##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


|           |  |                                                                                              |  | 
|---------- |  | -------------------------------------------------------------------------------------------- |  | 
|(MARK ONE) |  |                                                                                              |  | 
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934     |  | 
|          
|           |  | For the fiscal year ended January 28, 2006                                                   |  | 
|          
|           |  | OR                                                                                           |  | 
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 |  | 

For the transition period
from          to                   .


Commission File
Number 1-13740





BORDERS GROUP, INC.




|                                                                                     |  |                                                         
|------------------------------------------------------------------------------------ |  | --------------------------------------------------------
|Michigan
     (State or other jurisdiction of
    incorporation or organization)     |  | 38-3294588
     (I.R.S. Employer
    Identification No.)
|                                                                                    
|100 Phoenix Drive, Ann Arbor, Michigan
     (Address of principal executive offices) |  | 48108
     (Zip code)                                   

477-1100






|               |  |                                     
|-------------- |  | ------------------------------------
|Title of Class |  | Name of Exchange on which registered
|               |  |                                     
|Common Stock   |  | New York Stock Exchange             











S-K 10-K.






12b-2






DOCUMENTS INCORPORATED BY REFERENCE












---



##### 










BORDERS GROUP, INC. INDEX


|                                                                                        |  |                                                                                                                          |  |      |    | 
|--------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                        |  |                                                                                                                          |  | Page |   
|                                                                                        |  |                                                                                                                          |  |      |   
|PART I                                                                                  |  |                                                                                                                          |  |      |    | 
|Item 1.                                                                                 |  | Business                                                                                                                 |  |      | 2  | 
|Item 1A.                                                                                |  | Risk Factors                                                                                                             |  |      | 9  | 
|Item 1B.                                                                                |  | Unresolved Staff Comments                                                                                                |  |      | 12 | 
|Item 2.                                                                                 |  | Properties                                                                                                               |  |      | 12 | 
|Item 3.                                                                                 |  | Legal Proceedings                                                                                                        |  |      | 13 | 
|Item 4.                                                                                 |  | Submission of Matters to a Vote of Security
    Holders                                                                  |  |      | 15 | 
|PART II                                                                                 |  |                                                                                                                          |  |      |    | 
|Item 5.                                                                                 |  | Market for the Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |  |      | 15 | 
|Item 6.                                                                                 |  | Selected Financial Data                                                                                                  |  |      | 17 | 
|Item 7.                                                                                 |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |  |      | 18 | 
|Item 7A.                                                                                |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |  |      | 42 | 
|Item 8.                                                                                 |  | Financial Statements and Supplementary Data                                                                              |  |      | 44 | 
|Item 9.                                                                                 |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                 |  |      | 71 | 
|Item 9A.                                                                                |  | Controls and Procedures                                                                                                  |  |      | 71 | 
|Item 9B.                                                                                |  | Other Information                                                                                                        |  |      | 74 | 
|PART III                                                                                |  |                                                                                                                          |  |      |    | 
|Item 10.                                                                                |  | Directors and Executive Officers of the
    Registrant                                                                   |  |      | 74 | 
|Item 11.                                                                                |  | Executive Compensation                                                                                                   |  |      | 74 | 
|Item 12.                                                                                |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                       |  |      | 74 | 
|Item 13.                                                                                |  | Certain Relationships and Related
    Transactions                                                                       |  |      | 74 | 
|Item 14.                                                                                |  | Principal Accounting Fees and Services                                                                                   |  |      | 74 | 
|PART IV                                                                                 |  |                                                                                                                          |  |      |    | 
|Item 15.                                                                                |  | Exhibits, Financial Statement Schedules                                                                                  |  |      | 75 | 
|                                                                                        |  | Signatures                                                                                                               |  |      | 78 | 
|Subsidiaries of Registrant                                                             
|Consent of Ernst & Young LLP                                                           
|Statement of Gregory P. Josefowicz, Chairman, President and CEO Pursuant to Section 302
|Statement of Edward W. Wilhelm, Senior Vice President and CFO Pursuant to Section 302  
|Statement of Gregory P. Josefowicz, Chairman, President and CEO Pursuant to Section 906
|Statement of Edward W. Wilhelm, Senior Vice President and CFO Pursuant to Section 906  





---



##### Table of Contents






PART I





Item 1. Business


Forward-Looking Statements




General




Segment Information




Domestic Borders Superstores




2



---



##### Table of Contents















|                     |  |           |    | 
|-------------------- |  | --------- | -- | 
|                     |  | Number of |   
|State                |  | Stores    |   
|                     |  |           |   
|Alaska               |  |           | 1  | 
|Arizona              |  |           | 11 | 
|California           |  |           | 76 | 
|Colorado             |  |           | 13 | 
|Connecticut          |  |           | 8  | 
|Delaware             |  |           | 2  | 
|District of Columbia |  |           | 3  | 
|Florida              |  |           | 25 | 
|Georgia              |  |           | 15 | 
|Hawaii               |  |           | 7  | 
|Idaho                |  |           | 2  | 
|Illinois             |  |           | 35 | 
|Indiana              |  |           | 11 | 
|Iowa                 |  |           | 4  | 
|Kansas               |  |           | 7  | 
|Kentucky             |  |           | 5  | 
|Louisiana            |  |           | 1  | 
|Maine                |  |           | 2  | 
|Maryland             |  |           | 12 | 
|Massachusetts        |  |           | 11 | 

