SCHEDULE 14A

SCHEDULE 14A INFORMATION

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Handleman Company
500 Kirts Boulevard
Troy, Michigan 48084

Notice of 2007
Annual Meeting of Shareholders
and Proxy Statement

Stephen Strome
Chairman and Chief Executive Officer
Handleman Company
500 Kirts Boulevard
Troy, MI 48084

August 3, 2007

Dear Shareholders:

It is my pleasure to invite you to Handleman Company’s 2007 Annual Meeting of Shareholders. We will hold the meeting on Wednesday, September 5, 2007, at 2:00 p.m., Eastern Daylight Time, at the Somerset Inn, 2601 West Big Beaver, Troy, Michigan 48084. During the Annual Meeting we will discuss each item of business described in the enclosed Notice of Annual Meeting and Proxy Statement and give a report on Handleman Company’s business operations. There will also be time devoted to respond to shareholder questions.

We hope you will be able to attend the Annual Meeting. Please vote your shares regardless of whether you plan to attend in person. We are pleased to offer multiple options for voting your shares. As detailed in the “Questions and Answers” section of the Proxy Statement (Appendix A) you can vote using any of the following methods: sign and date the proxy card or voting instruction card and return it in the prepaid envelope; vote by telephone or the Internet; or vote in person at the meeting.

Thank you for your continued support of Handleman Company.

		Sincerely,
		Stephen Strome
		Chairman and Chief Executive Officer

TABLE OF CONTENTS

		Page
Notice of the 2007 Annual Meeting of Shareholders			1
General Information			2
Voting Securities			2
I. Election of Directors			3
• Board Nominees for Terms to Expire at the 2009 Annual Meeting			3
• Board Nominees for Terms to Expire at the 2010 Annual Meeting			4
• Directors Whose Terms Expire in 2008			5
• Directors Whose Terms Expire in 2009			6
Board Information			7
• Board Meetings			7
• Director Independence			7
• Board Committees			7
• Audit Committee			7
• Corporate Governance and Nominating Committee			7
• Corporate Governance and Nominating Committee Process for Identifying and Evaluating Nominees			8
• Compensation Committee			8
• Corporate Governance Documents			8
• Presiding Director			8
• Communications with the Board			9
• Director Education			9
• Director October In-House Education			9
• Director October 2007 In-House Education			9
• Certain Relationships and Related Transactions			9
• Section 16(a) Beneficial Ownership Reporting Compliance			10
• Compensation Committee Interlocks and Insider Participation			10
Compensation Discussion and Analysis			10
• Oversight of the Executive Compensation Program			10
• The Company’s Executive Compensation Philosophy			11
• Total Compensation			13
• Components of the Executive Compensation Program			13
• Base Salary			13
• Annual Incentive Opportunity			14
• Long-Term Incentives			16
• Defined Benefit Pension Plan			18
• Employment Agreements and Severance Agreements			19
• Change-in-Control			19
• Other Benefits			19
• Stock Ownership Guidelines			20
• Compensation Committee Report			20
• Summary Compensation Table			21
• Grants of Plan Based Awards			22
• Outstanding Equity Awards			23
• Option Exercises and Stock Vested			24
• Pension Benefits			25
• All Other Compensation			26
• Board Compensation			27
Potential Payments Upon a Change-in-Control			28
Audit Committee Report			29
Security Ownership of Certain Beneficial Owners and Management			30
II. Ratification of Appointment of Independent Registered Public Accounting Firm			32
• Independent Registered Public Accounting Firm Fees			32
III. Other Matters			33
• Other Proposals			33
• Shareholder Proposals for the 2008 Annual Meeting			33
Appendix A – Questions and Answers about the Annual Meeting and Voting			A-1
Appendix B – Corporate Governance Guidelines			B-1
Appendix C – Audit Committee Charter			C-1
Appendix D – Corporate Governance and Nominating Committee Charter			D-1

HANDLEMAN COMPANY

The Annual Meeting of Shareholders of Handleman Company (the “Company”) will be held on Wednesday, September 5, 2007 at 2:00 p.m. Eastern Daylight Time, at the Somerset Inn, 2601 West Big Beaver Road, Troy, Michigan 48084. The proposals to be voted on at the Annual Meeting are as follows:

1.

The election of five Directors. Nominees are:

Elizabeth A. Chappell
Robert E. Kirby
Adam D. Sexton
Ralph J. Szygenda
Thomas S. Wilson

	2.		To ratify the Handleman Company Board of Director’s Audit Committee appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending May 3, 2008, and
	3.		To transact such other business as may properly come before the Annual Meeting and any adjournment thereof.

The Board of Directors recommends a vote “FOR” its nominees for Directors and “FOR” the ratification of the Audit Committee’s appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending May 3, 2008. The Board or proxy holders will use their discretion on other matters that may arise at the Annual Meeting.

The record date for determination of the shareholders entitled to notice of, and to vote at, the Annual Meeting, or any adjournment thereof, was July 9, 2007.

If you have any questions about the Annual Meeting, please contact:

Corporate Secretary
Handleman Company
500 Kirts Boulevard
Troy, MI 48084
248-362-4400

By Order of the Handleman Company Board of Directors

HANDLEMAN COMPANY

500 Kirts Boulevard
Troy, Michigan 48084

PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS

To Be Held September 5, 2007

GENERAL INFORMATION

The approximate mailing date for this Proxy Statement and the proxy is August 3, 2007. A copy of the Annual Report of the Company for the fiscal year ended April 28, 2007 accompanies this Notice.

It is important that your shares be represented at the meeting. We encourage you to read the Proxy Statement and vote your shares as soon as possible. The proxy is solicited by the Board of Directors of the Company. The shares represented by valid proxies in the enclosed form will be voted if received in time for the Annual Meeting. Expenses incurred in connection with the solicitation of proxies will be paid by the Company and may include requests by mail and personal contact by its directors, officers and employees. In addition, the Company has retained BNY Mellon Shareholder Services LLC, 480 Washington Boulevard, 27^th Floor, Jersey City, NJ 07310 to aid in the solicitation of proxies from brokers, banks, other nominees and institutional holders at a fee not to exceed $5,000 plus out-of-pocket expenses. The Company will reimburse brokers or other nominees for their expenses in forwarding proxy materials to shareholders. Any person giving a proxy has the power to revoke it at any time before it is voted.

For additional information regarding voting your shares, see “Questions and Answers,” which is attached as Appendix A.

VOTING SECURITIES

Only shareholders of record of $.01 par value common stock (the “Common Stock”) at the close of business on July 9, 2007 are entitled to notice of, and to vote at, the meeting or at any adjournment or adjournments thereof, each share having one vote. As of July 9, 2007, the date of record, the Company had issued and outstanding 20,449,040 shares of Common Stock.

I. ELECTION OF DIRECTORS

The Board of Directors is divided into three classes. At each Annual Meeting, the term of one class expires. Directors in each class serve for three-year terms, or until the Director’s retirement. Five Nominees for Director are to be elected by shareholders at the Annual Meeting. The class of Directors whose terms expire in 2009 includes three Directors. Two nominees for Director, Robert E. Kirby and Adam D. Sexton, are nominated for election for two-year terms, to be added to the class expiring in 2009. Three nominees for Director: Elizabeth A. Chappell, Ralph J. Szygenda, and Thomas S. Wilson are to be elected for three-year terms expiring in 2010.

Following each Director’s name is (1) the year he or she was first elected a Director, if he or she is an incumbent, (2) his or her age as of the date of the Annual Meeting, and (3) an account of the Director’s business experience.

Nominees for Terms to Expire at the 2009 Annual Meeting:

Robert E. Kirby		Age 50

Mr. Kirby has served as President and Chief Operating Officer of the Company since October 2006. From May 2004 through October 2006, Mr. Kirby served as President, Personal Products Company – Consumer Products Companies of Johnson & Johnson. From April 2002 through May 2004, Mr. Kirby served as Vice President, Global Supply Chain – Consumer & Personal Care Group of Johnson & Johnson. From May 1999 to April 2002, Mr. Kirby served as Vice President, North America Operations – Consumer Products Companies. Prior to joining Johnson & Johnson Mr. Kirby was employed by Fort James Corporation and Kimberly-Clark Corporation where he held several positions of increasing responsibility. His last position with Fort James Corporation was Vice President and Chief Technical Officer/Research and Development. Mr. Kirby’s last position at Kimberly-Clark was Vice President/Research and Development, Household Products. Mr. Kirby holds a BS degree in Chemical Engineering from the University of New Hampshire.

Adam D. Sexton		Age 43

Mr. Sexton has over 15 years of experience in marketing and management in the music and technology industries. Mr. Sexton currently serves as Chief Marketing Officer of Groove Mobile, Inc., a world leader in over-the-air download music stores. Mr. Sexton joined Grove Mobile in 2004. Mr. Sexton held the position of Vice President, Marketing for the Entertainment Technology Group of Macrovision from 2000 to 2004. Macrovision develops and markets copy protection, digital rights management and electronic license management technologies for the enterprise software, consumer software, and home video and music markets. Prior to joining Macrovision Mr. Sexton was employed by Supertracks, Arista Records, EMI Records and BMG International where he held positions of varying responsibility. Mr. Sexton holds a BA degree in Government from Harvard College and an MBA in Marketing/Management from Columbia Business School.

Nominees for Terms to Expire at the 2010 Annual Meeting:

Elizabeth A. Chappell		Director since 1999
		Age 49

Ms. Chappell has served as President and Chief Executive Officer of the Detroit Economic Club since April 2002. From January 2001 until April 2002, Ms. Chappell served as a business consultant in private practice. Ms. Chappell served as Executive Vice President — Corporate Communications and Investor Relations of Compuware Corporation from January 2000 to January 2001. Ms. Chappell was formerly President and Chief Executive Officer of The Chappell Group Inc., a consulting firm she founded in 1995 that specialized in strategic planning, organizational development, sales and marketing strategies and the design of customer centered processes. Prior to forming The Chappell Group, Ms. Chappell was employed by AT&T where she held several positions of varying responsibility. Her last position with AT&T was Global Service Vice President. Ms. Chappell holds a BA degree in Marketing from Michigan State University. Ms. Chappell also attended the Executive Management Program at the University of California, Berkeley. Ms. Chappell is also a director of American Axle and Manufacturing.

Ralph J. Szygenda		Director since 2003
		Age 59

Mr. Szygenda has served as Group Vice President and Chief Information Officer of General Motors Corporation since January 2000. Mr. Szygenda joined General Motors Corporation in June 1996 as Vice President and Chief Information Officer. Mr. Szygenda is a member of GM’s Automotive Strategy Board and is responsible for the Information Systems & Services organization. Accountable for the management of all information technology efforts within General Motors, he is directly responsible for developing and implementing GM’s global digital business strategy. Before joining GM, Mr. Szygenda was vice president and chief information officer at Bell Atlantic Corporation, in Arlington, Virginia, a position he held since June 1993. His main initiatives involved reengineering Bell Atlantic’s business processes and delivering information systems to meet the new electronic generation. Mr. Szygenda has been recognized for his business and technology leadership through awards that include Industry Week’s 2001 Technology Leader of the Year, Information Week’s 2002 Chief Information Officer of the Year and CIO Magazine’s 20/20 Vision Award recognizing his contributions in driving the information age. In 2003, he was inducted in the CRN Computer Industry Hall of Fame; in 2005, he received the Computerworld Honors Program Leadership Award; in 2006, he received the Automotive News Industry All Star Award and, in 2007, he was inducted into the CIO Hall of Fame. Mr. Szygenda holds a BS degree in computer science from the University of Missouri-Rolla in 1970 and a master’s degree in electrical engineering from the University of Texas in 1975. Mr. Szygenda also received an honorary professional degree and honorary doctorate degree in engineering from the University of Missouri-Rolla.

