costs as incurred. Without consideration to the
one-time charge, the Company's consolidated financial statements issued
subsequent to fiscal year 1998 are not expected to be materially affected by the
adoption of SOP 98-5.

     In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 is effective for
the Company's fiscal year ending January 29, 2000. Adoption is not expected to
have a material effect on the Company's consolidated financial statements as the
Company's policies are substantially in compliance with SOP 98-1.

     In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133). SFAS
133 requires companies to recognize all derivatives contracts as either assets
or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change.

     SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently plans to adopt SFAS 133 on January
30, 2000. On that date, hedging relationships will be designated anew and
documented.

     The Company from time to time enters into interest rate swap agreements for
the purpose of hedging risks attributable to changing interest rates associated
with the Company's revolving credit facility, and, in general, such hedges have
been fully effective. The Company may from time to time, enter into interest
rate swaps in the future and these transactions are expected to substantially
offset the effects of changes in the underlying variable interest rates. The
Company does not believe that adoption of SFAS 133 will have a material effect
on its consolidated financial statements.

     Historically, the Company has not used derivative contracts for speculative
purposes.

Year 2000
- --------------------------------------------------------------------------------
     The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in other normal business
activities.

     In 1997, the Company began assessing how it may be impacted by the Year
2000 issue and has formulated and commenced implementation of a comprehensive
plan to address all known aspects of the issue.

     The Company's plan encompasses the following areas: (1) information
systems that utilize date/time oriented software (IT systems), (2) computer
chips, processors and controllers (non-IT systems), and (3) vendors and
customers. The Company is in various stages of implementation which include
remediation, testing and implementation.

     To date, approximately 80% of the Company's administrative support IT
systems have at least completed the remediation phase. Of this amount,
approximately 80% have completed the testing and remediation phase and 20% have
been replaced or upgraded. All remaining Year 2000 compliance efforts for
administrative IT functions are expected to be completed by the second quarter
of fiscal 1999.

     Approximately 90% of non-IT systems have completed the remediation, testing
and implementation phases with no material replacements necessary.


                                      11

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 
OPERATIONS CONTINUED


     The Company has been obtaining information from major vendors, suppliers,
and service providers to determine if their systems will be Year 2000 compliant.
There has been no indication from these sources that their systems will not be
sufficiently Year 2000 compliant or that their failure to be Year 2000 compliant
will cause a significant disruption in the operations of the Company. The
Company is developing contingency plans to identify alternative sources which
are Year 2000 compliant in the event the current parties suffer significant
disruption as a result of Year 2000 compliance failures.

     The Company estimates that total costs to implement its Year 2000 plan will
be between $4.0 million and $6.0 million of which $2.6 million has already been
incurred, including $1.5 million relating to the purchase of new software and
hardware modifications, and $1.1 million relating to Year 2000 consultants. The
estimated total includes direct costs for systems enhancements which would have
been implemented in the ordinary course of business but whose acquisition has
been accelerated to ensure compliance by the Year 2000. The estimate excludes
costs for scheduled system upgrades which have not been accelerated due to Year
2000 issues.

     The implementation of the Company's proprietary point-of-sale system
(Bookmaster), which began in 1996, is continuing and is expected to be
completed in the second quarter of fiscal 1999. Bookmaster, which is Year 2000
compliant, is an inventory management system with integrated point-of-sale
features that utilizes a proprietary data-warehouse-based just-in-time
replenishment system. It enhances communications and real-time access to the
Company's network of stores, distribution center, and wholesalers. The
Bookmaster system has been installed in approximately 25% of all Barnes & Noble
stores. By the end of the second quarter of fiscal 1999 all existing Barnes &
Noble and B. Dalton stores will either be utilizing the Bookmaster system or
will receive Year 2000 upgrades to their existing point-of-sale systems.

     Should some of the Company's systems not be available due to Year 2000
problems, in a reasonably likely worst case scenario, the Company may experience
significant delays in its ability to perform certain functions. However, the
Company does not expect an impairment in its ability to execute critical
functions.

Disclosure Regarding Forward-Looking Statements
- -------------------------------------------------------------------------------
     This report may contain certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) and information
relating to the Company that are based on the beliefs of the management of the
Company as well as assumptions made by and information currently available to
the management of the Company. When used in this report, the words "anticipate,"
"believe," "estimate," "expect," "intend," "plan" and similar expressions, as
they relate to the Company or the management of the Company, identify
forward-looking statements. Such statements reflect the current views of the
Company with respect to future events, the outcome of which is subject to
certain risks, including among others general economic and market conditions,
decreased consumer demand for the Company's products, possible disruptions in
the Company's computer or telephone systems, increased or unanticipated costs or
effects associated with Year 2000 compliance by the Company or its service or
supply providers, possible work stoppages or increases in labor costs, possible
increases in shipping rates or interruptions in shipping service, effects of
competition, possible disruptions or delays in the opening of new stores or the
inability to obtain suitable sites for new stores, higher than anticipated store
closing or relocation costs, higher interest rates, the performance of the
Company's online initiatives such as barnesandnoble.com, unanticipated increases
in merchandise or occupancy costs, unanticipated adverse litigation results or
effects, and other factors which may be outside of the Company's control. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results or outcomes may vary materially from
those described as anticipated, believed, estimated, expected, intended or
planned. Subsequent written and oral forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements in this paragraph. 




                                      12

<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
Fiscal Year                                                              1998                1997                1996
(In thousands of dollars, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                    <C>                 <C>      
Sales                                                            $  3,005,608           2,796,852           2,448,124
Cost of sales and occupancy                                         2,142,717           2,019,291           1,785,392
                                                                 ------------           ---------           ---------
     Gross profit                                                     862,891             777,561             662,732
                                                                 ------------           ---------           ---------
Selling and administrative expenses                                   577,195             540,423             465,687
Depreciation and amortization                                          88,345              76,951              59,806
Pre-opening expenses                                                    8,795              12,918              17,571
                                                                 ------------           ---------           ---------
     Operating profit                                                 188,556             147,269             119,668
Interest (net of interest income of $976, $446 and $2,288,
     respectively) and amortization of deferred financing fees        (24,412)            (37,666)            (38,286)
Equity in net loss of barnesandnoble.com llc                          (71,334)                 --                  --
Gain on formation of barnesandnoble.com llc                            63,759                  --                  --
                                                                 ------------           ---------           ---------
     Earnings before provision for income taxes and
       extraordinary charge                                           156,569             109,603              81,382
Provision for income taxes                                             64,193              44,935              30,157
                                                                 ------------           ---------           ---------
     Earnings before extraordinary charge                              92,376              64,668              51,225
Extraordinary charge due to early extinguishment of debt,
     net of tax benefits of $7,991                                         --              11,499                  --
                                                                 ------------           ---------           ---------
     Net earnings                                                 $    92,376              53,169              51,225
                                                                 ============           =========           =========

Earnings per common share
     Basic
       Earnings before extraordinary charge                       $      1.35                0.96                0.77
       Extraordinary charge due to early extinguishment
         of debt, net of tax benefits                             $        --                0.17                  --
       Net earnings                                               $      1.35                0.79                0.77
     Diluted
       Earnings before extraordinary charge                       $      1.29                0.93                0.75
       Extraordinary charge due to early extinguishment of debt,
         net of tax benefits                                      $        --                0.17                  --
       Net earnings                                               $      1.29                0.76                0.75
Weighted average common shares outstanding
     Basic                                                         68,435,000          67,237,000          66,103,000
     Diluted                                                       71,677,000          69,836,000          67,886,000
- ---------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.                                      Barnes & Noble, Inc. 1998
</TABLE>