3



---



##### Table of Contents



|               |  |           |     | 
|-------------- |  | --------- | --- | 
|               |  | Number of |    
|State          |  | Stores    |    
|               |  |           |    
|Michigan       |  |           | 17  | 
|Minnesota      |  |           | 8   | 
|Mississippi    |  |           | 1   | 
|Missouri       |  |           | 9   | 
|Montana        |  |           | 3   | 
|Nebraska       |  |           | 2   | 
|Nevada         |  |           | 6   | 
|New Hampshire  |  |           | 4   | 
|New Jersey     |  |           | 16  | 
|New Mexico     |  |           | 5   | 
|New York       |  |           | 26  | 
|North Carolina |  |           | 8   | 
|Ohio           |  |           | 18  | 
|Oklahoma       |  |           | 4   | 
|Oregon         |  |           | 7   | 
|Pennsylvania   |  |           | 21  | 
|Rhode Island   |  |           | 2   | 
|South Dakota   |  |           | 1   | 
|Tennessee      |  |           | 6   | 
|Texas          |  |           | 21  | 
|Utah           |  |           | 4   | 
|Vermont        |  |           | 1   | 
|Virginia       |  |           | 14  | 
|Washington     |  |           | 11  | 
|West Virginia  |  |           | 1   | 
|Wisconsin      |  |           | 6   | 
|               |  |           |    
|Total          |  |           | 473 | 
|               |  |           |    



Waldenbooks Specialty Retail Stores








|                     |  |           |    | 
|-------------------- |  | --------- | -- | 
|                     |  | Number of |   
|State                |  | Stores    |   
|                     |  |           |   
|Alabama              |  |           | 3  | 
|Alaska               |  |           | 5  | 
|Arizona              |  |           | 9  | 
|Arkansas             |  |           | 5  | 
|California           |  |           | 51 | 
|Colorado             |  |           | 10 | 
|Connecticut          |  |           | 14 | 
|Delaware             |  |           | 2  | 
|District of Columbia |  |           | 1  | 
|Florida              |  |           | 41 | 
|Georgia              |  |           | 16 | 
|Hawaii               |  |           | 8  | 
|Idaho                |  |           | 3  | 
|Illinois             |  |           | 31 | 
|Indiana              |  |           | 15 | 
|Iowa                 |  |           | 9  | 
|Kansas               |  |           | 5  | 
|Kentucky             |  |           | 11 | 
|Louisiana            |  |           | 5  | 
|Maine                |  |           | 2  | 
|Maryland             |  |           | 19 | 
|Massachusetts        |  |           | 24 | 
|Michigan             |  |           | 28 | 
|Minnesota            |  |           | 6  | 

4



---



##### Table of Contents



|               |  |           |     | 
|-------------- |  | --------- | --- | 
|               |  | Number of |    
|State          |  | Stores    |    
|               |  |           |    
|Mississippi    |  |           | 4   | 
|Missouri       |  |           | 12  | 
|Montana        |  |           | 4   | 
|Nebraska       |  |           | 5   | 
|Nevada         |  |           | 4   | 
|New Hampshire  |  |           | 5   | 
|New Jersey     |  |           | 23  | 
|New Mexico     |  |           | 2   | 
|New York       |  |           | 39  | 
|North Carolina |  |           | 19  | 
|North Dakota   |  |           | 3   | 
|Ohio           |  |           | 35  | 
|Oklahoma       |  |           | 10  | 
|Oregon         |  |           | 8   | 
|Pennsylvania   |  |           | 51  | 
|Rhode Island   |  |           | 3   | 
|South Carolina |  |           | 11  | 
|South Dakota   |  |           | 2   | 
|Tennessee      |  |           | 10  | 
|Texas          |  |           | 38  | 
|Utah           |  |           | 4   | 
|Vermont        |  |           | 3   | 
|Virginia       |  |           | 25  | 
|Washington     |  |           | 14  | 
|West Virginia  |  |           | 8   | 
|Wisconsin      |  |           | 11  | 
|Wyoming        |  |           | 2   | 
|               |  |           |    
|Total          |  |           | 678 | 
|               |  |           |    



International Stores






|               |  |           |    | 
|-------------- |  | --------- | -- | 
|               |  | Number of |   
|Country        |  | Stores    |   
|               |  |           |   
|Australia      |  |           | 14 | 
|New Zealand    |  |           | 2  | 
|Puerto Rico    |  |           | 3  | 
|Singapore      |  |           | 1  | 
|United Kingdom |  |           | 35 | 
|               |  |           |   
|Total          |  |           | 55 | 
|               |  |           |   