Thomas S. Wilson		Director since 2004
		Age 57

Mr. Wilson has served as President and Chief Executive Officer of Palace Sports and Entertainment, Inc., (“PS&E”) since 1993, overseeing the operations of the Detroit Pistons, Detroit Shock and Tampa Bay Lightning, and entertainment venues such as The Palace, DTE Energy Music Theatre and Meadow Brook Music Festival in Michigan and the St. Pete Times Forum in Florida. The Palace was designed largely around Mr. Wilson’s input and he was responsible for developing the operational philosophies of the arena. Mr. Wilson’s direction was instrumental in the renovation of DTE Energy Music Theatre (“DTE Theater”), and he remains actively involved in the operational phase and the ongoing improvement of the facility. The DTE Theatre has been named the nation’s busiest, top-grossing or highest attended outdoor venue by Amusement Business in each of its 12 seasons under Mr. Wilson’s guidance. In 1994, PS&E assumed management of Meadow Brook Music Festival on the grounds of Oakland University in Rochester, Michigan. It also purchased the Tampa Bay Lightning and the leasehold rights to its home arena, the St. Pete Times Forum in Tampa, Florida in 1999. During Mr. Wilson’s tenure, the Pistons have become recognized as one of the best marketed teams and most highly valued teams in the NBA. Mr. Wilson holds a BA degree in Business Administration from Wayne State University.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” ITS NOMINEES

CONTINUING DIRECTORS

Directors Whose Terms Expire at the 2008 Annual Meeting:

Eugene A. Miller		Director since 2002
		Age 69

Mr. Miller served as Chairman of the Board of Comerica Incorporated and Comerica Bank from January 2002 through his retirement in October 2002. From June 1999 through December 2001, Mr. Miller served as Chairman, President and Chief Executive Officer of Comerica Incorporated and Comerica Bank. From June 1993 until June 1999, Mr. Miller served as Chairman and Chief Executive Officer of Comerica Incorporated and Comerica Bank. Mr. Miller’s banking career began in 1955 with The Detroit Bank, forerunner of Comerica Bank. He rose to chairman, president and chief executive officer of Comerica Incorporated and Comerica Bank prior to the merger of Comerica Incorporated and Manufacturers National Corporation. Mr. Miller earned a bachelor of business administration degree with honors from the Detroit Institute of Technology. Mr. Miller is also a director of DTE Energy, Inc., TriMas Corporation and Amerisure Companies.

P. Daniel Miller		Director since 2005
		Age 59

Mr. P. Daniel Miller has served as Executive Vice President of Kimball International and as President of Kimball International Furniture since August 2000. Mr. Miller’s prior experience includes executive management positions, sales and marketing, manufacturing operations and multi-billion dollar branded sales and distribution strategies, both domestically and internationally, at International Knife and Saw, Overhead Door Corporation and Whirlpool Corporation. During Mr. Miller’s tenure with Whirlpool Corporation, he served as President and CEO of the Latin American Appliance Group in Brazil, as well as holding senior marketing assignments worldwide. Mr. Miller is a graduate of the University of Evansville with a degree in Business Administration; he completed the Harvard University Advanced Management Program in 1991.

Irvin D. Reid		Director since 2002
		Age 66

Dr. Reid has served as President of Wayne State University (”WSU”) since November 1997. WSU is a national research university with urban teaching and service missions in metropolitan Detroit. WSU is among the nation’s 21 largest universities and one of only 50 public research institutions nationwide that have achieved Carnegie I designation. WSU has the largest graduate/professional enrollment in Michigan and is among the top five in the country. WSU has the largest single-campus medical school in the nation. Previous to assuming the presidency of Wayne State University, Dr. Reid served for more than eight years as president of Montclair State University, the second largest higher education institution in the State of New Jersey. Over a 10-year period, he also served in a number of capacities at the University of Tennessee in Chattanooga including Dean of the School of Business Administration and John Stagmaier Professor of Economics and Business Administration; head of the Department of Marketing and Business Law; and Alan Lorberbaum Professor of Marketing. He has also served as associate professor at Howard University, senior specialist for the National Aeronautics and Space Administration (NASA), consultant to the U.S. Consumer Product Safety Commission, assistant professor at Drexel University, and lecturer at Philadelphia College of Art and St. Joseph’s University, Philadelphia, PA. Dr. Reid holds graduate degrees in business and applied economics from the Wharton School of the University of Pennsylvania (M.A., Ph.D.). Dr. Reid also holds undergraduate and graduate degrees in psychology from Howard University (B.S., M.S.), as well as a certificate in higher education administration from the Institute for Educational Management at Harvard University. Dr. Reid is also a director of Mack-Cali Real Estate Investment Trust.

Directors Whose Terms Expire at the 2009 Annual Meeting:

James B. Nicholson		Director since 1991
		Age 64

Mr. Nicholson has served as President, Chief Executive Officer and Director of PVS Chemicals, Inc. since 1979. PVS manufactures, markets and distributes chemicals for water treatment and industrial use. Operations include six manufacturing facilities and a highly diversified product distribution network. In addition to an extensive customer base in the United States, PVS has established itself in markets throughout the world, most notably in Belgium, Canada, Germany and Thailand. A 1965 graduate of Stanford University, Mr. Nicholson holds an undergraduate degree in Economics. He earned an MBA degree from the University of Chicago in 1967 and an MS degree in Economics from the London (England) School of Economics in 1968. Mr. Nicholson worked at the London, England branch of the First National Bank of Chicago from 1967 to 1970. From 1970 to 1972, he was manager of a Dublin, Ireland office of the same bank. In 1972, Mr. Nicholson joined PVS as a Vice President and assumed the additional duties of Treasurer in 1977. He became President of PVS in 1979 and has served as Chief Executive Officer since that date. Mr. Nicholson is a director of LaSalle Bank and the non-executive Chairman of the Board of LaSalle Bank Midwest N.A. Mr. Nicholson is also Chairman of the Board of Amerisure Companies.

Lloyd E. Reuss		Director since 1993
		Age 70

Mr. Reuss served as General Motors Corporation’s Executive Vice President of New Vehicles and Systems from April 1992 until January 1993. Mr. Reuss served as President of General Motors Corporation from August 1990 until April 1992. Mr. Reuss retired from GM in January 1993 after 36 years of service. In January 1993 he became a member of the GM Corporate Advisory Council. In May 1993, he was named the Executive Dean of the Center for Advanced Technologies at Focus: HOPE in Detroit, Michigan where he serves without compensation. In his capacity as Executive Dean, Mr. Reuss also serves as the Chairman of the Coalition for New Manufacturing Education and on the steering committee for the Focus: HOPE Capital Campaign. Mr. Reuss received a BSME degree from the University of Missouri in 1957. He is also a graduate of the Senior Executive Course at the Massachusetts Institute of Technology. In April 1992, Mr. Reuss received the Engineering Society of Detroit Foundation’s prestigious Leadership Award and was honored for his significant contributions to the engineering profession and his outstanding leadership in the fields of science and engineering. In February 1995, Mr. Reuss received the Society of Automotive Engineer’s Medal of Honor for his leadership in technical and educational activities. Mr. Reuss is also a director of International Speedway Corporation and U.S. Sugar Corporation.

Stephen Strome		Director since 1989
		Age 62

Stephen Strome, Chairman and Chief Executive Officer of Handleman Company, assumed the role of Chairman of the Board in January 2001 and has served as a member of the Board of Directors since 1989. In 1990 Mr. Strome was elected President and in 1991 was named Chief Executive Officer. Prior to Mr. Strome’s election as President, he served as Executive Vice President of the Company and President of the Video and Home Computer Software Division. Before joining Handleman Company in 1978, Mr. Strome was employed with Fruehauf Corporation from 1974 to 1978 and with Kmart Corporation from 1968 to 1974. Mr. Strome holds a BA degree from Hillsdale College and an MBA from Wayne State University. Mr. Strome serves as a member of the Executive Advisory Council of Wayne State University’s School of Business Administration. He also serves as Chairman of the Board of Trustees of Detroit Public Television and as a member on the Executive Board of the National Conference for Community and Justice. Mr. Strome previously served as a director of AmerUs Group.

BOARD INFORMATION

Board Meetings:

During the fiscal year ended April 28, 2007, Handleman Company’s Board of Directors (the “Board”) held a total of eight meetings. During fiscal 2007, each Director of the Company attended at least 75% of the aggregate number of meetings of the Board and of all committees of the Board on which such Director served. The Annual Meeting of Shareholders is held in conjunction with a regularly scheduled Board meeting, and Directors are expected to attend. Seven of the nine Directors attended the September 6, 2006 Annual Meeting.

Handleman Company’s independent Directors met without the Chief Executive Officer seven times during the fiscal year ended April 28, 2007.

Director Independence:

New York Stock Exchange (the “Exchange”) independence standards for companies listed on the Exchange, including the Company, require a majority of the Board to be independent and every member of each of the Audit Committee, Compensation Committee, and Corporate Governance and Nominating Committee to be independent from the Company. A director is considered independent only if the Board “affirmatively determines that the director has no material relationship with the listed company (directly or as a partner, shareholder or officer of an organization that has a relationship with the company),” in accordance with the listing standards of the Exchange. In connection with this standard, the Board has affirmatively determined that all of the Directors and nominees (other than Messrs. Strome and Kirby) are independent of the Company and its management under the standards set forth by the Exchange.

Board Committees:

Audit Committee: The Audit Committee is appointed by the Board of Directors of the Company to provide assistance to the Board of Directors in fulfilling its oversight responsibility relating to the Company’s financial statements and financial reporting processes; the systems of internal accounting and financial controls; the internal audit function; the annual independent audit of the Company’s financial statements; any financially-related legal compliance or ethics programs as established by the Board; and any other areas specified by the Board of potential significant financial risk to the Company.

All members of the Audit Committee are financially literate, as the Company’s Board has interpreted such qualification in its business judgment. The Board of Directors has determined that Eugene A. Miller satisfies the standard for “audit committee financial expert” in compliance with the Sarbanes-Oxley Act of 2002 and has accounting or related financial management expertise as required by the New York Stock Exchange.

The functions of the Audit Committee are listed in the Audit Committee Charter, which is attached as Appendix C to this Proxy Statement. The Audit Committee Charter is also available on the Company’s website, www.handleman.com, under Investor Relations/Corporate Governance.

The Audit Committee held seven meetings during the fiscal year ended April 28, 2007. Members: Mr. Eugene A. Miller, Chairman, Ms. Elizabeth A. Chappell, Dr. Irvin D. Reid and Mr. Ralph J. Szygenda.

Corporate Governance and Nominating Committee:

The Corporate Governance and Nominating Committee considers the performance of incumbent Directors and makes recommendations to the Board for nominees for election as Directors. The Corporate Governance and Nominating Committee also considers nominees for Directors recommended by shareholders. Recommendations for the 2008 Annual Meeting of Shareholders should be submitted to the attention of the Chairman of the Corporate Governance and Nominating Committee at the Company’s executive offices no later than April 4, 2008. The Board of Directors has adopted corporate governance guidelines recommended by the Committee. The Committee annually reviews and monitors the guidelines.