                                      13

<PAGE>

CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>

(In thousands of dollars, except per share data)                January 30, 1999                     January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                               <C>   
Assets
Current assets:
     Cash and cash equivalents                                       $    31,081                               12,697
     Receivables, net                                                     57,523                               43,858
     Merchandise inventories                                             945,073                              852,107
     Prepaid expenses and other current assets                            54,634                               68,902
                                                                     -----------                            ---------
       Total current assets                                            1,088,311                              977,564
                                                                     -----------                            ---------
Property and equipment:
     Land and land improvements                                            3,197                                  681
     Buildings and leasehold improvements                                383,292                              347,598
     Fixtures and equipment                                              440,488                              378,058
                                                                     -----------                            ---------
                                                                         826,977                              726,337
     Less accumulated depreciation and amortization                      316,631                              244,207
                                                                     -----------                            ---------
       Net property and equipment                                        510,346                              482,130
                                                                     -----------                            ---------
Intangible assets, net                                                    86,980                               90,237
Investment in barnesandnoble.com llc                                      82,307                                   --
Other noncurrent assets                                                   39,653                               41,240
                                                                     -----------                            ---------
       Total assets                                                  $ 1,807,597                            1,591,171
                                                                     ===========                            =========
Liabilities and Shareholders' Equity
Current liabilities:
     Accounts payable                                                $   498,237                              459,795
     Accrued liabilities                                                 274,085                              253,050
                                                                     -----------                            ---------
       Total current liabilities                                         772,322                              712,845
                                                                     -----------                            ---------
Long-term debt                                                           249,100                              284,800
Deferred income taxes                                                     32,449                                   --
Other long-term liabilities                                               74,937                               61,771
Shareholders' equity:
     Common stock; $.001 par value; 300,000,000 shares
       authorized; 68,759,111 and 67,921,830 shares issued and
       outstanding, respectively                                              69                                   68
     Additional paid-in capital                                          523,517                              468,860
     Retained earnings                                                   155,203                               62,827
                                                                     -----------                            ---------
       Total shareholders' equity                                        678,789                              531,755
                                                                     -----------                            ---------
Commitments and contingencies                                                 --                                   --
                                                                     -----------                            ---------
       Total liabilities and shareholders' equity                    $ 1,807,597                            1,591,171
                                                                     ===========                            =========
- ---------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.                                      Barnes & Noble, Inc. 1998
</TABLE>





                                      14

<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                   Common            Additional             Retained
(In thousands of dollars)                           Stock        paid-in capital   earnings (deficit)           Total
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>           <C>               <C>                 <C>    
Balance at January 27, 1996                          $  66               441,736              (41,567)        400,235
Exercise of 459,022 common stock options,
     including tax benefits of $2,272                   --                 4,529                   --           4,529
Net earnings                                            --                    --               51,225          51,225
                                                     -----               -------              -------         -------
Balance at February 1, 1997                             66               446,265                9,658         455,989
Exercise of 1,545,580 common stock options,
     including tax benefits of $8,253                    2                22,595                   --          22,597
Net earnings                                            --                    --               53,169          53,169
                                                     -----               -------              -------         -------
Balance at January 31, 1998                             68               468,860               62,827         531,755
Exercise of 837,281 common stock options,
     including tax benefits of $9,002                    1                18,306                   --          18,307
barnesandnoble.com llc issuance of membership
     units (net of deferred income taxes of $26,325)    --                36,351                   --          36,351
Net earnings                                            --                    --               92,376          92,376
                                                     -----               -------              -------         -------
Balance at January 30, 1999                          $  69               523,517              155,203         678,789
                                                     =====               =======              =======         =======
- ---------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.                                      Barnes & Noble, Inc. 1998
</TABLE>



                                      15

<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
Fiscal Year                                                              1998                1997                1996
(In thousands of dollars)
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                   <C>      <C>   
Cash flows from operating activities:
     Net earnings                                                    $ 92,376              53,169              51,225
Adjustments to reconcile net earnings to net cash flows
       from operating activities:
       Depreciation and amortization                                   88,721              78,629              61,652
       Loss (gain) on disposal of property and equipment                3,291                 853               (130)
       Deferred taxes                                                  14,761              11,598               6,604
       Extraordinary charge due to early extinguishment of debt,
         net of tax benefits                                               --              11,499                  --
       Increase in other long-term liabilities for scheduled rent
         increases in long-term leases                                 14,031              16,350              15,663
       Gain on formation of barnesandnoble.com llc                    (63,759)                 --                  --
       Equity in net loss of barnesandnoble.com llc                    71,334                  --                  --
       Changes in operating assets and liabilities, net               (39,673)             (2,884)           (15,477)
                                                                     ---------           ---------          ---------
       Net cash flows from operating activities                       181,082             169,214             119,537
                                                                     ---------           ---------          ---------
Cash flows from investing activities:
     Purchases of property and equipment                             (141,388)           (121,903)          (171,885)
     Investment in barnesandnoble.com llc                             (75,394)                 --                  --
     Proceeds from formation of barnesandnoble.com llc                 75,000                  --                  --
     Proceeds from sales of property and equipment                         10                  --                 177
     Net increase in other noncurrent assets                           (3,533)            (13,177)           (16,787)
                                                                     ---------           ---------          ---------
       Net cash flows from investing activities                      (145,305)           (135,080)          (188,495)
                                                                     ---------           ---------          ---------
Cash flows from financing activities:
     Net increase (decrease) in revolving credit facility             (35,700)            244,800            (32,400)
     Proceeds from issuance of long-term debt                              --                  --             100,000
     Repayment of long-term debt                                           --            (290,000)                --
     Proceeds from exercise of common stock options
       including related tax benefits                                  18,307              22,597               4,529
     Payment of note premium                                               --             (11,281)                 --
                                                                     ---------           ---------          ---------
       Net cash flows from financing activities                       (17,393)            (33,884)             72,129
                                                                     ---------           ---------          ---------
Net increase in cash and cash equivalents                              18,384                 250               3,171
Cash and cash equivalents at beginning of year                         12,697              12,447               9,276
                                                                     ---------           ---------          ---------
Cash and cash equivalents at end of year                             $ 31,081              12,697              12,447
                                                                     =========           =========          =========
Changes in operating assets and liabilities, net:
     Receivables, net                                                $(14,012)              1,700               3,461
     Merchandise inventories                                          (93,491)           (119,904)              8,148
     Prepaid expenses and other current assets                         (1,047)              9,721            (19,502)
     Accounts payable and accrued liabilities                          68,877             105,599             (7,584)
                                                                     ---------           ---------          ---------
       Changes in operating assets and liabilities, net              $(39,673)             (2,884)           (15,477)
                                                                     =========           =========          =========
Supplemental cash flow information: 
     Cash paid during the period for:
       Interest                                                      $ 25,243              37,845              38,103
       Income taxes                                                  $ 18,225              20,282              24,574
- ---------------------------------------------------------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.                                      Barnes & Noble, Inc. 1998
</TABLE>


                                      16

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     For the 52 weeks ended January 30, 1999 (fiscal 1998), the 52 weeks ended
January 31, 1998 (fiscal 1997) and the 53 weeks ended February 1, 1997 (fiscal
1996).

(In thousands of dollars, except per share data)

1. Summary of Significant Accounting Policies


Business

     Barnes & Noble, Inc. (Barnes & Noble), through its wholly owned
subsidiaries (collectively, the Company), is primarily engaged in the sale of
books through three principal bookselling strategies: its "super" store strategy
through its wholly owned subsidiary Barnes & Noble Booksellers, Inc., under its
Barnes & Noble Booksellers, Bookstop and Bookstar trade names (hereafter
collectively referred to as Barnes & Noble stores), its mall strategy through
its wholly owned subsidiaries B. Dalton Bookseller, Inc. and Doubleday Book
Shops, Inc., under its B. Dalton stores, Doubleday Book Shops and Scribner's
Bookstore trade names (hereafter collectively referred to as B. Dalton stores),
and its direct-mail strategy through its wholly owned subsidiary Marboro Books
Corp. The Company is also engaged in the online retailing of books and other
products through a 50% interest in barnesandnoble.com llc (barnesandnoble.com),
as more fully described in Note 5. The Company's interest in barnesandnoble.com
is through its wholly owned subsidiary B&N.com Holding Corp.