5



---



##### Table of Contents





Internet






Distribution






6



---



##### Table of Contents





|                             |  |        |    |  |                |  |           | 
|---------------------------- |  | ------ | -- |  | -------------- |  | --------- | 
|Locality, Country            |  | Number |    |  | Square Footage | 
|                             |  |        |    |  |                | 
|Bedfordshire, United Kingdom |  |        | 1  |  |                |  | 67,000    | 
|California, United States    |  |        | 1  |  |                |  | 414,000   | 
|Cornwall, United Kingdom     |  |        | 1  |  |                |  | 25,000    | 
|Indiana, United States       |  |        | 1  |  |                |  | 96,000    | 
|Kuala Lumpur, Malaysia       |  |        | 1  |  |                |  | 4,200     | 
|Melbourne, Australia         |  |        | 1  |  |                |  | 35,300    | 
|Ohio, United States          |  |        | 1  |  |                |  | 172,000   | 
|Pennsylvania, United States  |  |        | 1  |  |                |  | 115,000   | 
|Puerto Rico                  |  |        | 1  |  |                |  | 700       | 
|Singapore                    |  |        | 1  |  |                |  | 8,200     | 
|St. Columb, United Kingdom   |  |        | 1  |  |                |  | 50,000    | 
|Tennessee, United States     |  |        | 3  |  |                |  | 926,000   | 
|                             |  |        |    |  |                | 
|Total                        |  |        | 14 |  |                |  | 1,913,400 | 
|                             |  |        |    |  |                | 



state-of


Employees




Trademarks and Service Marks


® ® ® ® sm ® ® ® ® ® ®


7



---



##### Table of Contents



Executive Officers of the Company




|                      |  |     |  |                                                                                            
|--------------------- |  | --- |  | -------------------------------------------------------------------------------------------
|Name                  |  | Age |  | Position                                                                                   
|                      |  |     |  |                                                                                            
|Gregory P. Josefowicz |  | 53  |  | Chairman, President and Chief Executive Officer                                            
|Vincent E. Altruda    |  | 56  |  | President, Borders Group U.S.                                                              
|Cedric J. Vanzura     |  | 42  |  | President, Borders Group International, Paperchase Worldwide and
    Information Technology
|Thomas D. Carney      |  | 59  |  | Senior Vice President, General Counsel and Secretary                                       
|Daniel T. Smith       |  | 41  |  | Senior Vice President, Human Resources                                                     
|Edward W. Wilhelm     |  | 47  |  | Senior Vice President, Chief Financial Officer                                             













Additional Information


10-K, 10-Q, 8-K


8



---



##### Table of Contents





48108-2202.


10-K





Item 1A. Risk Factors


Risk Factors




Expansion Strategy








9



---



##### Table of Contents









Waldenbooks




Seasonality




Competition




pre-recorded


10



---



##### Table of Contents





Consumer Spending Patterns




Foreign Exchange Risk




Potential for Uninsured Losses and/or Claims




Changes to Information Technology Systems May Disrupt the
Supply Chain




Distribution and Logistics Network




11



---



##### Table of Contents





Planned Retirement of Mr. Josefowicz; Reliance on Key
Personnel




Other Risks







Item 1B. Unresolved Staff Comments







Item 2. Properties




|                                                                     |  |           |     | 
|-------------------------------------------------------------------- |  | --------- | --- | 
|                                                                     |  | Number of |    
|Lease Terms to Expire During 12 Months Ending on or About January 31 |  | Stores    |    
|                                                                     |  |           |    
|2007                                                                 |  |           | 4   | 
|2008                                                                 |  |           | 8   | 
|2009                                                                 |  |           | 11  | 
|2010                                                                 |  |           | 13  | 
|2011                                                                 |  |           | 17  | 
|2012 and later                                                       |  |           | 420 | 
|                                                                     |  |           |    
|Total                                                                |  |           | 473 | 
|                                                                     |  |           |    



12



---



##### Table of Contents





|                                                                     |  |           |     | 
|-------------------------------------------------------------------- |  | --------- | --- | 
|                                                                     |  | Number of |    
|Lease Terms to Expire During 12 Months Ending on or About January 31 |  | Stores    |    
|                                                                     |  |           |    
|2007                                                                 |  |           | 410 | 
|2008                                                                 |  |           | 92  | 
|2009                                                                 |  |           | 87  | 
|2010                                                                 |  |           | 53  | 
|2011                                                                 |  |           | 24  | 
|2012 and later                                                       |  |           | 12  | 
|                                                                     |  |           |    
|Total                                                                |  |           | 678 | 
|                                                                     |  |           |    



|                                                                     |  |           |    | 
|-------------------------------------------------------------------- |  | --------- | -- | 
|                                                                     |  | Number of |   
|Lease Terms to Expire During 12 Months Ending on or About January 31 |  | Stores    |   
|                                                                     |  |           |   
|2007                                                                 |  |           |   | 
|2008                                                                 |  |           |   | 
|2009                                                                 |  |           | 2  | 
|2010                                                                 |  |           |   | 
|2011                                                                 |  |           |   | 
|2012 and later                                                       |  |           | 53 | 
|                                                                     |  |           |   
|Total                                                                |  |           | 55 | 
|                                                                     |  |           |   