The guidelines establish corporate governance standards, outline the respective responsibilities of management and the Board and provide a process for evaluating the performance of the Board. A copy of the guidelines is attached as Appendix B to this Proxy Statement. The Board believes that it is important that the Company’s shareholders and others are able to review its corporate governance practices. Accordingly, the Company publishes its Corporate Governance Guidelines and Code of Business Conduct and Ethics on the Company’s website, www.handleman.com, under Investor Relations/Corporate Governance.

The functions of the Corporate Governance and Nominating Committee are listed in the Corporate Governance and Nominating Committee Charter, which is attached as Appendix D to this Proxy Statement.

The Corporate Governance and Nominating Committee Charter is also available on the Company’s website, www.handleman.com, under Investor Relations/Corporate Governance.

The Corporate Governance and Nominating Committee held three meetings during the fiscal year ended April 28, 2007. Members: Mr. Lloyd E. Reuss, Chairman, Mr. Eugene A. Miller, Mr. P. Daniel Miller, Mr. James B. Nicholson, and Dr. Irvin D. Reid.

Corporate Governance and Nominating Committee Process for Identifying and Evaluating Nominees:

The Directors and the Corporate Governance and Nominating Committee (the “Committee”) are responsible for recommending candidates for membership on the Board. In assessing potential new Directors, the Committee considers individuals from various disciplines and diverse professional backgrounds. The selection of qualified directors is complex and crucial to Handleman’s long-term success. The Committee considers Board candidates based upon various criteria, such as their broad-based business skills and experiences, a global business and social perspective, concern for the long-term interests of the shareholders, and personal integrity and judgment. In addition, Directors must have time available to devote to Board activities and to enhance their knowledge of Handleman Company and the industries in which Handleman operates. To assist in the identification and evaluation of qualified director candidates the Company has, on occasion, engaged the services of a search firm.

Compensation Committee:

The duties of the Compensation Committee are: recommending to the Board of Directors the remuneration arrangements for senior management; recommending to the Board of Directors compensation plans in which officers are eligible to participate; recommending to the Board of Directors director compensation programs; and granting stock options, performance shares, performance units and restricted stock awards under the Company’s Stock Plans. The functions of the Compensation Committee are listed in the Compensation Committee Charter. The Compensation Committee Charter is available on the Company’s website, www.handleman.com, under Investor Relations/Corporate Governance.

The Compensation Committee held five meetings during the fiscal year ended April 28, 2007. Members: Mr. James B. Nicholson, Chairman, Ms. Elizabeth A. Chappell, Mr. Lloyd E. Reuss and Mr. Thomas S. Wilson.

Corporate Governance Documents:

The Audit Committee, Corporate Governance and Nominating Committee and Compensation Committee Charters, Corporate Governance Guidelines and Code of Business Conduct and Ethics are available in print to any shareholder or interested party who requests them by contacting the Corporate Secretary, Handleman Company, 500 Kirts Blvd., Troy, MI 48084.

Presiding Director:

The Board designates annually an independent, non-employee Director to serve as Presiding Director. Duties and responsibilities of the Presiding Director include:

	•		presiding over executive sessions of the independent Board members;
	•		advising the Chief Executive Officer of appropriate feedback from executive sessions, including any actions to be taken as well as any issues or concerns raised by the independent Directors;
	•		advising on the agenda for the Board meetings;
	•		meeting with senior officers, if deemed appropriate, to discuss the business and issues facing the Company;
	•		working with the Chairman of the Corporate Governance and Nominating Committee in the selection of the Committee Chairs; and
	•		meeting with shareholders, if appropriate, to discuss their concerns.

The Chairs of the Compensation Committee, Audit Committee, and Corporate Governance and Nominating Committee rotate annually in the position of Presiding Director. Effective April 29, 2007, the Presiding Director is Mr. James B. Nicholson.

Communications with the Board:

Shareholders may communicate with the Presiding Director or with the non-employee Directors as a group by sending a letter by regular or express mail addressed to the Corporate Secretary, Handleman Company, 500 Kirts Blvd., Troy, MI 48084, Attention: Presiding Director or Non-Employee Directors. All such non-frivolous correspondence sent to that address will be delivered to those Directors on a quarterly basis, unless management determines by individual case that it should be sent more promptly. All correspondence to Directors will be acknowledged by the Corporate Secretary and may also be forwarded within Handleman Company to the subject matter expert for attention and/or investigation if appropriate.

The process of communicating with the Presiding Director or with the non-employee Directors as a group, as outlined above, is not limited to shareholders and may be utilized by interested parties who wish to communicate with the Presiding Director or with the non-employee Directors as a group.

Director Education:

One of Handleman Company’s core values is “Continuous Learning and Improvement.” The Company encourages and supports this value throughout all levels of the organization. The Board members also believe continuous learning is important to ensure the ongoing effectiveness of the Board. Accordingly, the Board has established guidelines for ongoing continuing education for Directors. See guideline 36 of Handleman Company’s Corporate Governance Guidelines attached as Appendix B.

Director In-House Education:

On October 23, 2006, a Director in-house education course was presented at the Handleman Company’s corporate office by the National Association of Corporate Directors (“NACD”). The four hour session on “Board Leadership” covered:

	•		Duties and Responsibilities of All Board Members
	•		Sarbanes-Oxley
	•		The Current Environment of Directorship
	•		The Responsibilities of Directorship
	•		Board Structure and Leadership
	•		Relationship of Board to Management
	•		Creating and Sustaining Board Value
	•		Conducting Productive Board Meetings

Seven of the nine Directors attended the October 23, 2006 Director in-house education course.

Director October 2007 In-House Education:

The Company has scheduled a Director in-house education course to be presented at the Handleman Company’s corporate office by NACD in October 2007, during which an Institutional Shareholder Services accredited education session will be conducted. It is expected that all Directors will attend.

Certain Relationships and Related Transactions:

There are no matters relating to certain relationships and related transactions that Handleman Company is required to disclose under applicable rules and regulations.

Section 16(a) Beneficial Ownership Reporting Compliance:

Federal securities law requires that Directors and Executive Officers of the Company must report to the Securities and Exchange Commission and the Company, within certain periods, the number of shares of the Corporation’s equity securities they own and any changes in such ownership. Based upon information furnished by the Directors and Executive Officers, all required Section 16(a) filings for fiscal year 2007 have been made in a timely manner, except that one Form 4, covering one transaction, was filed late by Donald M. Genotti, an Executive Officer of the Company.

Compensation Committee Interlocks and Insider Participation:

No member of the Compensation Committee is a current or former officer or employee of the Company.

COMPENSATION DISCUSSION AND ANALYSIS

Handleman Company is a category manager and distributor of prerecorded music and console video game hardware, software, and accessories to leading retailers in the United States, United Kingdom and Canada. As a category manager, the Company manages a broad assortment of titles to optimize sales and inventory productivity in retail stores. In conducting its business activities, the Company encounters aggressive competition. In recent years, because of changes in the music industry, the Company dedicated considerable human resources to exploring new market opportunities and to ensuring long-term customer loyalty and commitments.

In this competitive and rapidly changing environment, it is critical to the Company’s long-term success and profitability that its business is managed by energetic, experienced, and capable individuals with the talent, skills, and dedication to oversee the organization on a day-to-day basis coupled with the vision to anticipate and respond to future market developments. The Company must ensure that it has the appropriate level of executive talent within the organization and must continuously develop its leaders’ capabilities and competencies.

The Company’s key executive compensation objectives are to:

	•		attract first-class executive talent,
	•		retain key business leaders,
	•		reward past and future performance, and
	•		align the long-term interests of the Company’s executive officers and shareholders.

The Company uses a variety of compensation elements to achieve these objectives, including base salary, annual incentive opportunities and long-term incentives (including performance shares, performance units, restricted stock awards and stock options, each of which is discussed in more detail below). Each element also provides a framework for governing the Company’s overall employee compensation program.

Oversight of the Executive Compensation Program

The Company’s Compensation Committee of the Board of Directors (“Committee”) administers the executive compensation program. As reflected in its charter, the Committee has overall responsibility for setting the Chief Executive Officer’s (“CEO”) compensation and for approving, with the recommendation of the CEO, the executive officers’ compensation packages including the Chief Financial Officer (“CFO”). The Committee determines the CEO’s compensation based on its evaluation of the CEO’s performance at the end of the fiscal year based on goals and objectives the Committee established at the beginning of that fiscal year. The Committee then determines, taking into consideration the recommendation of its compensation consultant, the CEO’s compensation level, including base salary, annual incentive opportunity, long-term incentives and any other remuneration.

The Committee is also responsible for the oversight of the Company’s retirement plans and health and welfare benefit plans. Additionally, the Committee administers the Company’s various equity compensation plans, and exercises general oversight over the Company’s compensation practices. A complete description of the Committee’s responsibilities and functions is set forth in its charter, which can be found on the Company’s website at www.handleman.com under Investor Relations/Corporate Governance.

To assist the Committee in performing its duties, the Board of Directors has authorized the Committee to retain an independent compensation consultant, which reports to the Committee Chairperson, to provide consultation on Committee duties and responsibilities. During fiscal 2007, the Consultant provided and/or performed the following services:

	§		provided independent competitive market data and recommendations related to executive officers, including the CEO, CFO, and other executive officers’ compensation levels and incentive compensation design;
	§		reviewed and analyzed market data and made recommendations on compensation mix, incentive mix, and incentive compensation design;
	§		reviewed the Company’s compensation levels, performance, and incentive compensation design compared to a peer group;
	§		provided information on executive compensation trends and implications for the Company’s executive compensation program design; and
	§		monitored program effectiveness.

The Board of Directors granted the Committee the authority to determine the scope of the consultant’s services and the Committee may terminate the consultant’s engagement at any time. The consultant reports to the Committee Chairman. For additional information on the Committee’s members and duties, see “Compensation Committee” on page eight of this proxy statement.

The Company’s Executive Compensation Philosophy

The Committee establishes the principles that underlie the Company’s executive compensation program and that guide the design and administration of specific plans, agreements, and arrangements for the executive officers implementing the program. These principles, as embodied in the executive compensation program, should motivate the executive officers to improve the Company’s financial position, to be personally accountable for the performance of the business units, divisions, or functions for which they are responsible, and to make decisions about the Company’s business that will deliver shareholder value.

The Company’s compensation philosophy is comprised of six core principles. First, compensation reinforces the Company’s business objectives and values. Handleman’s objective is to generate long-term value for all of its stakeholders: shareholders, customers, vendors and employees. The Company creates value in the supply chain by leveraging core competencies to create customers for its customers. Leveraging core competencies will enable growth with existing and new customers and into adjacent product categories, channels, and markets. In order to accomplish this objective, Handleman’s compensation practices must enable it to attract and retain top employees.

Second, Handleman’s compensation is performance related. In accomplishing this objective, the Committee links a significant portion of an executive officer’s total compensation to how the individual performs, how the individual’s business unit, division or function performs, and how the Company performs. In doing this the Committee uses a variety of performance based compensation vehicles in the executive compensation program, which individually and collectively are designed to incorporate performance criteria that promote the Company’s annual operating plan and long-term business strategy. The Committee also emphasizes the Company’s performance relative to the organizations in the Company’s peer group. Some of the long term performance criteria measure the Company’s performance against that of a group of organizations in similar industries. However, given the nature of Handleman’s business, there are relatively few peer companies that are direct business competitors. Therefore, the peer company list includes companies with whom the Company competes for labor as well as retail and consumer packaged goods companies. Handleman’s consultant and executive management developed the list for the Committee’s approval.