Consolidation

     The consolidated financial statements include the accounts of Barnes &
Noble and its wholly owned subsidiaries. Investments in affiliates that are 20%
to 50% owned, principally barnesandnoble.com, are accounted for using the equity
method. The Company's investment in barnesandnoble.com has been presented in the
accompanying consolidated financial statements under the equity method as of the
beginning of fiscal 1998 and as a consolidated wholly owned subsidiary for all
of fiscal 1997. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain prior-period amounts have been reclassified
for comparative purposes.

Use of Estimates

     In preparing financial statements in conformity with generally accepted 
accounting principles, the Company is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Cash and Cash Equivalents

     The Company considers all short-term, highly liquid instruments purchased
with an original maturity of three months or less to be cash equivalents.

Merchandise Inventories

     Merchandise inventories are stated at the lower of cost or market. Cost is
determined primarily by the retail inventory method on the first-in, first-out
(FIFO) basis for 86% and 83% of the Company's merchandise inventories as of
January 30, 1999 and January 31, 1998, respectively. The remaining merchandise
inventories are valued on the last-in, first-out (LIFO) method.

     If substantially all of the merchandise inventories currently valued at
LIFO costs were valued at current costs, merchandise inventories would remain
unchanged as of January 30, 1999, and would have increased approximately $5,102
as of January 31, 1998.

Property and Equipment

     Property and equipment are carried at cost, less accumulated depreciation
and amortization. For financial reporting purposes, depreciation is computed
using the straight-line method over estimated useful lives. For tax purposes,
different methods are used. Maintenance and repairs are expensed as incurred,
while betterments and major remodeling costs are capitalized. Leasehold
improvements are capitalized and amortized over the shorter of their estimated
useful lives or the terms of the respective leases. Capitalized lease
acquisition costs are being amortized over the average lease terms of the
underlying leases. In March 1998, the Accounting Standards Executive Committee
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1). This statement is
effective for the Company's fiscal year ending January 29, 2000. Adoption is not
expected to have a material effect on the Company's consolidated financial
statements as the Company's policies are substantially in compliance with SOP
98-1. Costs incurred in purchasing management information systems are
capitalized and included in property and equipment. These costs are amortized
over their estimated useful lives from the date the systems become operational.

Intangible Assets and Amortization

     The costs in excess of net assets of businesses acquired are carried as
intangible assets, net of accumulated amortization, in the accompanying
consolidated balance sheets. The net intangible assets, consisting primarily of
goodwill and trade names, of $59,365 and $27,615 as of January 30, 1999, and
$61,484 and $28,753 as of January 31, 1998, are amortized over 40 years using
the straight-line method.

     Amortization of goodwill and trade names included in depreciation and
amortization in the accompanying consolidated statements of operations is
$3,257, $3,257 and $3,305 during fiscal 1998, 1997 and 1996, respectively.
Accumulated amortization at January 30, 1999 and January 31, 1998 was $44,551
and $41,294, respectively.

                                      17

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC. 1998


     The Company periodically evaluates the recoverability of goodwill and
considers whether this goodwill should be completely or partially written off or
the amortization periods accelerated. The Company assesses the recoverability of
this goodwill based upon several factors, including management's intention with
respect to the acquired operations and those operations' projected undiscounted
store-level cash flows.

Deferred Charges

     Costs incurred to obtain long-term financing are amortized over the terms
of the respective debt agreements using the straight-line method, which
approximates the interest method. Unamortized costs included in other noncurrent
assets as of January 30, 1999 and January 31, 1998 were $1,397 and $1,764,
respectively. Unamortized costs of $8,209 were included in the extraordinary
loss due to the early extinguishment of debt for fiscal 1997. Amortization
expense included in interest and amortization of deferred financing fees is
$376, $1,678 and $1,846 during fiscal 1998, 1997 and 1996 respectively.

Revenue Recognition

     Revenue from sales of the Company's products is recognized at the time of
sale.

     The Company sells memberships which entitle purchasers to additional
discounts. The membership revenue is deferred and recognized as income over the
twelve-month membership period.

     Sales returns (which are not significant) are recognized at the time
returns are made.

Pre-opening Expenses

     In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP
98-5). SOP 98-5 requires an entity to expense all start-up activities, as
defined, when incurred. The Company has historically amortized costs associated
with the opening of new stores over the respective store's first 12 months of
operations. In accordance with SOP 98-5, the Company will adopt its provisions
effective for the fiscal year ending January 29, 2000, and will record a one
time non-cash charge reflecting the cumulative effect of a change in accounting
principle in the first quarter of fiscal year 1999, in an amount estimated to be
$4,500 after taxes, representing such start-up costs capitalized as of the
beginning of that fiscal year. In addition, the Company will, on a prospective
basis, expense all such start-up costs as incurred. Excluding the one time
charge, the Company's consolidated financial statements are not expected to be
materially affected by the adoption of SOP 98-5.

Closed Store Expenses

     Upon a formal decision to close or relocate a store, the Company charges
unrecoverable costs to expense. Such costs include the net book value of
abandoned fixtures and leasehold improvements and a provision for future lease
obligations, net of expected sublease recoveries. Costs associated with store
closings of $1,208 during fiscal 1998 are included in selling and administrative
expenses in the accompanying consolidated statements of operations.

Net Earnings Per Common Share

     Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock options.

Income Taxes

     The provision for income taxes includes federal, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities. The
deferred tax assets and liabilities are measured using the enacted tax rates and
laws that are expected to be in effect when the differences reverse.

Stock Options

     The Company accounts for all transactions under which employees receive
shares of stock or other equity instruments in the Company or the Company incurs
liabilities to employees in amounts based on the price of its stock in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Generally, compensation expense is
not recognized for stock option grants.

Reporting Period

     The Company's fiscal year is comprised of 52 or 53 weeks, ending on the
Saturday closest to the last day of January. The reporting periods ended January
30, 1999, January 31, 1998 and February 1, 1997 contained 52 weeks, 52 weeks and
53 weeks, respectively.

2. Receivables, Net

     Receivables represent customer, bankcard, landlord and other receivables
due within one year as follows:

                                    January 30, 1999           January 31, 1998
- -------------------------------------------------------------------------------
Trade accounts                              $  6,743                      6,628
Bankcard receivables                          19,421                     15,536
Receivables from landlords for
     leasehold improvements                   23,659                     16,715
Other receivables                              7,700                      4,979
                                            --------                     ------
Total receivables, net                      $ 57,523                     43,858
                                            ========                     ======
- -------------------------------------------------------------------------------

3. Debt

     On November 18, 1997, the Company obtained an $850,000 five-year senior
revolving credit facility (the Revolving Credit Facility) with a syndicate led
by The Chase Manhattan Bank. The Revolving Credit Facility refinanced an
existing


                                      18

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC. 1998

$450,000 revolving credit and $100,000 term loan facility (the Old Facility).
The Revolving Credit Facility permits borrowings at various interest rate
options based on the prime rate or London Interbank Offer Rate (LIBOR) depending
upon certain financial tests. In addition, the agreement requires the Company to
pay a commitment fee up to 0.25% of the unused portion depending upon certain
financial tests. The Revolving Credit Facility contains covenants, limitations
and events of default typical of credit facilities of this size and nature,
including financial covenants which require the Company to meet, among other
things, cash flow and interest coverage ratios and which limit capital
expenditures. The Revolving Credit Facility is secured by the capital stock,
accounts receivable and general intangibles of the Company's subsidiaries.