Item 3. Legal Proceedings




13



---



##### Table of Contents









14



---



##### Table of Contents






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







PART II







|        |                                                                                                                 
|------- | ----------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity Securities



|                    |                |      |   |       |     |           |   |          |  |  |   |      | 
|------------------- | -------------- | ---- | - | ----- | --- | --------- | - | -------- |  |  | - | ---- | 
|                    |                |      |   |       |     | Dividends |  
|                    |                | High |   |       | Low |           |   | Declared | 
|                    |                |      |   |       |     |           |   |          | 
|Fiscal Quarter 2005 |                |      |   |       |     |           |   |          |  |  |   |     
|                    | First Quarter  |      | $ | 27.47 |     |           | $ | 23.59    |  |  | $ | 0.09 | 
|                    | Second Quarter |      | $ | 26.20 |     |           | $ | 23.92    |  |  | $ | 0.09 | 
|                    | Third Quarter  |      | $ | 25.30 |     |           | $ | 18.96    |  |  | $ | 0.09 | 
|                    | Fourth Quarter |      | $ | 24.70 |     |           | $ | 18.71    |  |  | $ | 0.10 | 
|Fiscal Quarter 2004 |                |      |   |       |     |           |   |          |  |  |   |     
|                    | First Quarter  |      | $ | 25.21 |     |           | $ | 21.27    |  |  | $ | 0.08 | 
|                    | Second Quarter |      | $ | 24.94 |     |           | $ | 22.09    |  |  | $ | 0.08 | 
|                    | Third Quarter  |      | $ | 25.22 |     |           | $ | 21.42    |  |  | $ | 0.08 | 
|                    | Fourth Quarter |      | $ | 26.30 |     |           | $ | 21.95    |  |  | $ | 0.09 | 









|                                |                                      |                |  |     |                   |           |  |              |  |  |  |       | 
|------------------------------- | ------------------------------------ | -------------- |  | --- | ----------------- | --------- |  | ------------ |  |  |  | ----- | 
|                                |                                      |                |  |     |                   | Number of | 
|                                |                                      | Number of      |  |     | Weighted-         |           |  | Shares       | 
|                                |                                      | Awards         |  |     | Average           |           |  | Available    | 
|                                |                                      | Outstanding(2) |  |     | Exercise Price(3) |           |  | for Issuance | 
|Plan Category                   |                                      |                |  |     |                   |           |  |              | 
|Plans approved by stockholders: |                                      |                |  |     |                   |           |  |              |  |  |  |      
|                                | 2004 Long-Term Incentive
    Plan(1) |                |  | 517 |                   |           |  | 23.80        |  |  |  | 3,841 | 



|    |                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2004 Long-Term Incentive Plan (the 2004 Plan)
    was approved by shareholders in May 2004, and replaced all prior
    equity compensation plans (the Prior Plans). At
    January 28, 2006, there were approximately 6.3 million
    stock options outstanding under the Prior Plans with a
    weighted-average

15



---



##### Table of Contents



|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|    | exercise price of $22.98, which, if forfeited or cancelled,
    become available for issuance under the 2004 Plan.                                       
|   
|(2) | Number of awards outstanding as of January 28, 2006
    includes approximately 473,741 restricted share units and
    approximately 43,080 stock options.
|   
|(3) | Reflects the weighted-average exercise price of stock options
    outstanding as of January 28, 2006 only.                                               



|                                                |  |           |           |  |              |                  |       |                     |                 |  |                  |  |  |   |             | 
|----------------------------------------------- |  | --------- | --------- |  | ------------ | ---------------- | ----- | ------------------- | --------------- |  | ---------------- |  |  | - | ----------- | 
|                                                |  |           |           |  |              |                  |       | Approximate         |                
|                                                |  |           |           |  |              | Total Number of  |       |                     | Dollar Value of | 
|                                                |  |           |           |  |              | Shares Purchased |       |                     | Shares that May | 
|                                                |  | Total     |           |  | Average      |                  |       | as Part of Publicly |                 |  | Yet Be Purchased | 
|                                                |  | Number of |           |  | Price Paid   |                  |       | Announced Plans     |                 |  | Under the Plans  | 
|Fiscal Period                                   |  | Shares    |           |  | per Share(1) |                  |       | or Programs(2)      |                 |  | or Programs      | 
|                                                |  |           |           |  |              |                  |       |                     |                 |  |                  | 
|October 23, 2005 through
    November 19, 2005  |  |           | 1,367,900 |  |              | $                | 19.34 |                     |                 |  | 1,367,900        |  |  | $ | 72,975,125  | 
|November 20, 2005 through
    December 17, 2005 |  |           | 650,000   |  |              | $                | 21.12 |                     |                 |  | 650,000          |  |  | $ | 62,714,366  | 
|December 18, 2005 through
    January 28, 2006  |  |           | 2,464,700 |  |              | $                | 21.52 |                     |                 |  | 2,462,200        |  |  | $ | 246,058,387 | 
|                                                |  |           |           |  |              |                  |       |                     |                 |  |                  | 
|Total                                           |  |           | 4,482,600 |  |              | $                | 20.80 |                     |                 |  | 4,480,100        |  |  | $ | 246,058,387 | 
|                                                |  |           |           |  |              |                  |       |                     |                 |  |                  | 



|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Average price paid per share includes commissions and is rounded
    to the nearest two decimal places.                                 
|   
|(2) | On January 11, 2006, the Company announced that the Board
    of Directors authorized $250.0 million of potential share
    repurchases.