For fiscal 2007, the organizations comprising this peer group consisted of:

Performance Food Group Co.		Grainger Inc.		Nash Finch Co.
United Stationers Inc.		Borders Group Inc.		Alberto-Culver Co.
Warner Music Group Corp.		American Axle & Mfg. Holding		Gamestop Corp.
Scotts Miracle Gro Co.		Guitar Center Inc.		Pier 1 Imports Inc.
Herman Miller, Inc.		Source Interlink Cos. Inc.		PcConnections Inc.
Trans World Entertainment Corp.		Compuware Corp.		Navarre Corp.
Amcon Distributing Co.

When the Company’s performance is better than its established objectives for the relevant performance period, the Committee awards executive officers more than the initial target award (which is typically set at the median of the peer group). Conversely, when the Company’s performance does not meet key objectives, the Committee grants incentive award payments, if any at all, that are less than the target level.

Third, incentive compensation should represent the majority of the total compensation opportunity. To achieve this objective, the proportion of an executive officer’s total compensation that varies with individual, business unit, division, function, or corporate performance increases as the scope and level of the individual’s business responsibilities increases. Accordingly, for fiscal 2007, approximately 66% of the total target direct compensation for the CEO (the sum of base salary, annual incentive compensation, and long-term incentive compensation) at the time of award was at risk against the achievement of both short- and long-term performance objectives. Generally, for fiscal 2007, the amount of the total target direct compensation at risk against the achievement of both short- and long-term performance objectives for the CFO and the other executive officers ranged from approximately 58% to 62% at target levels.

Fourth, compensation levels must be competitive. To assure that the Company’s compensation is competitive with the wholesale/distribution industry and with the Company’s direct competitors, each year the Committee reviews compensation survey data that the Consultant compiles and prepares. The Company uses this survey data to ensure that for each executive position the Committee’s compensation actions are appropriate, reasonable and consistent with the Company’s philosophy based on the various markets in which the Company competes for executive talent. This survey data consists of wholesale/distribution industry data, that includes some of the organizations in the Company’s peer group as identified above, as well as more general compensation data that includes organizations similar in size and geographical location to the Company across a variety of industries.

In addition to the Company’s peer group survey data, the Committee also uses data applicable to other relevant talent pools (such as consumer packaged goods, retail and brand management industry data and/or general industry or special market data) and selected other companies with which the Committee believes the Company competes for executive talent. This allows the Committee to more precisely tailor compensation packages to the demands of the market. Similarly, for some executive positions, the Company may require skills and/or experience from a more varied set of backgrounds.

Fifth, incentive compensation should balance short- and long-term performance. In selecting the specific elements of the Company’s executive compensation program, the Committee creates a structure that balances achieving short-term or annual results as well as ensuring the Company’s long-term viability and success. Therefore, to reinforce the importance of balancing these perspectives, the executive officers are regularly provided both short- and long-term incentives. Participation in the Company’s long-term incentive program increases at higher levels of responsibility as executive officers in these leadership roles have the greatest influence on the Company’s strategic direction and results over time.

Sixth, executive officers should have a stake in their decisions. The Committee believes that it is in the best interest of the Company and its shareholders for the executive officers to have a financial interest in the long-term results of their business decisions. Consequently, the Company provides its executive officers with various ways to become shareholders of the Company. These opportunities include annual grants of performance shares and performance units.

Total Compensation

The Committee targets the total direct compensation (base salary, annual incentive compensation, and long-term incentive compensation) of the executive officers, including the CEO and CFO, at the total direct compensation median for the organizations in the Company’s peer group. The Committee generally believes that median performance merits median pay; thus, it establishes objectives for both absolute and relative Company performance, so that it can determine performance and pay objectively at the end of the performance period. The Committee determines the actual payout, whether above, below, or at the competitive median, by performance against these pre-established measures and objectives.

Periodically, the Committee reviews the Company’s total executive compensation program, with the Consultant’s input, in comparison to evolving market practices in the wholesale/distribution industry and other industries, external regulatory and other developments, the market for executive talent, and the Company’s executive compensation philosophy. The review includes base salary, annual incentive opportunity, long-term incentive compensation, the cost to the Company of all perquisites and other personal benefits, and company-sponsored retirement plans.

The Committee also reviews each executive officer’s total direct compensation under several termination scenarios including change-in-control of the Company, termination of employment by the Company, and resignation or retirement by the executive officer. The Company prepares, and the Committee reviews, tally sheets setting forth all of the listed scenarios. The Committee uses this information to position the total target direct compensation of the CEO and the other executive officers in the market range of the 50th percentile of the organizations in the Company’s peer group when warranted by Company and individual performance.

Components of the Executive Compensation Program

The Company’s executive compensation program is comprised of the following components:

	§		base salary;
	§		an annual incentive opportunity, which is paid in cash;
	§		long-term incentives (including equity-based awards; primarily performance shares, stock options and restricted stock; and cash-based awards, primarily performance units);
	§		a defined benefit pension plan (frozen as of November 1, 2006);
	§		a defined contribution retirement account;
	§		a defined benefit supplemental executive retirement plan (frozen as of November 1, 2006);
	§		a change-in-control plan; and
	§		other benefits.

Base Salary

Annually, the Committee reviews and determines the base salaries of the Company’s CEO, the CFO, and other executive officers. The Committee has established and maintains base salary ranges for the Company’s various executive positions that are within the market ranges indicated by the compensation survey and peer company data compiled and prepared by the Consultant. It is within the Committee’s discretion to adjust the base salaries. For each individual, the Committee considers the scope of his or her responsibilities and experience, as well as the level of individual performance achieved by each executive, and balances these against competitive salary practices.

In determining each executive officer’s base salary, the Committee also considers internal equity within the Company, both with respect to the other executive officers and to the Company’s employees generally. Because of the Committee’s emphasis on performance-based compensation, it will typically only make adjustments for executive officers’ salaries to compensate for a significant deviation in an executive officer’s pay when compared to the market compensation data or to recognize an individual for outstanding individual performance or increased responsibility. The Committee’s practice is consistent with the Company’s philosophy that compensation above competitive median levels for executive officers should result primarily from the variable portion of the compensation package.

The salaries the Company paid to the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO) during fiscal 2007 are shown in the Summary Compensation Table on page 21.

Annual Incentive Opportunity

Management Incentive Plan

As described above, at the beginning of each fiscal year, the Committee establishes an annual incentive opportunity for the CEO, the CFO, and the other executive officers of the Company. The Committee awards this annual incentive opportunity pursuant to the Company’s Management Incentive Plan. This process is undertaken after the end of the prior fiscal year when the Company’s financial results have been made available to the Board of Directors and the Board has approved the Company’s annual operating plan for the current fiscal year. At that time, the Committee (i) sets the overall Company performance objectives for the year, (ii) sets individual performance measures for the year, and (iii) establishes a target bonus opportunity for each executive officer.

In addition, the Company pays annual incentive bonuses in late June or early July for the prior fiscal year’s performance, based on the Committee’s assessment of actual performance against the pre-established Company performance objectives and individual performance measures for the prior fiscal year. For fiscal 2007, the performance measures for annual incentive bonuses were based on net income and in the case of some executives, savings from the Company’s “Growth Through Excellence initiative”, (“GTE”), which is the Company’s initiative to significantly reduce the cost of the business.

A more in-depth description of the Committee’s decisions with respect to the annual incentive payment made to the executive officers for fiscal 2007 follows.

Setting Company performance objectives

The Committee, working with the CEO and the Consultant, set the Company’s fiscal 2007 performance objective, which was achieving net income of $20.1 million. One-hundred percent of the annual incentive opportunity for the CEO and CFO was based on this objective. The Company’s Chief Operating Officer (“COO”), who began his position in October 2006, also had the $20.1 million net income objective. The other named executive officers’ objective was seventy-five percent based on the $20.1 million net income objective with the remaining twenty-five percent being based on the overall cost savings target from the GTE initiative.

While the Committee had the discretion to reflect or exclude the impact of any specified developments that may have occurred during the year in determining whether the executives met their fiscal 2007 performance objective, there were no such developments that warranted the Committee making any modifications.

Setting a target annual incentive opportunity

The Committee established a target annual incentive opportunity for each executive officer that considers all factors that the Committee deems relevant, including, but not limited to, a review of the compensation paid by organizations in the Company’s peer group and the desired mix of fixed and variable compensation elements as determined by the Committee for each executive.

For each of the performance objectives, the Committee used a formula to establish a payout range around the target annual incentive opportunity. The formula determined the percentage of the target incentive to be paid, based on a percentage of goal achievement, with a minimum below which no payment will be made.

The payout range established for fiscal 2007 for each executive officer was:

Result levels						Threshold				Target				Maximum				Max Plus
Pay % times bonus target							25	%			100	%			200	%			300	%*
																			250	%**
Position
Chief Executive Officer		% payout					15	%			60	%			120	%			180	%
		$ payout					108				432				864				1,296
Chief Operating Officer		% payout					15	%			60	%			120	%			180	%
		$ payout					82.5				330				660				990
Chief Financial Officer		% payout					12.5	%			50	%			100	%			150	%
		$ payout					42.5				170				340				510
Senior Vice Presidents		% payout					10	%			40	%			80	%			100	%
SVP/CIO		$ payout					25.0				100				200				250
SVP PM&L							22.0				88.0				176				220
SVP HR & OD							22.0				88.0				176				220

Measuring performance

At the end of fiscal 2007, the Committee reviewed the Company’s actual performance against the established performance objectives. The consolidated net loss result for fiscal 2007 was $(53.4) million, which was below the required threshold to trigger a payment on this measure. For named executives who had a twenty-five percent personal objective related to the Growth Through Excellence initiative a $6.1 million cost savings was realized; therefore, one-hundred percent of the actual target was awarded for this component. The annual incentive for the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO) during fiscal 2007 are shown in the Summary Compensation Table on page 21. Additional information about the annual incentive opportunities is shown in the Grants of Plan-Based Awards Table on page 22.

Under the Management Incentive Plan, the Committee has the discretion to pay annual incentive payments for the executive officers in cash or restricted stock or a combination of these items. The Committee grants any restricted stock or restricted stock units under the Company’s Long-Term Incentive Plan (see Stock Ownership Guidelines on page 20). The Committee also has discretion, in appropriate circumstances, to award a bonus that is lower than the amount calculated under the formula described above or no bonus at all. The Committee believes that the fiscal 2007 incentive bonus payments, while minimal, are consistent with the Company’s strategy of rewarding its executive officers for the achievement of important and challenging business goals. In view of the Company’s results for the year, the annual incentive bonus calculations resulted in reasonable performance-related bonus payments to the Company’s executive officers.

COO and CIO incentives

The COO negotiated incentives as part of his employment offer from the Company. The COO received a negotiated guaranteed annual incentive of $300,000 at the end of fiscal 2007. He received a job offer compensation agreement that pays a cash bonus at specified anniversary dates. The COO will receive a cash bonus based on the closing price of 100,000 shares of Handleman stock on the second anniversary of his hire date and 50,000 shares on the third anniversary (October 2008 and 2009, respectively). This bonus is referred to as phantom stock in the Grants of Plan Based Awards Table on page 22. He received a signing bonus of $150,000 with $100,000 being paid in January 2007 and the remaining to be paid upon his establishment of his primary residence in Michigan. The COO also received 20,000 restricted shares of Handleman stock with one-half vesting on the first anniversary and one-half vesting on the second anniversary of employment. The COO received a stock grant of 100,000 options of Handleman stock that will vest 33% on each of the next 3 anniversary years.