     Net proceeds from the Revolving Credit Facility are available for general 
corporate purposes and were used to redeem all of the Company's outstanding
$190,000, 11-7/8% senior subordinated notes on January 15, 1998. As a result of
the refinancings, the Company recorded an extraordinary charge of $11,499 (net
of applicable taxes) due to the early extinguishment of debt during fiscal 1997.
The extraordinary charge represents the payment of a call premium associated
with the redemption of the senior subordinated notes of $6,656 (net of
applicable taxes) and the write-off of unamortized fees of $4,843 (net of
applicable taxes).

     The Company from time to time enters into interest rate swap agreements to
manage interest costs and risk associated with changes in interest rates. These
agreements effectively convert underlying variable - rate debt based on prime
rate or LIBOR to fixed-rate debt through the exchange of fixed and floating
interest payment obligations without the exchange of underlying principal
amounts. As of January 30, 1999 and January 31, 1998 the Company had outstanding
$125,000 of swaps with maturities ranging from 1999 to 2003. The Company
recorded interest expense associated with these agreements of $440 and $306
during fiscal years 1998 and 1997, respectively.

     Selected information related to the Company's revolving credit facility is
as follows:

Fiscal Year                                1998       1997       1996
- -------------------------------------------------------------------------------
Balance at end of year                $ 249,100    284,800     40,000
Average balance
     outstanding during
     the year                         $ 380,315    105,127    101,671
Maximum borrowings
     outstanding during
     the year                          $535,000    304,900    192,800
Weighted average
     interest rate during
     the year                              6.29%      7.12%      7.56%
Interest rate at end
     of year                               5.77%      6.60%      6.87%
- -------------------------------------------------------------------------------

     Fees expensed with respect to the unused portion of the Company's
revolving credit commitment were $733, $1,204 and $911, during fiscal 1998,
1997 and 1996, respectively.

     The amounts outstanding under the Company's Revolving Credit Facility of
$249,100 and $284,800 as of January 30, 1999 and January 31, 1998, respectively,
have been classified as long-term debt based on the terms of the credit
agreement and the Company's intention to maintain principal amounts outstanding
through November 2002.

     The Company has no agreements to maintain compensating balances.

4. Fair Values of Financial Instruments

     The carrying values of cash and cash equivalents reported in the
accompanying consolidated balance sheets approximate fair value due to the
short-term maturities of these assets.

     The aggregate fair value of the Revolving Credit Facility approximates its
carrying amount, because of its recent and frequent repricing based upon market
conditions. Interest rate swap agreements are valued based on market quotes
obtained from dealers. The Company also maintains an investment in Chapters
Inc., a Canadian book retailer. The fair value of the investment in Chapters
Inc. is based on quoted market prices and conversion rates at January 30, 1999
and January 31, 1998.

     The carrying amounts and fair values of the Company's financial
instruments as of January 30, 1999 and January 31, 1998 are as follows:

                                      January 30, 1999       January 31, 1998
- -------------------------------------------------------------------------------
                                     Carrying      Fair     Carrying      Fair
                                       Amount     Value       Amount     Value
- -------------------------------------------------------------------------------
Cash and cash
     equivalents                     $ 31,081    31,081     12,697    12,697
Revolving credit
     facility                        $249,100   249,100    284,800   284,800
Interest rate swaps
     liability                       $     --     2,189         --     1,463
Investment in
     Chapters Inc.                   $ 18,827    33,201     17,686    31,445
- -------------------------------------------------------------------------------

                                      19

<PAGE>

                                                        
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC.1998

5. Formation of barnesandnoble.com llc

     On November 12, 1998, the Company and Bertelsmann AG (Bertelsmann)
completed the formation of a limited liability company to operate the online
retail bookselling operations of the Company's wholly owned subsidiary,
barnesandnoble.com inc. The new entity is structured as a limited liability
company under the name barnesandnoble.com llc. Under the terms of the relevant
agreements, effective as of October 31, 1998, the Company and Bertelsmann each
have a 50% membership interest in barnesandnoble.com. The Company contributed
substantially all of the assets and liabilities of its online operations to the
joint venture and Bertelsmann paid $75,000 to the Company and made a $150,000
cash contribution to the joint venture. Bertelsmann also agreed to contribute an
additional $50,000 to the joint venture for future working capital requirements.
In addition, if in an initial public offering (see below) of barnesandnoble.com
prior to December 31, 2001, the value of Bertelsmann's interest exceeds the
value of Bertelsmann's investment, Bertelsmann will pay the Company such excess
amount, up to $25,000. As a consequence of the above transactions the Company
has recognized a pre-tax gain during fiscal 1998 in the amount of $126,435, of
which $63,759 has been recognized in earnings based on the $75,000 received
directly from Bertelsmann and $62,676 ($36,351 after taxes) has been reflected
in additional paid-in capital based on the Company's share of the incremental
equity of the joint venture resulting from the $150,000 Bertelsmann
contribution.

     Summarized financial information for barnesandnoble.com follows:

Fiscal Year                             1998    1997(1)
- --------------------------------------------------------------------------------
Net sales                            $ 70,249    14,601
Gross profit                         $ 16,169     2,849
Loss before taxes                    $(85,590)  (15,395)
Current assets                       $102,114    12,197
Noncurrent asset                     $ 89,324    24,879
Current liabilities                  $ 26,824    12,268
Net assets                           $164,614    24,808
Barnes & Noble's equity in loss
     before taxes                    $(71,334)  (15,395)
Barnes & Noble's equity in net 
     assets                          $ 82,307    24,808
- --------------------------------------------------------------------------------

(1) Fiscal 1997 represents amounts as consolidated in the accompanying
consolidated financial statements.

6. Employees' Retirement and Defined Contribution Plans

     The Company maintains a noncontributory defined benefit pension plan (the
Pension Plan) and a defined contribution plan (the Savings Plan) for the benefit
of substantially all employees. In addition, the Company provides certain health
care and life insurance benefits (the Postretirement Plan) to retired employees,
limited to those receiving benefits or retired as of April 1, 1993.

     A summary of the components of net periodic pension cost for the Pension
Plan and other postretirement benefit cost for the Postretirement Plan follows:


<TABLE>
<CAPTION>
                                                          Pension Plan                          Postretirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year                                        1998       1997       1996                1998       1997       1996
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>        <C>                   <C>        <C>        <C>

Service cost                                   $  4,157      3,294      2,542                  --         --         --
Interest cost                                     2,039      1,666      1,354                 149        315        326
Expected return on plan assets                   (2,208)    (1,803)    (1,500)                 --         --         --
Net amortization and deferral                        36         36         36                (135)        --         --
                                               --------     ------     ------                ----       ----       ----
     Net periodic cost                         $  4,024      3,193      2,432                  14        315        326
                                               ========     ======     ======                ====       ====       ====
</TABLE>



     Total Company contributions charged to employee benefit expenses for the
Savings plan were $3,090, $2,545 and $2,115 during fiscal 1998, 1997 and 1996,
respectively.