16



---



##### Table of Contents



| | 
| | 
| | 

Item 6. Selected Financial Data


SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA




|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |         |  |  |   |         | 
|----------------------------------------------------------------------------- |  | ----------------- | ------- |  | -------- | - | ------- | -------- |  | - | -------- | - |  | -------- | ------- |  |  | - | ------- | 
|                                                                              |  | Fiscal Year Ended |        
|                                                                              |  |                   |        
|                                                                              |  | Jan. 28,          |         |  | Jan. 23, |   |         | Jan. 25, |  |   | Jan. 26, |   |  | Jan. 27, |        
|(dollars in millions except per share data)                                   |  | 2006(1)           |         |  | 2005     |   |         | 2004     |  |   | 2003     |   |  | 2002     |        
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Statement of Operations Data                                                  |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |         |  |  |   |         | 
|Domestic Borders superstore sales                                             |  | $                 | 2,709.5 |  |          | $ | 2,588.9 |          |  | $ | 2,470.2  |   |  | $        | 2,319.0 |  |  | $ | 2,234.1 | 
|Waldenbooks Specialty Retail sales                                            |  |                   | 744.8   |  |          |   | 779.9   |          |  |   | 820.9    |   |  |          | 852.2   |  |  |   | 902.1   | 
|International sales                                                           |  |                   | 576.4   |  |          |   | 510.7   |          |  |   | 407.5    |   |  |          | 314.9   |  |  |   | 251.7   | 
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Total sales                                                                   |  | $                 | 4,030.7 |  |          | $ | 3,879.5 |          |  | $ | 3,698.6  |   |  | $        | 3,486.1 |  |  | $ | 3,387.9 | 
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Operating income                                                              |  | $                 | 173.4   |  |          | $ | 216.7   |          |  | $ | 198.1    |   |  | $        | 187.6   |  |  | $ | 146.7   | 
|Income from continuing operations                                             |  | $                 | 101.0   |  |          | $ | 131.9   |          |  | $ | 117.3    |   |  | $        | 107.6   |  |  | $ | 80.9    | 
|Cumulative effect of accounting change (net of tax)                           |  |                   |        |  |          |   |        |          |  |   | 2.1      |   |  |          |        |  |  |   |        | 
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Net income                                                                    |  | $                 | 101.0   |  |          | $ | 131.9   |          |  | $ | 115.2    |   |  | $        | 107.6   |  |  | $ | 80.9    | 
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Per Share Data                                                                |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |         |  |  |   |         | 
|Diluted earnings per common share from continuing operations                  |  | $                 | 1.42    |  |          | $ | 1.69    |          |  | $ | 1.48     |   |  | $        | 1.31    |  |  | $ | 0.98    | 
|Diluted loss per common share from cumulative effect of
    accounting change |  |                   |        |  |          |   |        |          |  |   | (0.02    | ) |  |          |        |  |  |   |        | 
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Diluted earnings per common share                                             |  | $                 | 1.42    |  |          | $ | 1.69    |          |  | $ | 1.46     |   |  | $        | 1.31    |  |  | $ | 0.98    | 
|                                                                              |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |        
|Cash dividends declared per common share                                      |  | $                 | 0.37    |  |          | $ | 0.33    |          |  | $ | 0.08     |   |  | $        |        |  |  | $ |        | 
|Balance Sheet Data                                                            |  |                   |         |  |          |   |         |          |  |   |          |   |  |          |         |  |  |   |         | 
|Working capital                                                               |  | $                 | 326.7   |  |          | $ | 569.4   |          |  | $ | 556.0    |   |  | $        | 463.0   |  |  | $ | 342.8   | 
|Total assets                                                                  |  | $                 | 2,572.2 |  |          | $ | 2,628.8 |          |  | $ | 2,584.6  |   |  | $        | 2,378.0 |  |  | $ | 2,285.6 | 
|Short-term borrowings                                                         |  | $                 | 206.4   |  |          | $ | 141.0   |          |  | $ | 140.7    |   |  | $        | 112.1   |  |  | $ | 81.6    | 
|Long-term debt, including current portion                                     |  | $                 | 5.6     |  |          | $ | 55.9    |          |  | $ | 57.3     |   |  | $        | 50.0    |  |  | $ |        | 
|Long-term capital lease obligations, including current portion                |  | $                 | 0.5     |  |          | $ | 0.1     |          |  | $ | 0.4      |   |  | $        | 19.6    |  |  | $ | 51.4    | 
|Stockholders equity                                                          |  | $                 | 927.8   |  |          | $ | 1,088.9 |          |  | $ | 1,100.6  |   |  | $        | 984.0   |  |  | $ | 908.2   | 



|    |                                                      
|--- | -----------------------------------------------------
|(1) | The Companys 2005 fiscal year consisted of 53 weeks.