The Company’s Chief Information Officer (“CIO”) also negotiated incentives as part of his employment offer from the Company. The CIO received a guaranteed annual incentive of $75,000 at the end of fiscal 2007. He received a job offer compensation agreement that pays a cash bonus at specified anniversary dates. The CIO received a cash bonus based on the closing price of 2,500 shares of Handleman stock in June 2007 and will receive a cash bonus in June 2008. He received a signing bonus of $50,000 with payments of $25,000 after 60 days of employment and $25,000 after 180 days of employment. The CIO received 10,000 restricted shares of Handleman stock with one-half vesting in June 2007 and one-half vesting in June 2008.

Long-Term Incentives

The Company’s long-term incentive plan rewards the Company’s executive officers for Company performance over a period of more than one fiscal year. Since fiscal 2004, the long-term incentive plan has consisted of four components: performance shares and performance unit awards pursuant to the Company’s Long-Term Incentive Plan, stock options, and restricted stock. Historically, the Company used stock options and awards as the key components for the long-term incentive plan, but the Company replaced the stock options with performance units in fiscal 2006. As previously discussed, the Committee believes that long-term incentive compensation performs an essential role in retaining and motivating executive officers and that, by providing them with long-term incentives, their decisions affecting the operation of the business will be aimed at maximizing long-term shareholder value.

Each June, the Committee determines the overall amount of the long-term incentive award for each executive officer, including the CEO and CFO, and makes an annual grant of performance shares and performance units to each executive officer of the Company. These awards are made after the end of the fiscal year when the Committee has had an opportunity to evaluate the Company’s operating results for the prior fiscal year and at the same time that the Company is making all of its compensation decisions for the current fiscal year.

In determining the size of individual long-term incentive awards, as well as the amount of total awards to the executive officers as a group, the Committee considers two factors: the target dollar value of the long-term incentive package and the package’s potential dilutive effect.

In setting the dollar value of the long-term incentive package for each executive officer, the Committee considers survey data on total compensation packages and the value of long-term incentive awards at organizations in the Company’s peer group as compiled and analyzed by the Consultant, as well as share usage and shareholder dilution, before arriving at a final award value.

The Committee initially established the general magnitude of the proposed awards based on the approach for valuing the size of awards described above. As an additional check, the Committee also compared the proposed awards as a percentage of the Company’s outstanding shares against awards made by the organizations in the Company’s peer group as a percentage of their outstanding shares. This comparison produced results that were comparable with the value-based analysis and confirmed the Committee’s belief that the general magnitude of proposed awards was both reasonable and within the range necessary to be competitive.

The Committee, and the Company, have consistently made grants of long-term incentive awards in June of each year and has made such awards without regard to the release of the Company’s financial results for the year or the release of any other material non-public information. On June 7, 2006, in fiscal 2007, the Committee met and approved the long-term incentive award for the executive officers, which consisted of performance shares and performance units. See the table on page 17 for details of performance share and performance unit grants made in fiscal 2007.

Performance Share Awards

Each year, the Committee grants performance share awards to the executive officers to link the achievement of free cash flow performance goals. The Company believes free cash flow performance drives total shareholder returns over an extended period. The performance share awards have a three-year performance period and are paid out in the form of shares of the Company’s common stock upon achievement of pre-determined financial metrics. These awards are intended to provide a strong incentive for achieving specific performance goals over the performance period that advances shareholder value. These awards also encourage executive officer retention, as they are subject to forfeiture if the executive officer’s employment terminates for any reason other than death, disability, or retirement before the end of the performance period.

The specific performance measure for the fiscal 2005 through fiscal 2007 performance period was free cash flow compared to the peer group of companies also used for executive compensation benchmarking purposes. The free cash flow result for the fiscal 2005 through fiscal 2007 performance period was determined to be at target which was the fiftieth percentile of the peer group; therefore, all participants were awarded with the targeted number of shares set at the beginning of the period.

In June 2006, the Committee granted performance share awards that will be payable at the end of fiscal 2009 if the Company achieves, on an overall basis for the three-year period from fiscal 2007 to fiscal 2009, specified objectives based on free cash flow compared to organizations in the Company’s peer group. See table on this page for details.

The amount the Company recognized for financial reporting purposes for fiscal 2007 for the performance share awards granted to the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO) during fiscal 2007 are shown in the Summary Compensation Table on page 21. Additional information on these awards, including the potential number of shares of the Company’s common stock payable at threshold, target, and maximum performance levels, are shown in the Grants of Plan-Based Awards Table on page 22.

Performance Units

As described above, performance units were introduced to the Company’s long-term incentive plan in fiscal 2006, replacing the stock option portion of the plan. The Committee believed that performance units were preferable to stock options for the following reasons:

	•		They would tie a significant portion of compensation to the longer-term business results;
	•		They would provide increased liquidity for executives;
	•		They would enable the Company to provide both market-competitive total compensation and dilution levels; and
	•		They would provide a vehicle for executive officers to pay the attendant tax liability once the restrictions on the grants expired.

The first potential payment of performance units will occur at the end of fiscal 2008.

Achievement of the performance unit awards is based on the same performance goals and financial parameters as the performance shares (i.e., free cash flow compared to the organizations in the Company’s peer group as calculated at the end of the three-year performance period). Performance share and performance unit awards made in fiscal 2007 to the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO) are summarized below:

Fiscal 2007 – Fiscal 2009 Performance share/unit grants

Performance level

Threshold

Target

Maximum

Result level (percentile)

30

50

70

Shares/units awarded vs. target (%)

50

%

100

%

150

%

Position

Performance shares/units

CEO

13,400/13,400

26,800/26,800

40,200/40,200

COO

20,000/20,000

40,000/40,000

60,000/60,000

CFO

7,000/7,000

14,000/14,000

21,000/21,000

SVPs

3,400/3,400

6,800/6,800

10,200/10,200

The amount recognized for financial reporting purposes during fiscal 2007 for the performance unit awards granted to the CEO, the CFO, and the three most highly compensated officers (other than the CEO and CFO) during fiscal 2007 are shown in the Summary Compensation Table on page 21. Additional information on these awards, including the potential number of shares of the Company’s common stock payable at the threshold, target and maximum performance levels, and their full grant date fair values, are shown in the Grants of Plan-Based Awards Table on page 22.

Stock Options and Restricted Stock Awards

Although the Company has not generally granted stock options since fiscal 2005, stock options are a component of the Company’s long-term incentive program. The COO negotiated stock options as part of his employment offer. A stock option rewards an executive officer only if the market value of the Company’s common stock increases above the exercise price of the option and the individual remains employed with the Company for the period required for the option to vest. In addition, stock options link a portion of the executive officer’s compensation to the interests of the Company’s shareholders by providing an incentive to maximize shareholder value.

Each stock option permits the executive officer, generally for a period of 10 years, to purchase one share of the Company’s common stock from the Company at the exercise price, which is the closing market price of the Company’s common stock on the date of grant.

The amount the Company recognized for financial reporting purposes during fiscal 2007 for the stock options it granted to the COO during fiscal 2007 is shown in the Summary Compensation Table on page 21. Additional information on these awards, and their full grant date fair value, is shown in the Grants of Plan-Based Awards Table on page 22.

The Company does not generally consider restricted stock awards as a standard part of the long-term incentive plan for the listed executives. However, the COO negotiated a restricted stock award as part of his employment offer in fiscal 2007.

During the restriction periods, the executive officers holding restricted stock awards are entitled to vote the shares and to receive dividends on the shares if and when declared by the Board of Directors, in each case on the same basis as the Company’s shareholders.

The amount the Company recognized for financial reporting purposes during fiscal 2007 for restricted stock awards granted to the COO and CIO during fiscal 2007 is shown in the Summary Compensation Table on page 21. Additional information on these awards and their full grant date fair value is shown in the Grants of Plan-Based Awards Table on page 22.

Defined Benefit Pension Plan

Executive officers participate in the Company’s tax-qualified defined benefit pension plan on the same terms as the rest of the Company’s salaried employees. Because the Internal Revenue Code limits the pension benefits (based on an annual compensation limit) that can be accrued under a tax-qualified defined benefit pension plan, the Company established a supplemental defined benefit pension plan for its executive officers to compensate these individuals for the reduction in their pension benefit resulting from this limitation. This supplemental plan is a restoration plan to provide comparable level retirement benefits to those provided to other employees.

At its May 17, 2006 meeting, the Committee accepted a management proposal to terminate both the defined benefit pension plan and the supplemental defined benefit executive retirement plan effective November 1, 2006. The supplemental plan present values are being cashed-out to all active and terminated participants before the end of fiscal 2008. The actuarial present value of the accumulated pension benefits of the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO) as of the end of fiscal 2007, as well as other information about the Company’s defined benefit pension plans, are shown in the Pension Benefits Table on page 25.

Employment Agreements and Severance Agreements

Consistent with its compensation philosophy, in general, the Company does not enter into employment agreements and/or severance agreements with its executive officers. As a result, these officers serve at the will of the Board of Directors. The Company has, however, entered into agreements with the COO and CIO relative to their accepting employment with the Company as discussed on page 15 and page 16 under COO and CIO incentives.

This policy enables the Company to remove an executive officer prior to retirement whenever it is in the Company’s best interest, with full discretion to determine a severance package for that individual (excluding vested benefits). When the Company removes an executive officer from his or her position, the Committee exercises its business judgment in approving an appropriate severance and general release arrangement for the individual in light of all relevant circumstances, including, but not limited to, his or her term of employment, past accomplishments, reasons for separation from the Company, and market practices. At the present time, the only exception to this policy is the severance provision contained in the individual employment agreement with Mr. Kirby, the COO. Handleman entered into a severance arrangement with Mr. Kirby pursuant to which Handleman will provide Mr. Kirby with one year’s base salary plus a portion of his target bonus in the amount of $150,000 and will immediately vest Mr. Kirby’s cash bonus based on the closing price of 100,000 shares of Handleman stock on Mr. Kirby’s employment termination date (referred to as phantom stock in the Grants of Plan Based Awards Table on page 22), and will provide one year of COBRA coverage for his family, if Handleman terminates Mr. Kirby’s employment for any other reason than cause during the first two years of his employment.

Change-in-Control

To ensure that the executive officers are focused on protecting shareholder value and to ensure that executive officers are motivated to successfully complete a transaction that involves a change in the ownership or control of the Company, Change-in-Control Agreements are provided that specify severance benefits to the executive officers (including the CEO and CFO). The Committee believes that it is in the best interests of the Company and its shareholders to offer such a plan to its executive officers. The Company competes for executive talent in a highly competitive market in which companies routinely offer similar benefits to senior employees. The potential severance benefit will be paid based on an involuntary termination without cause or a voluntary termination with good reason, following a Change-in-Control of the Company.

The Committee views the Change-in-Control benefit as reasonable and appropriate, and competitive for the executive officers (including the CEO and CFO), who may not be in a position to obtain comparable employment. The Committee determined, based on market information, that the accelerated vesting of all outstanding equity awards upon an involuntary termination without cause, or a voluntary termination with good reason, following a Change-in-Control of the Company, is a customary and reasonable component of an equity incentive program.

The amount of the estimated potential payments and benefits payable to the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO), assuming a Change-in-Control of the Company and a qualifying termination of employment as of the last day of fiscal 2007, are shown in the discussion of Potential Payments Upon a Change-in-Control on page 28.

Other Benefits

The Company maintains medical and dental insurance, accidental death insurance, and disability insurance programs for all of its employees, including the executive officers, as well as customary vacation, leave of absence, and other similar policies. Executive officers are eligible to participate in these programs on the same basis as the rest of the Company’s salaried employees.