     Weighted-average actuarial assumptions used in determining the net periodic
pension and other post retirement benefit costs and the funded status of the
Pension Plan and the Postretirement Plan are as follows:


<TABLE>
<CAPTION>
                                                          Pension Plan                          Postretirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year                                          1998       1997       1996               1998        1997     1996
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>        <C>        <C>                <C>         <C>      <C>
Discount rate                                        7.3%       7.3%       7.5%                7.3%       7.3%     7.5%
Expected return on plan assets                       9.5%       9.5%       9.5%                --         --        --
Assumed rate of compensation increase                4.3%       4.3%       4.0%                --         --        --
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>



     As a result of the formation of barnesandnoble.com llc, as more fully
described in Note 5, assets of the Pension Plan and an equivalent benefit
obligation, were transferred to barnesandnoble.com's defined benefit pension
plan as of the date of the formation.


                                       20

<PAGE>


                                                        
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED    BARNES & NOBLE, INC.1998


     The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the Pension Plan and the Postretirement Plan:


<TABLE>
<CAPTION>
                                                                 Pension Plan                      Postretirement Plan
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year                                                   1998          1997                    1998         1997
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>           <C>                       <C>          <C>
Change in benefit obligation:
     Benefit obligation at beginning of year               $30,734        21,378                   1,975        4,349
     Service cost                                            4,157         3,294                      --           --
     Interest cost                                           2,039         1,666                     149          315
     Transfer to barnesandnoble.com                           (642)           --                      --           --
     Actuarial (gain) loss                                  (2,427)        5,752                     136       (2,544)
     Benefits paid                                            (797)       (1,356)                   (115)        (145)
                                                           -------       -------                  ------       ------
       Benefit obligation at end of year                    33,064        30,734                   2,145        1,975
                                                           -------       -------                  ------       ------
Change in plan assets:

     Fair value of plan assets at beginning of year         22,909        18,565                      --           --
     Actual return on assets                                 2,255         4,165                      --           --
     Employer contributions                                  1,395         1,535                      --           --
     Benefits paid                                            (797)       (1,356)                     --           --
     Transfer to barnesandnoble.com                           (431)           --                      --           --
                                                           -------       -------                  ------       ------
       Fair value of plan assets at end of year             25,331        22,909                      --           --
                                                           -------       -------                  ------       ------
Funded status                                               (7,733)       (7,825)                 (2,145)      (1,975)
Unrecognized net actuarial loss (gain)                         805         3,490                  (2,136)      (2,407)
Unrecognized prior service cost                               (183)         (201)                     --           --
Unrecognized net obligation remaining                          166           220                      --           --
                                                           -------       -------                  ------       ------
Accrued Benefit Cost                                       $(6,945)       (4,316)                 (4,281)      (4,382)
                                                           =======       =======                  ======       ======
</TABLE>


     The health care cost trend rate used to measure the expected cost of the
Postretirement Plan benefits is assumed to be 7.5% in 1999, declining at
one-half percent decrements each year through 2004 to 5.0% in 2004 and each year
thereafter. The health care cost trend assumption has a significant effect on
the amounts reported. For example, a 1% increase or decrease in the health care
cost trend rate would change the accumulated postretirement benefit obligation
by approximately $215 and $195, respectively, as of January 30, 1999, and would
change the net periodic cost by approximately $15 and $14, respectively, during
fiscal 1998.

7. Income Taxes

     The Company files a consolidated  federal  return.  Federal and state 
income tax provisions for fiscal 1998, 1997 and 1996 are as follows:

Fiscal Year                     1998       1997      1996
- --------------------------------------------------------------------------------
Current:
     Federal                $ 39,286     26,324     18,413
     State                    10,146      7,013      5,140
                            --------     ------     ------
                              49,432     33,337     23,553
                            --------     ------     ------
Deferred:

     Federal                  11,697      9,575      5,300
     State                     3,064      2,023      1,304
                            --------     ------     ------
                              14,761     11,598      6,604
                            --------     ------     ------
     Total                  $ 64,193     44,935     30,157
                            ========     ======     ======


     A reconciliation between the provision for income taxes and the expected
provision for income taxes at the federal statutory rate of 35% during fiscal
1998, 1997 and 1996, is as follows:

Fiscal Year                     1998       1997      1996
- --------------------------------------------------------------------------------
Expected provision for
    income taxes at federal
    statutory rate            $ 54,799     38,361     28,484
Amortization of goodwill
    and trade names              1,251      1,140      1,157
State income taxes, net of
    federal income tax benefit   8,596      5,873      3,341
Rehabilitation tax credit          --          --     (2,974)
Other, net                        (453)      (439)       149
                              --------     ------    -------
Provision for income taxes    $ 64,193     44,935     30,157
                              ========     ======    =======



                                       21

<PAGE>
                                                        
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC.1998


     The tax effects of temporary differences that give rise to significant
components of the Company's deferred tax assets and liabilities as of January
30, 1999 and January 31, 1998 are as follows:


<TABLE>
<CAPTION>
                                                                  January 30, 1999                    January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                                 <C>
Deferred tax liabilities:
     Operating expenses                                                  $(12,528)                             (10,103)
     Depreciation                                                         (29,829)                             (16,359)
     barnesandnoble.com                                                   (26,325)                                  --
                                                                         --------                              --------

       Total deferred tax liabilities                                     (68,682)                             (26,462)
                                                                         --------                              --------

Deferred tax assets:
     Inventory                                                              4,043                                6,604
     Lease transactions                                                    15,025                               16,108
     Reversal of estimated accruals                                         5,692                                5,418
     Restructuring charge                                                  16,931                               21,825
     Insurance liability                                                    2,502                                2,265
     Deferred income                                                       11,411                                7,058
     Other                                                                  5,632                                  824
                                                                         --------                              --------

       Total deferred tax assets                                           61,236                               60,102
                                                                         --------                              --------

         Net deferred tax assets (liabilities)                           $(7,446)                               33,640
                                                                         ========                              ========

</TABLE>



8. Shareholders' Equity

     At the Company's Annual Meeting of Stockholders held on June 3, 1998, the
Company's shareholders approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of shares of Common Stock,
par value $.001 per share, that the Company is authorized to issue from
100,000,000 to 300,000,000.

     As discussed more fully in Note 5, shareholders' equity as of January 30,
1999 includes an increase in additional paid-in capital of $36,351 as a result
of the formation of barnesandnoble.com llc.

     On July 10, 1998, the Board of Directors of the Company declared a dividend
of one Preferred Share Purchase Right (a Right) for each outstanding share of
the Company's common stock (Common Stock). The distribution of the Rights was
made on July 21, 1998 to stockholders of record on that date. Each Right
entitles the holder to purchase from the Company one four-hundredth of a share
of a new series of preferred stock, designated as Series H Preferred Stock, at a
price of $225 per one four-hundredth of a share. The Rights will be exercisable
only if a person or group acquires 15% or more of the Company's outstanding
Common Stock or announces a tender offer or exchange offer, the consummation of
which would result in such person or group owning 15% or more of the Company's
outstanding Common Stock.

     If a person or group acquires 15% or more of the Company's outstanding
Common Stock, each Right will entitle a holder (other than such person or any
member of such group) to purchase, at the Right's then current exercise price, a
number of shares of Common Stock having a market value of twice the exercise
price of the Right. In addition, if the Company is acquired in a merger or other
business combination transaction or 50% or more of its consolidated assets or
earning power are sold at any time after the Rights have become exercisable,
each Right will entitle its holder to purchase, at the Right's then current
exercise price, a number of the acquiring company's common shares having a
market value at that time of twice the exercise price of the Right. Furthermore,
at any time after a person or group acquires 15% or more of the outstanding
Common Stock of the Company but prior to the acquisition of 50% of such stock,
the Board of Directors may, at its option, exchange part or all of the Rights
(other than Rights held by the acquiring person or group) at an exchange rate of
one four-hundredth of a share of Series H Preferred Stock or one share of the
Company's Common Stock for each Right.

