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Net income has been in the red since at least 2006. They lost $151m in 2007, another $157m in 2008, $186m in 2009, and $109m in 2010. That's $603 million in losses over 4 years.
They've had financial difficulties since 2008, and their stock price utterly tanked after they were forced to take a high-interest loan in August 08 -- it hasn't gone above $5 since. They've had a couple of management changes as well, including one where execs opened up their golden parachute to collect seven-figure payments.
Ebooks also aren't that big a chunk of sales yet; they certainly weren't in 2007 when Borders started hemorrhaging money. I'm not sure they could afford to do much more than partner with Kobo, since building their own site and device would have driven them further in the hole and into debt.
I will amend my earlier position though -- over-expansion is just one of many reasons for their failure. Others include a bad balance sheet, massive debts, a major recession, revolving management, a bad outlook, and bad luck.
Their ebook strategy and timing certainly didn't help, but I don't see how even a great one would have saved them from bankruptcy.
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