Perquisites and Other Personal Benefits

The Company awards other forms of compensation to some of the named executives officers in the form of perquisites or other personal benefits. Each of these individuals receives automobile, executive life insurance, financial counseling, and executive physical benefits. The CEO also has a country club benefit and a supplemental long-term disability benefit. The COO and CIO received relocation expense reimbursements pursuant to the Company’s relocation policy.

Neither the CEO nor the other executive officers receive any additional cash compensation to reimburse them for any income tax liability that may arise and become due and payable as the result of their receipt of these items. Nor does the Company pay any additional cash compensation to the executive officers to reimburse them for any income taxes that become due and payable in connection with equity awards, including any taxes that become due as the result of the exercise or vesting of such awards.

The aggregate incremental cost to the Company of providing these personal benefits to the CEO, the CFO, and the three most highly-compensated executive officers (other than the CEO and CFO) during fiscal 2007 are shown in the Summary Compensation Table on page 21.

Stock Ownership Guidelines

The executive compensation program includes stock ownership guidelines for the executive officers. The Committee believes that this ownership policy encourages the executive officers to act like owners by encouraging them to acquire and maintain a meaningful stake in the Company and thereby promote the Company’s objective of increasing shareholder value.

The Board of Directors, upon the Committee’s recommendation, adopted stock ownership guidelines for the executive officers in fiscal 1997. The guidelines are designed to balance an individual executive officer’s needs for portfolio diversification with maintaining management stock ownership at levels high enough to assure the Company’s shareholders of management’s commitment to value creation. Under these guidelines, executive officers are expected, over time, to acquire and hold shares of the Company’s common stock equal in value to a multiple of their base salary, depending on their positions. Executive officers have five years to satisfy the guidelines, which are expressed as a specified number of shares. The Company’s stock ownership guidelines for executive officers are as follows:

Position		Ownership Level
Chief Executive Officer		5 times base salary
Chief Operating Officer		2 times base salary
Chief Financial Officer		2 times base salary
Senior Vice Presidents		2 times base salary

The Committee reviews the guidelines periodically and monitors the executive officers’ progress toward meeting their target ownerships levels. Shares held directly by the executive officer count toward satisfying the guidelines.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors reports that it has reviewed and discussed with management the section of this proxy statement headed Compensation Discussion and Analysis, and, on the basis of that review and discussion, recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Handleman Company’s fiscal 2007 annual report on Form 10-K and in this proxy statement.

By the members of the Compensation Committee of the Board of Directors of Handleman Company:

James B. Nicholson, Chairman
Elizabeth A. Chappell
Lloyd E. Reuss
Thomas S. Wilson

Summary Compensation Table for the Fiscal Year Ended April 28, 2007

																						Non-Equity
																						Incentive Plan				Change in				All Other
														Stock				Option				Compensation				Pension				Compensation
		Fiscal				Salary (1)				Bonus (2)				Awards (3)				Awards (4)				(5)				Value (6)				(7)				Total
Name & Principal Position		Year				($)				($)				($)				($)				($)				($)				($)				($)
Stephen Strome Chairman and CEO			2007				713,269				—				508,954				79,949				—				609,580				58,798				1,970,550
Robert E. Kirby President and COO			2007				285,577				400,000				393,718				40,925				—				—				43,834				1,164,054
Thomas C. Braum, Jr. Executive Vice   President and CFO			2007				329,230				—				199,587				19,977				—				136,091				19,820				704,705
Khaled Haram Senior Vice   President and CIO			2007				250,000				125,000				112,994				—				—				—				419,636				907,630
Mark Albrecht Senior Vice   President,   Human Resources			2007				217,644				—				128,020				28,830				22,000				31,204				21,456				449,154

Grants of Plan Based Awards During the Fiscal Year Ended April 28, 2007 (in thousands of dollars/shares)

																																														Grant
																																		All												Date
																																		Other												Fair
																																		Stock				All Other								Value
																																		Awards:				Option				Exercise				of
										Estimated Future Payouts												Estimated Future												Number				Awards:				or Base				Equity
										Under Non-Equity Incentive												Payouts Under Equity												of				Number of				Price of				Awards
										Plan Awards												Incentive Plan Awards												Shares				Securities				Option				(at
										Thres-												Thres-												of Stock				Underlying				Awards				target)
Name & Principal						Grant				hold				Target				Max				hold				Target				Max				or Units				Options				(7)				(8)
Position		Type of Grant				Date				($)				($)				($)				(#)				(#)				(#)				(#)				(#)				($/Sh)				($)
Stephen Strome		Annual Incentive (1)									108.0				432.0				1,296.0
Chairman and CEO		Performance Share (2)																					13.4				26.8				40.2																183.3
		Performance Unit (3)									91.7				183.3				275.0
Robert E. Kirby		Annual Incentive (1)									82.5				330.0				990.0
President and COO		Performance Share (2)																					20.0				40.0				60.0																273.6
		Performance Unit (3)									136.8				273.6				410.4
		Restricted Stock (4)					10/23/06																												20.0												166.6
		Phantom Stock (5)					10/23/06																												150.0												1,249.5
		Stock Option (6)					10/23/06																																100.0			$	8.33				239.1
Thomas C. Braum, Jr.		Annual Incentive (1)									42.5				170.0				510.0
EVP and CFO		Performance Share (2)																					7.0				14.0				21.0																95.8
		Performance Unit (3)									47.9				95.8				143.6
Khaled Haram		Annual Incentive (1)									25.0				100.0				250.0
SVP and CIO		Performance Share (2)																					3.4				6.8				10.2																46.5
		Performance Unit (3)									23.3				46.5				69.8
Mark Albrecht		Annual Incentive (1)									22.0				88.0				220.0
SVP, HR		Performance Share (2)																					3.4				6.8				10.2																46.5
		Performance Unit (3)									23.3				46.5				69.8

Outstanding Equity Awards as of Fiscal Year-End April 28, 2007

		Option Awards																				Stock Awards
																																		Equity
																																		Incentive
																																		Plan
																																		Awards:
																																		Market or
										Equity																								Payout
										Incentive																								Value of
										Plan																Market								Unearned
										Awards:																Value of				Equity Incentive				Shares,
		Number of				Number of				Number of																Shares or				Plan Awards:				Units, or
		Securities				Securities				Securities												Number of				Units of				Number of				Other
		Underlying				Underlying				Underlying												Shares or Units				Stock that				Unearned Shares,				Rights that
		Unexercised				Unexercised				Unexercised				Option								of Stock that				Have Not				Units, or Other				Have Not
		Options				Options				Unearned				Exercise				Option				Have Not				Vested				Rights that Have				Vested
Name & Principal		Exercisable				Unexercisable				Options				Price				Expiration				Vested				(15)				Not Vested (9)				(15)
Position		(#)				(#)				(#)				($)				Date				(#)				($)				(#)				($)
Stephen Strome			71,100	(1)											15.75				06/12/2011												53,600	(10)			402,536
Chairman and CEO			47,403	(2)											11.83				06/03/2012
			27,200	(3)											16.93				06/09/2013
			27,000	(4)											22.46				06/07/2014
Robert E. Kirby			100,000												8.33				10/23/2016				20,000	(5)			150,200				40,000	(11)			300,400
President and COO																							150,000	(6)			1,126,500
Thomas C. Braum,			3,667	(2)											11.83				06/03/2012												24,000	(12)			180,240
Jr. EVP and CFO			4,600	(3)											16.93				06/09/2013
			10,000	(4)											22.46				06/07/2014
Khaled Haram																							10,000	(7)			75,100				6,800	(13)			51,068
SVP and CIO																							5,000	(8)			37,550
Mark Albrecht			2,667	(3)											16.93				06/09/2013												13,600	(14)			102,136
SVP, HR			7,000	(4)											22.46				06/07/2014

Option Exercises and Stock Vested for the Fiscal Year Ended April 28, 2007

		Option Awards								Stock Awards
		Number of Shares								Number of Shares
		Acquired on				Value Realized on				Acquired on				Value Realized
Name & Principal		Exercise				Exercise				Vesting (1)				on Vesting (2)
Position		(#)				($)				(#)				($)
Stephen Strome Chairman and CEO			—				—				88,200				753,228
Robert E. Kirby President and COO			—				—				—				—
Thomas C. Braum, Jr. Executive Vice President and CFO			—				—				22,350				190,869
Khaled Haram Senior Vice President and CIO			—				—				—				—
Mark Albrecht Senior Vice President, Human Resources			—				—				12,900				110,166

Pension Benefits for the Fiscal Year Ended April 28, 2007

										Present Value of
						Number of Years				Accumulated				Payments During
						Credited Service (3)				Benefit (4)				Last Fiscal Year
Name & Principal Position		Plan Name				(#)				($)				($)
Stephen Strome		Pension Plan (1)									992,516
Chairman and CEO		SERP Plan (2)					29				3,416,201				—
Robert E. Kirby President and COO			—				—				—				—
Thomas C. Braum, Jr.		Pension Plan (1)									284,277
Executive Vice President and CFO		SERP Plan (2)					22				349,042				—
Khaled Haram Senior Vice President and CIO			—				—				—				—
Mark Albrecht		Pension Plan (1)									79,978
Senior Vice President, Human Resources		SERP Plan (2)					8				56,575				—

All Other Compensation for the Fiscal Year Ended April 28, 2007

																		Company
		Perquisites												Payments/				Contributions				Dividends/
		& Other								Discounted				Accruals on				to Defined				Earnings on				Insurance
		Personal				Tax				Securities				Termination				Contribution				Stock/Option				Premiums
		Benefits				Reimbursements				Purchases				Plans				Plans (6)				Awards				(7)				Other (8)
Name & Principal Position		($)				($)				($)				($)				($)				($)				($)				($)
Stephen Strome Chairman and CEO			36,751	(1)			—				—				—				12,973				—				9,074				—
Robert E. Kirby President and COO			7,300	(2)			—				—				—				10,769				—				669				25,096
Thomas C. Braum, Jr. EVP and CFO			9,990	(3)			—				—				—				8,588				—				1,242				—
Khaled Haram SVP and CIO			5,563	(4)			—				—				—				8,971				—				420				404,682
Mark Albrecht SVP, Human   Resources			15,343	(5)			—				—				—				5,483				—				630				—

Board Compensation

Officers of the Company who are Directors do not receive additional compensation for services as a Director. During fiscal 2007, non-employee Directors received an annual cash retainer of $25,000 payable in four quarterly installments of $6,250.

During fiscal 2007, each Director received meeting fees of $1,500 for each Board of Directors meeting attended. In addition, each member on a Committee was paid at the rate of $1,500 for each Committee meeting attended, with the exception of the Audit Committee Chairman who received Audit Committee meeting fees of $2,500 for each meeting attended and the Compensation Committee Chairman who received Compensation Committee meeting fees of $2,000 for each meeting attended. Non-committee member Directors who are requested in advance to participate in any Committee meeting are also paid the committee meeting fee. In addition, the Chief Executive Officer has the discretion to approve payments up to $500 to independent Directors for incremental services. During fiscal 2007, each Committee Chairman received an annual fee of $3,500. Directors are reimbursed for travel and other expenses related to attendance at Board and Committee meetings. In addition, during fiscal year 2007 the Presiding Director received an annual fee of $6,000.