     The Company will be entitled to redeem the Rights at any time prior to the
acquisition by a person or group of 15% or more of the outstanding Common Stock
of the Company, at a price of $.01 per Right. The Rights will expire on July 20,
2008.


                                       22

<PAGE>
                                                        
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC.1998


     The Company has 5,000,000 shares of $.001 par value preferred stock 
authorized for issuance, of which 250,000 shares have been designated by the
Board of Directors as Series H Preferred Stock and reserved for issuance upon
exercise of the Rights. Each such share of Series H Preferred Stock will be
nonredeemable and junior to any other series of preferred stock the Company may
issue (unless otherwise provided in the terms of such stock) and will be
entitled to a preferred dividend equal to the greater of $2.00 per share or 400
times any dividend declared on the Company's Common Stock. In the event of
liquidation, the holders of Series H Preferred Stock will receive a preferred
liquidation payment of $1,000 per share, plus an amount equal to accrued and
unpaid dividends and distributions thereon. Each share of Series H Preferred
Stock will have 400 votes, voting together with the Company's Common Stock.
However, in the event that dividends on the Series H Preferred Stock shall be in
arrears in an amount equal to six quarterly dividends thereon, holders of the
Series H Preferred Stock shall have the right, voting as a class, to elect two
of the Company's Directors, whose terms shall extend until such time when all
accrued and unpaid dividends for all previous quarterly dividend periods and for
the current quarterly dividend period on all shares of Series H Preferred Stock
then outstanding shall have been declared and paid or set apart for payment. In
the event of any merger, consolidation or other transaction in which the
Company's Common Stock is exchanged, each share of Series H Preferred Stock will
be entitled to receive 400 times the amount and type of consideration received
per share of the Company's Common Stock. As of January 30, 1999, there were no
shares of Series H Preferred Stock outstanding.

9. Restructuring Charge

     From 1989 through 1995, the Company closed, on average, between 40 and 60
mall bookstores per year primarily due to increasing competition from
superstores and declining mall traffic. During the fourth quarter of fiscal
1995, the Company accelerated its mall bookstore closing program with the aim of
forming a core of more profitable B. Dalton stores, and provided for these
closing costs and asset valuation adjustments through a non-cash restructuring
charge, and early adoption of Statement of Financial Accounting Standards No.
121, "Accounting for Impairment of Long-Lived Assets and Assets to be Disposed
Of" (SFAS 121). In the fourth quarter of fiscal 1995, the Company recorded a
non-cash charge to operating earnings of $123,768 ($87,303 after tax or $1.32
per share) to reflect the aggregate impact of its restructuring plan and change
in accounting policy. The charge to earnings included a $33,000 write-down of
goodwill, and $45,862 related to the write-down of fixed assets and other
long-term assets. The Company has substantially completed the store closing
program.


     The following table sets forth the restructuring liability activity:

                                            Lease
                       Provision for  Termination
                       Store Closing        Costs    Other   Total
- --------------------------------------------------------------------------------
Balance at
    January 27, 1996         $5,974       32,833    6,099   44,906
Fiscal 1996
    Activity                  4,442        2,371    4,497   11,310
                             ------      -------   ------   ------
Balance at
    February 1, 1997          1,532       30,462    1,602   33,596
Fiscal 1997 Activity          1,532        9,026    1,602   12,160
                             ------      -------   ------   ------
Balance at
    January 31, 1998            --        21,436      --    21,436
Fiscal 1998 Activity            --        12,968      --    12,968
                             ------      -------   ------   ------
Balance at
    January 30, 1999         $  --         8,468      --     8,468
                             ======      =======   ======   ======


     The remaining liability, representing outstanding lease liabilities, is
expected to be paid out over the next several years.

10. Stock Option Plans

     The Company currently has two incentive plans under which stock options
have been or may be granted to officers, directors and key employees of the
Company -- the 1991 Employee Incentive Plan (the 1991 Plan) and the 1996
Incentive Plan (the 1996 Plan). The options to purchase common shares generally
are issued at fair market value on the date of the grant, begin vesting after
one year in 33-1/3% or 25% increments per year, expire ten years from issuance
and are conditioned upon continual employment during the vesting period.

     At the Company's Annual Meeting of Stockholders held on June 3, 1998, the
Company's shareholders approved an amendment to the 1996 Plan increasing the
number of shares available for issuance from 6,000,000 to 11,000,000. The 1991
Plan allows the Company to grant options to purchase up to 4,732,704 shares of
common stock.

     In addition to the two incentive plans, the Company has granted stock
options to certain key executives and directors. The vesting terms and
contractual lives of these grants are similar to that of the incentive plans.


                                       23

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC.1998


     In accordance with the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), the Company discloses the
pro forma impact of recording compensation expense utilizing the Black-Scholes
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the Black-Scholes model does not necessarily provide a
reliable measure of the fair value of its stock options.

     Had compensation cost for the Company's stock option grants been determined
based on the fair value at the stock option grant dates consistent with the
method of SFAS 123, the Company's net earnings and diluted earnings per share
for fiscal 1998, 1997 and 1996, would have been reduced by approximately $6,188
or $0.09 per share, $3,863 or $0.06 per share, and $5,305 or $0.08 per share,
respectively.

     Because the application of the pro forma disclosure provisions of SFAS 123 
are required only to be applied to grants of options made by the Company during
fiscal 1995 and after, the above pro forma amounts may not be representative of
the effects of applying SFAS 123 to future years.

     The weighted-average fair value of the options granted during fiscal 1998,
1997 and 1996 were estimated at $12.96, $8.05, and $4.66 respectively, using the
Black-Scholes option-pricing model with the following assumptions: volatility of
35% for fiscal 1998 grants, 28% for fiscal 1997 and 1996 grants, risk-free
interest rate of 5.33% in fiscal 1998, 6.54% in fiscal 1997, and 6.63% in fiscal
1996, and an expected life of 5.4 years for fiscal 1998 and 6.0 years for fiscal
1997 and 1996.

     A summary of the status of the Company's stock options is presented below:


                                      Weighted-Average
(In thousands of shares)      Shares     Exercise Price
- --------------------------------------------------------------------------------
Balance, January 27, 1996      7,902            $  9.95
Granted                        1,856              14.63
Exercised                       (460)              4.95
Forfeited                       (156)             14.97
                              -------

Balance, February 1, 1997      9,142              11.07
Granted                        2,254              19.31
Exercised                     (1,546)              9.28
Forfeited                       (186)             16.25
                              -------

Balance, January 31, 1998      9,664              13.17
Granted                        1,841              31.12
Exercised                       (837)             11.11
Forfeited                       (390)             22.35
                              -------

Balance, January 30, 1999     10,278             $19.69
                              =======

     Options exercisable as of January 30, 1999, January 31, 1998 and February
1, 1997 were 6,780,000, 6,558,000 and 7,070,000, respectively. Options available
for grant under the plans were 5,902,000, 2,354,000 and 4,422,000 at January 30,
1999, January 31, 1998 and February 1, 1997, respectively.


                                       24

<PAGE>

                                                        
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED   BARNES & NOBLE, INC.1998


     The following table summarizes information as of January 30, 1999
concerning outstanding and exercisable options:


<TABLE>
<CAPTION>
                                    Options Outstanding                                   Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
    Range of            Number             Weighted-           Weighted-                 Number            Weighted-
    Exercise        Outstanding     Average Remaining             Average           Exercisable               Average
     Prices              (000s)     Contractural Life      Exercise Price                (000s)        Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
<S>                 <C>             <C>                    <C>                     <C>                 <C>

 $  3.21- $ 3.77          818                4.38               $  3.59                   818               $  3.59
 $ 10.00- $15.00        5,384                4.98               $ 12.11                 5,275               $ 12.08
 $ 17.13- $24.25        2,870                8.42               $ 19.93                   665                 18.67
 $ 26.50- $34.75        1,206                9.07               $ 34.30                    22                 28.92
                       ------                                                           -----
 $  3.21-$34.75        10,278                6.37               $ 16.22                 6,780               $ 11.76
                       ======                                                           =====

</TABLE>



11. Leases

     The Company leases retail stores, warehouse facilities, office space and
equipment. Substantially all of the retail stores are leased under noncancelable
agreements which expire at various dates through 2028 with various renewal
options for additional periods. The agreements, which have been classified as
operating leases, generally provide for both minimum and percentage rentals and
require the Company to pay all insurance, taxes and other maintenance costs.
Percentage rentals are based on sales performance in excess of specified
minimums at various stores.