17



---



##### Table of Contents



| | 
| | 
| | 



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

General










18



---



##### Table of Contents















19



---



##### Table of Contents



Results of Operations




|                                                    |                                                      |          |       |       |          |  |       |          |   |  |       |       |  
|--------------------------------------------------- | ---------------------------------------------------- | -------- | ----- | ----- | -------- |  | ----- | -------- | - |  | ----- | ----- | -
|                                                    |                                                      | Jan. 28, |       |       | Jan. 23, |  |       | Jan. 25, |  
|                                                    |                                                      | 2006     |       |       | 2005     |  |       | 2004     |  
|                                                    |                                                      |          |       |       |          |  |       |          |  
|Sales                                               |                                                      |          | 100.0 | %     |          |  | 100.0 | %        |   |  | 100.0 | %    
|Other revenue                                       |                                                      |          | 1.2   |       |          |  | 1.3   |          |   |  | 1.8   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Total revenue                                        |          |       | 101.2 |          |  |       | 101.3    |   |  |       | 101.8 |  
|Cost of merchandise sold (includes occupancy)       |                                                      |          | 72.9  |       |          |  | 72.5  |          |   |  | 73.0  |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Gross margin                                         |          |       | 28.3  |          |  |       | 28.8     |   |  |       | 28.8  |  
|Selling, general and administrative expenses        |                                                      |          | 23.6  |       |          |  | 22.9  |          |   |  | 22.8  |      
|Legal settlement expense                            |                                                      |          |      |       |          |  |      |          |   |  | 0.1   |      
|Pre-opening expense                                 |                                                      |          | 0.2   |       |          |  | 0.1   |          |   |  | 0.2   |      
|Asset impairments and other writedowns              |                                                      |          | 0.2   |       |          |  | 0.2   |          |   |  | 0.3   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Operating income                                     |          |       | 4.3   |          |  |       | 5.6      |   |  |       | 5.4   |  
|Interest expense                                    |                                                      |          | 0.4   |       |          |  | 0.2   |          |   |  | 0.2   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Income before income tax                             |          |       | 3.9   |          |  |       | 5.4      |   |  |       | 5.2   |  
|Income tax                                          |                                                      |          | 1.4   |       |          |  | 2.0   |          |   |  | 2.0   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Income before cumulative effect of accounting change |          |       | 2.5   |          |  |       | 3.4      |   |  |       | 3.2   |  
|Cumulative effect of accounting change (net of tax) |                                                      |          |      |       |          |  |      |          |   |  | 0.1   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Net income                                           |          |       | 2.5   | %        |  |       | 3.4      | % |  |       | 3.1   | %
|                                                    |                                                      |          |       |       |          |  |       |          |  

Consolidated Results  Comparison of 2005 to 2004


Sales




th




20



---



##### Table of Contents









Other Revenue




12-month




Gross Margin




21



---



##### Table of Contents





Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Interest Expense




Taxes




Net Income




22



---



##### Table of Contents



Consolidated Results  Comparison of 2004 to
2003


Sales




th








Other Revenue






23



---



##### Table of Contents





Gross Margin






Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






24



---



##### Table of Contents





Interest Expense




Taxes




Cumulative Effect of Accounting Change




Net Income




Segment Results






Domestic Borders Superstores


|                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | 2005 |         |   | 2004 |   |         | 2003 | 
|                             |  |      |         |   |      |   |         |      | 
|(dollar amounts in millions) |  |      |         |   |     
|Sales                        |  | $    | 2,709.5 |   |      | $ | 2,588.9 |      |  | $ | 2,470.2 |  
|Other revenue                |  | $    | 32.8    |   |      | $ | 28.7    |      |  | $ | 33.7    |  
|Net income                   |  | $    | 115.3   |   |      | $ | 112.0   |      |  | $ | 97.3    |  
|Net income as % of sales     |  |      | 4.3     | % |      |   | 4.3     | %    |  |   | 3.9     | %
|Depreciation expense         |  | $    | 84.5    |   |      | $ | 80.4    |      |  | $ | 79.5    |  
|Interest income              |  | $    | (14.4   | ) |      | $ | (5.4    | )    |  | $ | (1.9    | )
|Store openings               |  |      | 15      |   |      |   | 19      |      |  |   | 41      |  
|Store closings               |  |      | 4       |   |      |   | 2       |      |  |   |        |  
|Store count                  |  |      | 473     |   |      |   | 462     |      |  |   | 445     |  

25



---



##### Table of Contents



Domestic Borders Superstores  Comparison of 2005
to 2004


Sales




Other Revenue




Gross Margin






Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




26



---



##### Table of Contents



Interest Income




Net Income




Domestic Borders Superstores  Comparison of 2004
to 2003


Sales




Other Revenue




Gross Margin






Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






27



---



##### Table of Contents



Depreciation




Interest Income




Cumulative Effect of Accounting Change




Net Income




Effect of Terrorist Attacks on September 11,
2001








28



---



##### Table of Contents



Waldenbooks Specialty Retail


|                             |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | 2005 |       |   | 2004 |   |       | 2003 | 
|(dollar amounts in millions) |  |      |       |   |      |   |       |      | 
|Sales                        |  | $    | 744.8 |   |      | $ | 779.9 |      |  | $ | 820.9 |  
|Other revenue                |  | $    | 4.8   |   |      | $ | 17.4  |      |  | $ | 27.8  |  
|Net income                   |  | $    | 28.2  |   |      | $ | 41.5  |      |  | $ | 48.8  |  
|Net income as % of sales     |  |      | 3.8   | % |      |   | 5.3   | %    |  |   | 5.9   | %
|Depreciation expense         |  | $    | 18.2  |   |      | $ | 16.7  |      |  | $ | 18.5  |  
|Interest income              |  | $    | (43.8 | ) |      | $ | (42.2 | )    |  | $ | (38.8 | )
|Store openings               |  |      | 23    |   |      |   | 15    |      |  |   | 12    |  
|Store closings               |  |      | 50    |   |      |   | 43    |      |  |   | 74    |  
|Store count                  |  |      | 678   |   |      |   | 705   |      |  |   | 733   |  

