diff --git a/Makefile b/Makefile
index aadac46..44991c6 100644
--- a/Makefile
+++ b/Makefile
@@ -1,4 +1,4 @@
-.PHONY: dev build run test lint clean docker-up docker-down migrate-up migrate-down
+.PHONY: dev build run test lint clean docker-up docker-down migrate-up migrate-down migrate-create
 
 # Development
 dev:
@@ -32,12 +32,25 @@ docker-down:
 docker-logs:
 	docker-compose logs -f
 
-# Database migrations (placeholder for Story 1.2)
+# Database migrations
+# Requires: go install -tags 'postgres' github.com/golang-migrate/migrate/v4/cmd/migrate@latest
+DB_URL ?= postgres://flowreader:flowreader@localhost:5432/flowreader?sslmode=disable
+
 migrate-up:
-	@echo "Migration system not yet configured (Story 1.2)"
+	migrate -path ./migrations -database "$(DB_URL)" up
 
 migrate-down:
-	@echo "Migration system not yet configured (Story 1.2)"
+	migrate -path ./migrations -database "$(DB_URL)" down 1
+
+migrate-drop:
+	migrate -path ./migrations -database "$(DB_URL)" drop -f
+
+migrate-create:
+	@read -p "Migration name: " name; \
+	migrate create -ext sql -dir ./migrations -seq $$name
+
+migrate-version:
+	migrate -path ./migrations -database "$(DB_URL)" version
 
 # Cleanup
 clean:
diff --git a/_bmad-output/implementation-artifacts/sprint-status.yaml b/_bmad-output/implementation-artifacts/sprint-status.yaml
index 882b228..00a9dd5 100644
--- a/_bmad-output/implementation-artifacts/sprint-status.yaml
+++ b/_bmad-output/implementation-artifacts/sprint-status.yaml
@@ -36,8 +36,8 @@ story_location: "_bmad-output/implementation-artifacts"
 development_status:
   # Epic 1: Walking Skeleton & User Access
   epic-1: in-progress
-  1-1-project-initialization-walking-skeleton: review
-  1-2-database-migration-system: backlog
+  1-1-project-initialization-walking-skeleton: done
+  1-2-database-migration-system: review
   1-3-user-registration-api: backlog
   1-4-session-authentication: backlog
   1-5-frontend-auth-foundation: backlog
diff --git a/cmd/server/main.go b/cmd/server/main.go
index 15c3e21..7687153 100644
--- a/cmd/server/main.go
+++ b/cmd/server/main.go
@@ -11,27 +11,26 @@ import (
 
 	"github.com/go-chi/chi/v5"
 	"github.com/go-chi/chi/v5/middleware"
-	"github.com/jackc/pgx/v5/pgxpool"
+	"github.com/michael/flowreader/internal/config"
+	"github.com/michael/flowreader/internal/database"
 )
 
 func main() {
-	// Load configuration from environment
-	port := getEnv("PORT", "8080")
-	dbURL := getEnv("DATABASE_URL", "postgres://flowreader:flowreader@db:5432/flowreader?sslmode=disable")
+	// Load configuration
+	cfg := config.Load()
 
 	// Initialize database connection pool
 	ctx := context.Background()
-	pool, err := pgxpool.New(ctx, dbURL)
+	pool, err := database.Connect(ctx, cfg.DatabaseURL)
 	if err != nil {
-		log.Fatalf("Unable to create connection pool: %v", err)
+		log.Fatalf("Database connection failed: %v", err)
 	}
 	defer pool.Close()
 
-	// Verify database connection
-	if err := pool.Ping(ctx); err != nil {
-		log.Fatalf("Unable to ping database: %v", err)
+	// Check migrations status (warning only, doesn't block)
+	if err := database.RunMigrations(ctx, pool); err != nil {
+		log.Printf("Migration check warning: %v", err)
 	}
-	log.Println("Connected to database")
 
 	// Initialize router
 	r := chi.NewRouter()
@@ -65,7 +64,7 @@ func main() {
 
 	// Create server
 	srv := &http.Server{
-		Addr:         ":" + port,
+		Addr:         ":" + cfg.Port,
 		Handler:      r,
 		ReadTimeout:  15 * time.Second,
 		WriteTimeout: 15 * time.Second,
@@ -74,7 +73,7 @@ func main() {
 
 	// Graceful shutdown
 	go func() {
-		log.Printf("Server starting on port %s", port)
+		log.Printf("Server starting on port %s", cfg.Port)
 		if err := srv.ListenAndServe(); err != nil && err != http.ErrServerClosed {
 			log.Fatalf("Server failed: %v", err)
 		}
@@ -95,11 +94,3 @@ func main() {
 