     Rental expense under operating leases are as follows:

Fiscal Year                     1998       1997      1996
- --------------------------------------------------------------------------------
Minimum rentals            $ 271,201    253,472   222,700
Percentage rentals             3,183      3,216     2,750
                           ---------    -------   -------
                           $ 274,384    256,688   225,450
                           =========    =======   =======




     Future minimum annual rentals, excluding percentage rentals, required under
leases that had initial, noncancelable lease terms greater than one year, as of
January 30, 1999 are:

Fiscal Year
- --------------------------------------------------------------------------------
1999                                           $  271,769
2000                                              264,027
2001                                              261,090
2002                                              247,781
2003                                              228,481
After 2003                                      1,577,713
                                               ----------
                                               $2,850,861
                                               ==========


     Future minimum annual rentals for stores scheduled for closing pursuant to
the Company's restructuring plan are included in the preceding table. Future
rental payments representing the exit costs associated with these store closings
were included in the Company's non-cash restructuring charge of $123,768
recorded during fiscal 1995 and, therefore, do not represent future operating
expenses.

12. Litigation

     In March 1998, the American Booksellers Association (ABA) and 26
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Borders Group Inc.
(Borders) alleging violations of the Robinson-Patman Act, the California Unfair
Trade Practice Act and the California Unfair Competition Law. The Complaint
seeks injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. In November 1998, six other
independent booksellers instituted an action in the same court against the same
defendants asserting similar claims and seeking similar relief. The Company
intends to vigorously defend both actions.

     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 the Company, Borders, Amazon.com, Inc., certain publishers and
others alleging violation of the Robinson-Patman Act and other federal law, New
York statutes governing trade practices and common law. The Complaint seeks
certification of a class consisting of all retail booksellers in the United
States, whether or not currently in business, which were in business and were
members of the ABA at any time during the four year period preceding the filing
of the Complaint. The Complaint alleges that the named plaintiffs have suffered
damages of $11.25 million or more and requests treble damages on behalf of the
named plaintiffs and each of the purported class members, as well as of
injunctive and declaratory relief (including an injunction requiring the closure
of all of defendants' stores within 10 miles of any location where plaintiff
either has or had a retail bookstore during the four years preceding the filing
of the Complaint, and prohibiting the opening by defendants of any bookstore in
such areas for the next 10 years), disgorgement of alleged discriminatory
discounts, rebates, deductions and 


                                       25

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED    BARNES & NOBLE, INC.1998


payments, punitive damages, interest, costs, attorneys fees and other relief.
Many of the allegations in the Complaint are similar to those contained in the
action instituted by the ABA and 26 bookseller plaintiffs against the Company in
March of 1998. The Company intends to vigorously defend the action.

     In November 1998, a former bookstore chain in Texas which has filed for
bankruptcy protection, filed an amended complaint in an action in the Bankruptcy
Court for the Northern District of Texas against the Company alleging various
antitrust and related claims. Among other things, the plaintiff alleges that the
Company conspired with national book publishers to obtain lower prices and to
monopolize the Dallas/Fort Worth book retail market. The plaintiff is seeking
$11 million in actual damages, plus treble damages, punitive damages, and
attorneys' fees. The Company intends to vigorously defend this action.

     In addition to the above actions, various claims and lawsuits arising in
the normal course of business are pending against the Company. The subject
matter of these proceedings primarily includes commercial disputes and
employment issues. The results of these proceedings are not expected to have a
material adverse effect on the Company's consolidated financial position or
results of operations.

13. Certain Relationships and Related Transactions

     The Company leases space for its executive offices in properties in which a
principal shareholder/director/executive officer of the Company has a minority
interest. The space was rented at an aggregate annual rent including real estate
taxes of approximately $1,316, $1,309 and $1,307 in fiscal years 1998, 1997 and
1996, respectively.

     Marboro Books Corp., the Company's mail-order subsidiary, leases a 76,000 
square foot office/warehouse from a partnership in which a principal
shareholder/director/ executive officer of the Company has a 50% interest,
pursuant to a lease expiring in 2023. Pursuant to such lease, the Company paid
$737, $743 and $665 in fiscal years 1998, 1997 and 1996, respectively.

     The Company is provided with certain package shipping services by the LTA
Group, Inc. (LTA), a company in which the brother of a principal
shareholder/director/executive officer of the Company acquired a 20% interest
during fiscal 1996. The Company paid LTA $12,571, $11,528 and $9,100 for such
services during fiscal years 1998, 1997 and 1996, respectively.

     The Company leases retail space in a building in which Barnes & Noble
College Bookstores, Inc. (B&N College), a company owned by a principal
shareholder/director/executive officer of the Company, subleases space for its
executive offices. Occupancy costs allocated by the Company to B&N College for
this space totaled $725, $634 and $544 for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997, respectively. In connection with
the space, the Company reimbursed B&N College during fiscal 1997, for a landmark
tax credit totaling $726.

     B&N College also allocated certain operating costs it incurred on behalf of
the Company. These charges are included in the accompanying consolidated
statements of operations and approximated $48, $75 and $115 for fiscal 1998,
1997 and 1996, respectively. The Company charged B&N College $972 and $473 for
fiscal years ended January 30, 1999 and January 31, 1998, respectively, for
capital expenditures, business insurance, and other operating costs incurred on
their behalf.

     The Company uses a jet aircraft owned by B&N College and pays for the costs
and expenses of operating the aircraft based upon the Company's usage. Such
costs which include fuel, insurance, personnel and other costs approximate
$1,760, $1,910 and $1,685 during fiscal 1998, fiscal 1997 and fiscal 1996,
respectively, and are included in the accompanying consolidated statements of
operations.

     On November 27, 1996, Babbage's Etc. LLC (Babbage's), a company owned by a
principal shareholder/director/executive officer of the Company, acquired
substantially all of the assets of Software Etc. Stores, Inc. (Software), a
company (formerly a division of the Company) in which two principal
shareholder-directors had an ownership interest, and assumed the operations of
14 retail software departments located within Barnes & Noble stores. As of
January 30, 1999 there are 13 of these departments remaining. The Company pays
all rent related to these properties for which it receives a license fee from
Babbage's equal to 7.0% of the gross sales of such departments. The Company also
provides real estate and construction services to Babbage's and purchases
business insurance on its behalf for which the Company is reimbursed for its
incremental costs to provide such services. The Company charged Software and
Babbage's, on a combined basis, $1,396, $1,430 and $1,282 during fiscal 1998,
1997 and 1996, respectively, for such services, license fees, rent, operating
costs, insurance costs and benefits coverage. Babbages also purchases
merchandise from the Company at prices equal to the Company's cost to obtain and
ship the merchandise.

     barnesandnoble.com purchased $33,444 and $4,997 of merchandise from the
Company during fiscal 1998 and 1997, respectively, and barnesandnoble.com
expects to source most of its purchases through the Company in the future. The
Company has entered into an agreement (the Supply Agreement) with
barnesandnoble.com whereby the Company charges barnesandnoble.com the costs
associated with such purchases plus incremental overhead incurred by the Company
in connection with providing such inventory. The Supply Agreement is subject to
certain termination provisions.