Waldenbooks Specialty Retail  Comparison of 2005
to 2004


Sales




Other Revenue




Gross Margin






Selling, General and Administrative Expenses






29



---



##### Table of Contents



Asset Impairments and Other Writedowns




Depreciation




Interest Income




Net Income




Waldenbooks Specialty Retail  Comparison of 2004 to
2003


Sales


non-comparable


Other Revenue




Gross Margin






Selling, General and Administrative Expenses




30



---



##### Table of Contents





Asset Impairments and Other Writedowns






Depreciation




Interest Income




Net Income




International


|                                |                 |      |       |    |      |   |       |      |  |   |       |    | 
|------------------------------- | --------------- | ---- | ----- | -- | ---- | - | ----- | ---- |  | - | ----- | -- | 
|                                |                 | 2005 |       |    | 2004 |   |       | 2003 | 
|(dollar amounts in millions)    |                 |      |       |    |      |   |       |      |  |  
|Sales                           |                 | $    | 576.4 |    |      | $ | 510.7 |      |  | $ | 407.5 |   
|Other revenue                   |                 | $    | 10.9  |    |      | $ | 5.8   |      |  | $ | 4.1   |   
|Net income (loss)               |                 | $    | (7.8  | )  |      | $ | 5.6   |      |  | $ | (1.3  | ) 
|Net income (loss) as % of sales |                 |      | (1.4  | )% |      |   | 1.1   | %    |  |   | (0.3  | )%
|Depreciation expense            |                 | $    | 18.8  |    |      | $ | 15.8  |      |  | $ | 13.3  |   
|Interest expense                |                 | $    | 21.6  |    |      | $ | 19.1  |      |  | $ | 19.0  |   
|Superstores:                    |                 |      |       |    |      |   |       |      |  |   |       |   
|                                | Store openings  |      |       | 13 |      |   |       | 5    |  |   |       | 7  | 
|                                | Store count     |      |       | 55 |      |   |       | 42   |  |   |       | 37 | 
|Books etc.:                     |                 |      |       |    |      |   |       |      |  |   |       |   
|                                | Store openings  |      |       |   |      |   |       | 1    |  |   |       | 1  | 
|                                | Store closings  |      |       | 2  |      |   |       | 2    |  |   |       | 2  | 
|                                | Store count     |      |       | 33 |      |   |       | 35   |  |   |       | 36 | 
|Paperchase stand-alone stores:  |                 |      |       |    |      |   |       |      |  |   |       |   
|                                | Stores acquired |      |       |   |      |   |       | 11   |  |   |       |    | 
|                                | Store openings  |      |       | 4  |      |   |       | 3    |  |   |       |    | 
|                                | Store count     |      |       | 18 |      |   |       | 14   |  |   |       |    | 

31



---



##### Table of Contents



International  Comparison of 2005 to 2004


Sales




Other Revenue




Gross Margin






Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns




32



---



##### Table of Contents



Depreciation




Interest Expense




Net Income (Loss)






International  Comparison of 2004 to 2003


Sales




Other Revenue




Gross Margin






33



---



##### Table of Contents



Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




Interest Expense




Net Income






Corporate


|                             |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | 2005 |       |   | 2004 |   |       | 2003 | 
|                             |  |      |       |   |      |   |       |      | 
|(dollar amounts in millions) |  |      |       |   |      |  
|Interest expense             |  | $    | 50.9  |   |      | $ | 37.6  |      |  | $ | 30.4  |  
|Net loss                     |  | $    | (34.7 | ) |      | $ | (27.2 | )    |  | $ | (29.6 | )