The 2004 Stock Plan allows restricted stock grants to non-employee Directors. In September 2006, each non-employee Director received a 2,000 share grant of restricted Handleman Company stock. These shares vest in equal increments over three years. In addition, non-employee Directors receive a one-time stock grant of 500 shares when first joining the Board. This grant vests 100% three years from the date the Director first joins the Board.

Under resolutions of the Board of Directors presently in effect, if certain Corporate, Division or Subsidiary Officers should die while serving in such capacity, the Company will pay to the surviving spouse, or if there is no surviving spouse then to the decedent’s estate, the equivalent of one year’s salary (excluding bonuses) based upon the amount being received by the decedent at the time of his or her death, in 24 equal monthly installments commencing one month after death. In the event a Director should die while serving the Company in such position, the Company shall pay to the deceased’s surviving spouse, or if there is no surviving spouse to the deceased’s estate, the equivalent of one year’s cash retainer plus any accrued but unpaid board and committee meeting fees that the deceased was entitled to receive for such services from the Company at the time of his or her death, such amount to be paid in a lump sum one month from the date of death. In addition, the deceased Director’s outstanding restricted stock grants shall immediately vest.

The following table provides information on Handleman Company’s director compensation for non-employee directors is fiscal 2007.

Director compensation during the Fiscal Year Ended April 28, 2007

		Fees Earned or Paid				Stock				Option
		in Cash (1)				Awards (4)				Awards (6)				Total
Name		($)				($)				($)				($)
Elizabeth A. Chappell			56,500				23,157				1,742				81,399
Eugene A. Miller (2), (3)			67,000				23,157				1,742				91,899
P. Daniel Miller (5)			39,000				19,938				—				58,938
James B. Nicholson (2)			56,000				23,157				1,742				80,899
Irvin D. Reid			51,000				23,157				1,742				75,899
Lloyd E. Reuss (2), (3)			60,000				23,157				1,742				84,899
Ralph J. Szygenda			48,000				23,157				1,742				72,899
Thomas S. Wilson (5)			44,500				27,696				—				72,196
Total		$	422,000			$	186,576			$	10,452			$	619,028

POTENTIAL PAYMENTS UPON A CHANGE IN CONTROL

The Company has entered into Change in Control Agreements (the “Agreements”) with Stephen Strome, Robert E. Kirby, Thomas C. Braum, Jr., Khaled Haram, and Mark Albrecht in the event their employment is terminated as a result of, or in connection with, a change in control (as defined in the Agreements). The Agreements expire December 31, 2007 and are automatically renewed to December 31 of each subsequent year unless and until the Company or the named Executive Officer sends a written notice of termination to the other party by September 1st.

In the event of termination of employment or other specified changes in the employment relationship beginning 90 days before and ending two years after a change in control, the Agreements generally provide for payments of accrued salary and a prorata bonus for the Company’s current fiscal year in an amount equal to (1) the average of the annual bonus accrued on behalf of the executive during the Company’s three full fiscal years prior to the change in control, multiplied by (2) a fraction, the numerator of which is the number of days in the current fiscal year through the termination date and the denominator of which is 365; and a severance payment equal to the sum of base salary and the average of the annual bonus accrued during the three fiscal years prior to the termination date times 2.99 for Messrs Strome, Kirby, and Braum and accrued salary and bonus not paid, plus a severance payment equal to the sum of base salary and the average of the annual bonus accrued during the three fiscal years prior to the termination date times one for Messrs. Haram and Albrecht. The Agreements also entitle Messrs. Strome, Kirby, and Braum, to continue participation in the Company’s life and health insurance benefits for three years following the termination date. Messrs. Haram and Albrecht’s Agreements entitle them to continue participation in the Company’s life and health insurance benefits for one year following the termination date.

Based on current salaries and prior bonuses, if Messrs. Strome, Kirby, Braum, Haram or Albrecht had terminated their employment as of April 28, 2007 under circumstances entitling them to severance pay as described above, they would have been entitled to receive lump sum cash payments of $2,438,285; $1,943,500; $1,174,820; $275,000 and $259,590, respectively. The cost of life and health insurance benefits following the termination date for Messrs. Strome, Kirby, Braum, Haram or Albrecht would be $47,200; $41,000; $41,000; $13,250 and $13,200, respectively.

In addition, all restrictions on any outstanding incentive awards (including restricted stock and rights to performance shares and performance units) granted to Messrs. Strome, Kirby, Braum, Haram and Albrecht under any incentive plan or arrangement shall lapse and such incentive award shall become 100% vested and all stock options and stock appreciation rights granted to Messrs. Strome, Kirby, Braum, Haram and Albrecht under any incentive plan or arrangement will become 100% vested and immediately exercisable.

AUDIT COMMITTEE REPORT

The Audit Committee of the Handleman Company Board of Directors is composed of four independent directors. The Audit Committee is governed by the Audit Committee Charter adopted by the Board of Directors. A copy of the Audit Committee Charter is attached as Appendix C to this proxy statement.

As set forth in the Audit Committee Charter, the Committee is appointed by the Board of Directors to, among other duties and responsibilities, provide assistance to the Board of Directors in fulfilling its oversight responsibility relating to the Company’s financial statements and the financial reporting processes; the systems of internal accounting and financial controls; the internal audit function; the annual independent audit of the Company’s financial statements; the adequacy and effectiveness of the Company’s financially-related legal, regulatory, and ethical compliance programs; and any other areas specified by the Board of Directors of potential significant financial risk to the Company. The Committee is also responsible for hiring, retaining and terminating the Company’s independent registered public accounting firm. The Committee reports its activities to the Board of Directors on a regular basis.

Management has responsibility for the Company’s financial statements and financial reporting processes, including the systems of internal accounting and financial controls. The independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with generally accepted auditing standards and issuing a report thereon.

The Committee reviews the Company’s financial statements and financial reporting processes on behalf of the Board of Directors. In fulfilling its responsibilities, the Committee has met and held discussions with management, the internal auditors, and the independent registered public accounting firm. Management represented to the Committee that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles. The Committee has reviewed and discussed the audited consolidated financial statements for the fiscal year ended April 28, 2007, with management and the independent registered public accounting firm.

The Committee discussed with the independent registered public accounting firm the matters required to be discussed by Statement on Auditing Standards No. 61, Communications with Audit Committees, as amended. In addition, the Committee has discussed with the independent registered public accounting firm their independence from the Company and its management, including the letter regarding its independence provided to the Committee as required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees.

The Committee also discussed with the Company’s internal auditors and independent registered public accounting firm the overall scope and plans for their respective audits. The Committee met with the internal auditors and independent registered public accounting firm, with and without management present, to discuss the results of their examinations, the evaluations of the Company’s internal controls, and the overall quality of the Company’s financial reporting. The Committee also reviewed and discussed with the independent registered public accounting firm the fees paid to the independent registered public accounting firm.

The Company’s Chief Executive Officer and Chief Financial Officer also reviewed with the Committee the certifications that each such officer will file with the Securities and Exchange Commission (SEC) pursuant to the requirements of Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 and the rules and regulations issued by the SEC pursuant thereto. Management also reviewed with the Committee the policies and procedures it has adopted to ensure the accuracy of such certifications.

By the members of the Audit Committee of the Board of Directors of Handleman Company:

Eugene A. Miller, Chairman
Elizabeth A. Chappell
Irvin D. Reid
Ralph J. Szygenda

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The table below reflects the number of shares beneficially owned by (1) each Director and Director Nominee of the Company; (2) each Executive Officer of the Company named in the Summary Compensation Table; (3) all Directors, Director Nominees and Executive Officers as a group; and (4) each person or group owning more than five percent of the outstanding shares of Handleman Company Common Stock. Unless otherwise noted, the information is stated as of July 9, 2007 and the beneficial owners exercise sole voting and/or investment power over their shares.

Name of Beneficial Owner		Shares Owned				Percent of Class
Stephen Strome			459,455	(a)			2.2	%
Robert E. Kirby			21,646	(a)			*
Thomas C. Braum, Jr.			73,975	(a)			*
Khaled Haram			8,802	(a)			*
Mark J. Albrecht			33,794	(a)			*
Elizabeth A. Chappell			27,049	(b)			*
Eugene A. Miller			23,452	(b)			*
P. Daniel Miller			4,500				*
James B. Nicholson			25,214	(b)			*
Irvin D. Reid			13,452	(b)			*
Lloyd E. Reuss			24,482	(b)			*
Adam D. Sexton			—
Ralph J. Szygenda			9,972	(b)			*
Thomas S. Wilson			6,500				*
All Directors, Director Nominees and Executive Officers as a Group (16 persons)			785,277	(c)			3.8	%
Third Avenue Management LLC			3,163,062	(d)			15.5	%
Century Management			1,878,054	(d)			9.2	%
Franklin Advisory Services, LLC			1,820,000	(d)			8.9	%
Dimensional Fund Advisors, Inc.			1,713,648	(d)			8.4	%
Aegis Financial			1,423,100	(d)			7.0	%
Donald Smith & Co., Inc.			1,360,800	(d)			6.7	%
LSV Asset Management			1,170,582	(d)			5.7	%

II. RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP served as the independent registered public accounting firm for the Company and has reported on the Company’s consolidated financial statements for the fiscal years ended April 28, 2007 and April 29, 2006. For fiscal years 2007 and 2006, the Company’s independent registered public accounting firm was appointed by the Audit Committee. The Board of Directors concurred with that selection in an advisory capacity.

The Sarbanes-Oxley Act requires that each corporation’s audit committee be directly responsible for appointing the independent registered public accounting firm. The Audit Committee has selected PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending May 3, 2008. The Board of Directors has concurred in an advisory capacity with that selection.

As a matter of good corporate governance, the Audit Committee has elected to submit its selection of the independent registered public accounting firm to the shareholders for ratification.

In the event the shareholders do not ratify this appointment, the Audit Committee will reconsider whether to engage PricewaterhouseCoopers LLP, but may ultimately determine to engage that firm or another audit firm without re-submitting the matter to the shareholders.

Even if the appointment is ratified by the shareholders, the Audit Committee, in its discretion, may appoint a different independent registered public accounting firm at any time during the year if the Audit Committee determines that such a change would be in the best interests of the Company and its shareholders.

The Audit Committee considers PricewaterhouseCoopers LLP well qualified, with offices or affiliates in or near the Company’s locations in the U.S. and other countries where the Company operates.

The lead and concurring partners of PricewaterhouseCoopers LLP assigned to audit the Company rotate off the engagement after five years, and may not recur on the engagement for five years.

Representatives from PricewaterhouseCoopers LLP will be present at the Annual Meeting of Shareholders and will be provided the opportunity to make a statement at the meeting if they desire, and will also be available to respond to appropriate questions.

THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING MAY 3, 2008.

Independent Registered Public Accounting Firm Fees:

The following table presents fees for professional audit services performed by PricewaterhouseCoopers LLP for the audit of the Company’s annual consolidated financial statements for fiscal years 2007 and 2006 and for the review of the Company’s interim consolidated financial statements for each quarter in fiscal years 2007 and 2006 and for tax and all other services performed in fiscal years 2007 and 2006:

		Fiscal Year Ended				Fiscal Year Ended
		April 28, 2007				April 29, 2006
Audit Fees (1)		$	1,831,029			$	1,250,850
Audit-Related Fees (2)			113,982				298,012
Tax Fees (3)			127,570				91,070
All Other Fees			15,965				2,500
Total		$	2,088,546			$	1,642,432

The Audit Committee’s current practice on approval of services performed by the independent registered public accounting firm is to pre-approve all audit services and permissible non-audit services to be provided, providing the opportunity to assess the impact of the service on the auditor’s independence. In addition, the Audit Committee has delegated authority to grant certain pre-approvals to the Audit Committee Chairman. Pre-approvals granted by the Audit Committee Chairman are reported to the full Audit Committee at its next regularly scheduled meeting.