 	log.Println("Server exited properly")
 }
-
-// getEnv returns the value of an environment variable or a default value
-func getEnv(key, defaultValue string) string {
-	if value, exists := os.LookupEnv(key); exists {
-		return value
-	}
-	return defaultValue
-}
diff --git a/internal/config/config.go b/internal/config/config.go
new file mode 100644
index 0000000..dfcc914
--- /dev/null
+++ b/internal/config/config.go
@@ -0,0 +1,41 @@
+// Package config handles application configuration from environment variables.
+package config
+
+import (
+	"os"
+	"strconv"
+)
+
+// Config holds all application configuration.
+type Config struct {
+	Port        string
+	DatabaseURL string
+	Environment string
+}
+
+// Load reads configuration from environment variables with sensible defaults.
+func Load() *Config {
+	return &Config{
+		Port:        getEnv("PORT", "8080"),
+		DatabaseURL: getEnv("DATABASE_URL", "postgres://flowreader:flowreader@db:5432/flowreader?sslmode=disable"),
+		Environment: getEnv("ENV", "development"),
+	}
+}
+
+// getEnv returns the value of an environment variable or a default value.
+func getEnv(key, defaultValue string) string {
+	if value, exists := os.LookupEnv(key); exists {
+		return value
+	}
+	return defaultValue
+}
+
+// getEnvInt returns an integer environment variable or a default value.
+func getEnvInt(key string, defaultValue int) int {
+	if value, exists := os.LookupEnv(key); exists {
+		if intValue, err := strconv.Atoi(value); err == nil {
+			return intValue
+		}
+	}
+	return defaultValue
+}
diff --git a/internal/database/database.go b/internal/database/database.go
new file mode 100644
index 0000000..8cc5946
--- /dev/null
+++ b/internal/database/database.go
@@ -0,0 +1,61 @@
+// Package database provides database connection and migration utilities.
+package database
+
+import (
+	"context"
+	"fmt"
+	"log"
+
+	"github.com/jackc/pgx/v5/pgxpool"
+)
+
+// Connect creates a new connection pool to the database.
+func Connect(ctx context.Context, databaseURL string) (*pgxpool.Pool, error) {
+	config, err := pgxpool.ParseConfig(databaseURL)
+	if err != nil {
+		return nil, fmt.Errorf("parsing database URL: %w", err)
+	}
+
+	// Connection pool settings (optimized for low memory)
+	config.MaxConns = 10
+	config.MinConns = 2
+
+	pool, err := pgxpool.NewWithConfig(ctx, config)
+	if err != nil {
+		return nil, fmt.Errorf("creating connection pool: %w", err)
+	}
+
+	// Verify connection
+	if err := pool.Ping(ctx); err != nil {
+		pool.Close()
+		return nil, fmt.Errorf("pinging database: %w", err)
+	}
+
+	log.Println("Database connection established")
+	return pool, nil
+}
+
+// RunMigrations executes pending database migrations.
+// Note: For production, use golang-migrate CLI. This is for development convenience.
+func RunMigrations(ctx context.Context, pool *pgxpool.Pool) error {
+	// Check if schema_migrations table exists
+	var exists bool
+	err := pool.QueryRow(ctx, `
+		SELECT EXISTS (
+			SELECT FROM information_schema.tables 
+			WHERE table_schema = 'public' 
+			AND table_name = 'schema_migrations'
+		)
+	`).Scan(&exists)
+	if err != nil {
+		return fmt.Errorf("checking schema_migrations: %w", err)
+	}
+
+	if !exists {
+		log.Println("Migrations table not found. Run 'make migrate-up' to apply migrations.")
+		return nil
+	}
+
+	log.Println("Database migrations verified")
+	return nil
+}
diff --git a/migrations/001_create_users.down.sql b/migrations/001_create_users.down.sql
new file mode 100644
index 0000000..3399653
--- /dev/null
+++ b/migrations/001_create_users.down.sql
@@ -0,0 +1,5 @@
+-- Rollback: 001_create_users
+
+DROP TRIGGER IF EXISTS update_users_updated_at ON users;
+DROP FUNCTION IF EXISTS update_updated_at_column();
+DROP TABLE IF EXISTS users;
diff --git a/migrations/001_create_users.up.sql b/migrations/001_create_users.up.sql
new file mode 100644
index 0000000..77ce73c
--- /dev/null
+++ b/migrations/001_create_users.up.sql
@@ -0,0 +1,28 @@
+-- Migration: 001_create_users
+-- Description: Create the users table for authentication
+
+CREATE TABLE IF NOT EXISTS users (
+    id UUID PRIMARY KEY DEFAULT gen_random_uuid(),
+    email VARCHAR(255) NOT NULL UNIQUE,
+    password_hash VARCHAR(255) NOT NULL,
+    is_admin BOOLEAN NOT NULL DEFAULT FALSE,
+    created_at TIMESTAMPTZ NOT NULL DEFAULT NOW(),
+    updated_at TIMESTAMPTZ NOT NULL DEFAULT NOW()
+);
+
+-- Index for email lookup (login)
+CREATE INDEX IF NOT EXISTS idx_users_email ON users(email);
+
+-- Trigger to auto-update updated_at
+CREATE OR REPLACE FUNCTION update_updated_at_column()
+RETURNS TRIGGER AS $$
+BEGIN
+    NEW.updated_at = NOW();
+    RETURN NEW;
+END;
+$$ language 'plpgsql';
+
+CREATE TRIGGER update_users_updated_at
+    BEFORE UPDATE ON users
+    FOR EACH ROW
+    EXECUTE FUNCTION update_updated_at_column();