     The Company has entered into agreements (the Service Agreements) whereby
barnesandnoble.com receives various services from the Company, including, among
others, services 


                                       26

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED    BARNES & NOBLE, INC.1998


for payroll processing, benefits administration, insurance (property and
casualty, medical, dental and life), tax, traffic, fulfillment and
telecommunications. In accordance with the terms of such agreements the Company
has received, and expects to continue to receive, fees in an amount equal to the
direct costs plus incremental expenses associated with providing such services.
The Company received $856 and $250 for such services during fiscal 1998 and
1997, respectively.

14. Selected Quarterly Financial Information (Unaudited)

     A summary of quarterly financial information for each of the last two
fiscal years is as follows:


<TABLE>
<CAPTION>

Fiscal 1998 Quarter End                         April          July         October         January        Total Fiscal
On or About                                      1998          1998           1998            1999           Year 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>           <C>            <C>               <C>
Sales                                        $656,976        662,507       656,837       1,029,288           3,005,608
Gross profit                                  172,387        179,844       182,967         327,693             862,891
Equity in net loss of 
     barnesandnoble.com llc(1)                (13,603)       (23,003)      (20,472)        (14,256)            (71,334)
     Net earnings (loss)(2)                    (3,335)        (5,709)       (4,596)        106,016              92,376
Basic earnings (loss) per common share          (0.05)         (0.08)        (0.07)           1.54                1.35
Diluted earnings (loss) per common share        (0.05)         (0.08)        (0.07)           1.47                1.29


<CAPTION>
Fiscal 1997 Quarter End                         April          July         October         January        Total Fiscal
On or About                                      1997          1997           1997            1998           Year 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>           <C>            <C>               <C>

Sales                                        $595,731        617,748       614,831         968,542           2,796,852
Gross profit                                  147,514        158,813       164,514         306,720             777,561
     Earnings (loss) before extraordinary 
        charge                                 (3,861)        (1,366)           65          69,830              64,668
     Net earnings (loss)                       (3,861)        (1,366)           65          58,331              53,169
Basic earnings (loss) per common share
     Earnings (loss) before extraordinary 
        charge                                  (0.06)         (0.02)         0.00            1.03                0.96
     Net earnings (loss)                        (0.06)         (0.02)         0.00            0.86                0.79
Diluted earnings (loss) per common share
     Earnings (loss) before extraordinary 
        charge                                  (0.06)         (0.02)         0.00            0.98                0.93
     Net earnings (loss)                        (0.06)         (0.02)         0.00            0.81                0.76
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>



(1)  As a result of the formation of barnesandnoble.com llc on October 31, 1998,
     each quarter of fiscal 1998 presents the Company's equity in net loss of
     barnesandnoble.com llc as a separate line item in accordance with the
     equity method of accounting. Accordingly, the first three quarters of
     fiscal 1998 reflect the Company's one-hundred percent equity in net losses
     of barnesandnoble.com and the fourth quarter reflects the Company's fifty
     percent interest in the net losses of barnesandnoble.com. Fiscal 1997
     reflects the operations of barnesandnoble.com as a consolidated wholly
     owned subsidiary for each quarter presented.
(2)  Included in net earnings for the fourth quarter of fiscal 1998 is a pre-tax
     gain on the formation of barnesandnoble.com llc of $63,759 ($37,618 after
     tax) or $0.55 and $0.52 per basic and diluted common share, respectively.


                                       27

<PAGE>

R
EPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
Barnes & Noble, Inc.

     We have audited the accompanying consolidated balance sheets of Barnes &
Noble, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998 and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the fiscal years ended January 30, 1999, January 31, 1998,
and February 1, 1997, respectively. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Barnes &
Noble, Inc. and its subsidiaries as of January 30, 1999 and January 31, 1998 and
the results of their operations and their cash flows for the fiscal years ended
January 30, 1999, January 31, 1998 and February 1, 1997, in conformity with
generally accepted accounting principles.

New York, New York
March 10, 1999



/s/ BDO Seidman, LLP

BDO Seidman, LLP

                                       28





<PAGE>


                                                                   EXHIBIT 21.1

                      Subsidiaries of Barnes & Noble, Inc.

1.   Barnes & Noble Booksellers, Inc., a Delaware corporation, a wholly owned
     subsidiary of Barnes & Noble, Inc. (the "Company").

2.   B. Dalton Bookseller, Inc., a Minnesota corporation ("B. Dalton"), a wholly
     owned subsidiary of the Company.

3.   Doubleday Book Shops, Inc., a Delaware corporation, a wholly owned 
     subsidiary of B. Dalton. 

4.   Marboro Books Corp., a New York corporation, a wholly owned subsidiary of 
     the Company. 

5.   CCI Holdings, Inc., a Texas corporation, a wholly owned subsidiary of the 
     Company. 

6.   B&N Sub Corp., a Delaware corporation, a wholly owned subsidiary of the 
     Company. 

7.   B&N.com Holding Corp., a Delaware corporation, a wholly owned subsidiary 
     of the Company. 

8.   B&N.com Member Corp., a Delaware corporation, a wholly owned subsidiary of 
     the Company.







<PAGE>

                                                                   EXHIBIT 23.1


                             CONSENT OF INDEPENDENT
                           CERTIFIED PUBLIC ACCOUNTANTS



Barnes & Noble, Inc.
New York, New York



We hereby consent to the incorporation by reference of our report dated March
10, 1999 relating to the consolidated financial statements of Barnes & Noble,
Inc. and subsidiaries, incorporated by reference into the Company's Annual
Report on Form 10-K for the year ended January 30, 1999, into the prospectuses
constituting a part of the following registration statements: No. 33-84826 on
Form S-3, No. 33-89258 on Form S-3, No. 33-270333 on Form S-8, No. 33-89260 on
Form S-8, and No. 33-97410 on Form S-3.

We also consent to the references to us under the caption "Experts" in the
Prospectuses.


                                                      BDO Seidman, LLP


New York, New York
April 30, 1999







<TABLE> <S> <C>


<ARTICLE> 5
<MULTIPLIER> 1000
       
<S>                           <C>
<PERIOD-TYPE>                 YEAR
<FISCAL-YEAR-END>             JAN-30-1999
<PERIOD-END>                  JAN-30-1999
<CASH>                             31,081
<SECURITIES>                            0
<RECEIVABLES>                      57,523
<ALLOWANCES>                            0
<INVENTORY>                       945,073
<CURRENT-ASSETS>                1,088,311
<PP&E>                            826,977
<DEPRECIATION>                    316,631
<TOTAL-ASSETS>                  1,807,597
<CURRENT-LIABILITIES>             772,322
<BONDS>                                 0
<PREFERRED-MANDATORY>                   0
<PREFERRED>                             0
<COMMON>                               69
<OTHER-SE>                        678,720
<TOTAL-LIABILITY-AND-EQUITY>    1,807,597
<SALES>                         3,005,608
<TOTAL-REVENUES>                3,005,608
<CGS>                           2,142,717
<TOTAL-COSTS>                   2,142,717
<OTHER-EXPENSES>                  674,335
<LOSS-PROVISION>                        0
<INTEREST-EXPENSE>                 24,412
<INCOME-PRETAX>                   156,569
<INCOME-TAX>                       64,193
<INCOME-CONTINUING>                92,376
<DISCONTINUED>                          0
<EXTRAORDINARY>                         0
<CHANGES>                               0
<NET-INCOME>                       92,376
<EPS-PRIMARY>                        1.35
<EPS-DILUTED>                        1.29
        


</TABLE>