In fiscal 2007 all non-audit services were pre-approved by the Audit Committee.

The Audit Committee determined that the non-audit services provided (and the fees billed for such services) by PricewaterhouseCoopers LLP during fiscal 2007 and 2006 were compatible with maintaining their independence.

III. OTHER MATTERS

Other Proposals:

Neither the Company nor the members of its Board of Directors intend to bring before the Annual Meeting any matters other than those set forth in the Notice of Annual Meeting, and they have no present knowledge that any other matters will be presented for action at the meeting by others. However, if any other matters properly come before the meeting, it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their best judgment.

Shareholder Proposals for the 2008 Annual Meeting:

A shareholder proposal that is intended to be presented at the 2008 Annual Meeting of Shareholders must be received by the Company at its principal executive offices by April 4, 2008.

By Order of the Board of Directors,

Stephen Strome
Chairman and Chief Executive Officer

Dated: August 3, 2007

PLEASE VOTE. YOUR VOTE IS VERY IMPORTANT.
Promptly returning your proxy will help to reduce the cost of this solicitation.

Appendix A

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

Below are commonly asked questions relating to the purpose of a Proxy Statement and specific questions relating to Handleman Company’s Annual Shareholders’ Meeting. We hope the answers that follow provide you with the information you need to vote your shares.

		Number
What is a proxy?			1
What is a Proxy Statement?			2
Who can vote?			3
What is the quorum requirement of the Annual Meeting?			4
What am I voting on?			5
What are the voting recommendations of the Board?			6
What if other matters are presented for determination at the Annual Meeting?			7
What vote is required to elect the Directors?			8
What shares are covered by my proxy card?			9
What is the difference between holding shares as a shareholder of record and as a beneficial owner?			10
How do I vote?			11
What is the effect of not voting?			12
What can I do if I change my mind after I vote my shares?			13
How do participants in the Handleman Company 401(k) Plan vote their shares?			14
How do shareholders of record vote their shares if they are also participants in the Handleman Company 401(k) Plan?			15
What does it mean if I get more than one proxy card?			16
Will there be a management presentation at the Annual Meeting?			17
Who can attend the Annual Meeting?			18
What do I need to attend the Annual Meeting?			19
Can I bring a guest?			20
Who will count the vote?			21
How much did this proxy solicitation cost?			22
How do I recommend someone to be a candidate for election as a Director at the 2008 Annual Meeting?			23
When are shareholder proposals due for the 2008 Annual Meeting?			24
Where can I find a copy of the Audit Committee Charter, Corporate Governance and Nominating Committee Charter, Compensation Committee Charter, Corporate Governance Guidelines and Code of Business Conduct and Ethics for Handleman Company?			25
Can I access the Proxy Statement and 2007 annual report on the Internet instead of receiving paper copies?			26
How do I obtain more information about Handleman Company?			27

1. Q:

What is a proxy?

A:

A proxy is another person that you legally designate to vote your shares. If you designate someone as your proxy in a written document that document is also called a proxy or proxy card.

2. Q:

What is a Proxy Statement?

A:

It is a document that SEC regulations require Handleman Company to give to you when we ask you to sign a proxy card to vote your shares at the Annual Meeting. The Proxy Statement summarizes the information you need to know to intelligently vote your shares.

3. Q:

Who can vote?

A:

You can vote at the Annual Meeting if you were a shareholder of record as of the close of business on July 9, 2007. If you own the Company’s Common Stock, then you are entitled to one vote per share.

4. Q:

What is the quorum requirement of the Annual Meeting?

A:

A majority of the outstanding shares on July 9, 2007 constitutes a quorum for voting at the Annual Meeting. If you vote or attend the meeting, your shares will be part of the quorum. On the record date, 20,449,040 shares of Handleman Company’s Common Stock were outstanding.

5. Q:

What am I voting on?

A:

You are voting on the:

	(1)		proposal to elect five nominees for Director: Robert E. Kirby and Adam D. Sexton for two-year terms expiring in 2009, and Elizabeth A. Chappell, Ralph J. Szygenda and Thomas S. Wilson for three-year terms expiring in 2010, and
	(2)		ratification of the appointment PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm.

6. Q:

What are the voting recommendations of the Board?

A:

The Board of Directors is soliciting the proxy and recommends a vote “FOR” each of its Nominees for Directors and “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm.

7. Q:

What if other matters are presented for determination at the Annual Meeting?

A:

Other than the proposal to elect five nominees for Director and the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm, the Company does not expect any other matters to be presented for a vote at the Annual Meeting. If you grant a proxy, the proxy holders (Eugene A. Miller, James B. Nicholson and Lloyd E. Reuss) will use their judgment in voting your shares on other matters that may arise at the meeting.

8. Q:

What vote is required to elect the Directors?

A:

The five individuals who receive the most votes, even if not a majority, will be elected.

9. Q:

What shares are covered by my proxy card?

A:

The shares covered by your proxy card represent shares of Handleman Company stock that you own either as a:

	•		shareholder of record; or
	•		participant in the Handleman stock fund within the Company’s 401(k) Plan; or
	•		beneficial owner of shares held in street name.

10. Q:

What is the difference between holding shares as a shareholder of record and as a beneficial owner?

	A:		If your shares are registered directly in your name with Handleman Company’s transfer agent, BNY Mellon Shareholder Services, you are considered the “shareholder of record.” The Proxy Statement, 2007 annual report and proxy card have been sent directly to you by Handleman Company c/o BNY Mellon Shareholder Services.
			If your shares are held in a stock brokerage account or by a bank or other nominee, you are considered the “beneficial owner” of shares held in street name. The Proxy Statement and 2007 annual report have been forwarded to you by your broker, bank or nominee, which is considered the shareholder of record. As the beneficial owner, you have the right to direct your broker, bank or nominee how to vote your shares by using the voting instruction card included in the mailing or by following their instructions for voting by telephone or the Internet.

11. Q:

How do I vote?

A:

You may vote using any of the following methods:

	•		proxy card or voting instruction card. Be sure to sign and date the card and return it in the prepaid envelope. If you are a shareholder of record and you return your signed proxy card but do not indicate your voting preferences, the persons named in the proxy card will vote “FOR” the election of Directors and “FOR” the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm; or
	•		by telephone or the Internet. The telephone and Internet voting procedures established by Handleman Company for shareholders of record are designed to authenticate your identity, to allow you to give your voting instructions and to confirm that these instructions have been properly recorded. The availability of telephone and Internet voting for beneficial owners will depend on the voting process of your broker, bank or nominee. Therefore, we recommend that you follow the voting instructions in the materials you receive; or
	•		in person at the Annual Meeting. All shareholders may vote in person at the Annual Meeting. If you are a beneficial owner of shares, you must obtain a legal proxy from your broker, bank or nominee and present it to the inspector of election with your ballot when you vote at the meeting.

12. Q:

What is the effect of not voting?

	A:		It will depend on how your share ownership is registered. If you own shares as a shareholder of record and do not return a signed proxy card, your shares will not count toward the quorum and will not be voted.
			If you are a beneficial owner and do not vote, your broker may represent your shares at the meeting for purposes of obtaining a quorum. In the absence of your voting instructions, your broker may or may not vote your shares in its discretion depending on the proposals before the meeting.
			Your broker may vote your shares in its discretion and your shares will count toward the quorum requirement on “routine matters.” Regarding “non-routine matters,” your broker may not be able to vote your shares in its discretion. The election of Directors and the ratification of the appointment of the independent registered public accounting firm are routine matters on which brokers are permitted to vote on behalf of their clients if no voting instructions are furnished.

13. Q:

What can I do if I change my mind after I vote my shares?

A:

If you are a shareholder of record, you may revoke your proxy at any time before it is voted at the Annual Meeting by one of the following actions:

	•		send written notice of revocation to the Office of the Corporate Secretary, Handleman Company, 500 Kirts Boulevard, Troy, MI 48084; or
	•		submit a new proxy by telephone, Internet or paper ballot, after the date of the revoked proxy; or
	•		attend the Annual Meeting and vote in person.

If you are a beneficial owner of shares, you may submit new voting instructions by contacting your broker, bank or nominee. You may also vote in person at the Annual Meeting if you obtain a legal proxy as described in the answer to the previous question.

14. Q:

How do participants in the Handleman Company 401(k) Plan vote their shares?

	A:		As a participant in the Handleman Company 401(k) Plan, you have the right to direct Fidelity Management Trust Company how to vote the shares of Handleman Company credited to your account.
			You have been sent a Proxy Statement, 2007 annual report and proxy card from Handleman Company c/o BNY Mellon Shareholder Services. BNY Mellon Shareholder Services will transmit your voting instructions to Fidelity Management Trust Company who will vote the shares on your behalf.
			The shares credited to your account will be voted as directed; if the proxy card is not received by August 31, 2007 the shares credited to your account will not be voted.

15. Q:

How do shareholders of record vote their shares if they are also participants in the Handleman Company 401(k) Plan?

	A:		Shareholders of record who also own shares in the Handleman Company 401(k) Plan and maintain the same registration for both accounts will receive one proxy card for their total shares. The Proxy Statement, 2007 annual report and proxy card have been sent directly to you by Handleman Company c/o BNY Mellon Shareholder Services.
			For the shares credited to your 401(k) Plan account, BNY Mellon Shareholder Services will transmit your voting instructions to Fidelity Management Trust Company, who will vote the shares on your behalf. The shares will be voted as directed; if your proxy card is not received by August 31, 2007, the shares credited to your 401(k) Plan account will not be voted.

16. Q:

What does it mean if I get more than one proxy card?

	A:		It means your shares are in more than one account. You should vote the shares on all your proxy cards. If you are shareholder of record we encourage you to have all your shares registered in the same name and address.
			To register all your shares in the same name or if you have other questions about your stock holdings please contact BNY Mellon Shareholder Services by telephone by calling:

U.S. Shareholders:		(800) 851-1713
TDD for U.S. Hearing Impaired Shareholders:		(800) 231-5469
Foreign Shareholders:		(201) 680-6578
TDD for Foreign Hearing Impaired Shareholders:		(201) 680-6610

If you wish to communicate with BNY Mellon Shareholder Services by e-mail you can do so by contacting them at shrrelations@melloninvestor.com. Shareholders can view their certificate history or make address changes on BNY Mellon Shareholder Services website www.melloninvestor.com/ISD

17. Q:

Will there be a management presentation at the Annual Meeting?

A:

Stephen Strome, Chairman and Chief Executive Officer, will report on the performance of the Company during fiscal 2007 and respond to appropriate questions from shareholders.

18. Q:

Who can attend the Annual Meeting?

A:

All shareholders of record as of the close of business on July 9, 2007 can attend. Seating at the Annual Meeting will be on a first arrival basis.

19. Q:

What do I need to attend the Annual Meeting?

A:

To attend the Annual Meeting, please follow these instructions:

	•		to enter the Annual Meeting, bring your proof of ownership and identification; or
	•		if a broker or other nominee holds your shares, bring proof of your ownership with you to the Annual Meeting.

20. Q:

Can I bring a guest?

A:

Shareholders can bring a guest. Seating availability will be on a first arrival basis.

21. Q:

Who will count the vote?

A:

A representative of BNY Mellon Shareholder Services will tabulate the votes and act as inspector of election at the Annual Meeting.