Corporate  Comparison of 2005 to 2004




34



---



##### Table of Contents



Corporate  Comparison of 2004 to 2003




Liquidity and Capital Resources












35



---



##### Table of Contents

















36



---



##### Table of Contents









Off-Balance Sheet Arrangements






37



---



##### Table of Contents







Significant Contractual Obligations




|                            |  |             |       |          |           |   |       |           |  |   |            |  |  |       |         |  |  |   |         | 
|--------------------------- |  | ----------- | ----- | -------- | --------- | - | ----- | --------- |  | - | ---------- |  |  | ----- | ------- |  |  | - | ------- | 
|                            |  | Fiscal Year |      
|                            |  |             |       | 2011 and |           |   |      
|                            |  | 2006        |       |          | 2007-2008 |   |       | 2009-2010 |  |   | Thereafter |  |  | Total |        
|(dollars in millions)       |  |             |       |          |           |   |       |           |  |   |            |  |  |       |        
|Credit Agreement borrowings |  | $           | 153.6 |          |           | $ |      |           |  | $ |           |  |  | $     |        |  |  | $ | 153.6   | 
|Capital lease obligations   |  |             | 0.5   |          |           |   |      |           |  |   |           |  |  |       |        |  |  |   | 0.5     | 
|Operating lease obligations |  |             | 363.8 |          |           |   | 695.1 |           |  |   | 618.8      |  |  |       | 2,209.6 |  |  |   | 3,887.3 | 
|Senior guaranteed notes     |  |             | 50.0  |          |           |   |      |           |  |   |           |  |  |       |        |  |  |   | 50.0    | 
|Debt of consolidated VIEs   |  |             | 0.2   |          |           |   | 0.4   |           |  |   | 0.4        |  |  |       | 4.6     |  |  |   | 5.6     | 
|Other borrowings            |  |             | 3.1   |          |           |   |      |           |  |   |           |  |  |       |        |  |  |   | 3.1     | 
|                            |  |             |       |          |           |   |       |           |  |   |            |  |  |       |        
|Total                       |  | $           | 571.2 |          |           | $ | 695.5 |           |  | $ | 619.2      |  |  | $     | 2,214.2 |  |  | $ | 4,100.1 | 
|                            |  |             |       |          |           |   |       |           |  |   |            |  |  |       |        

Seasonality




|                        |                         |                           |       |      |      |   |       |         |   |   |         |       |   |   |         |       |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                        |                         | Fiscal 2005 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |      
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |      
|Sales                   |                         | $                         | 847.2 |      |      | $ | 891.6 |         |   | $ | 837.2   |       |   | $ | 1,454.7 |      
|Operating income (loss) |                         |                           | (6.2  | )    |      |   | 5.4   |         |   |   | (19.3   | )     |   |   | 193.5   |      
|% of full year:         |                         |                           |       |      |      |   |       |         |   |   |         |       |   |   |         |      
|                        | Sales                   |                           |       | 21.0 | %    |   |       | 22.1    | % |   |         | 20.8  | % |   |         | 36.1  | %
|                        | Operating income (loss) |                           |       | (3.6 | )    |   |       | 3.1     |   |   |         | (11.1 | ) |   |         | 111.6 |  

38



---



##### Table of Contents



|                        |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                         | Fiscal 2004 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                         | $                         | 830.8 |      |      | $ | 847.1 |         |   | $ | 833.3   |      |   | $ | 1,368.3 |     
|Operating income (loss) |                         |                           | 5.6   |      |      |   | 15.0  |         |   |   | 0.4     |      |   |   | 195.7   |     
|% of full year:         |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales                   |                           |       | 21.4 | %    |   |       | 21.8    | % |   |         | 21.5 | % |   |         | 35.3 | %
|                        | Operating income (loss) |                           |       | 2.6  |      |   |       | 6.9     |   |   |         | 0.2  |   |   |         | 90.3 |  

|                        |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                         | Fiscal 2003 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                         | $                         | 751.4 |      |      | $ | 826.9 |         |   | $ | 807.9   |      |   | $ | 1,312.4 |     
|Operating income (loss) |                         |                           | (8.0  | )    |      |   | 8.2   |         |   |   | 0.9     |      |   |   | 197.0   |     
|% of full year:         |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales                   |                           |       | 20.3 | %    |   |       | 22.4    | % |   |         | 21.8 | % |   |         | 35.5 | %
|                        | Operating income (loss) |                           |       | (4.0 | )    |   |       | 4.1     |   |   |         | 0.5  |   |   |         | 99.4 |  

Critical Accounting Policies and Estimates




Asset Impairments




Goodwill Impairment




39



---



##### Table of Contents





Inventory






Leases




Gift Cards




Advertising and Vendor Incentive Programs




02-16, 02-16),


40



---



##### Table of Contents







Income Taxes






New Accounting Guidance








41



---



##### Table of Contents









13-1, 13-1). 13-1 13-1 13-1




Related Party Transactions







Item 7A. Quantitative and Qualitative Disclosures
About Market Risk




Interest Rate Risk




42



---



##### Table of Contents









Foreign Currency Exchange Risk




43



---



##### Table of Contents






Item 8. Financial Statements and Supplementary
Data


INDEX TO FINANCIAL STATEMENTS


|                                                                                                                                                |  |      |    | 
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                                |  | Page |   
|                                                                                                                                                |  |      |   
|Consolidated Statements of Operations for
    the fiscal years ended January 28, 2006, January 23,
    2005, and January 25, 2004               |  |      | 45 | 
|Consolidated Balance Sheets as of
    January 28, 2006 and January 23, 2005                                                                     |  |      | 46 | 
|Consolidated Statements of Cash Flows for
    the fiscal years ended January 28, 2006, January 23,
    2005, and January 25, 2004               |  |      | 47 | 
|Consolidated Statements of
    Stockholders Equity for the fiscal years ended
    January 28, 2006, January 23, 2005, and
    January 25, 2004 |  |      | 48 | 
|Notes to Consolidated Financial
    Statements                                                                                                  |  |      | 49 | 
|Report of Independent Registered Public
    Accounting Firm                                                                                     |  |      | 70 | 

44



---



##### Table of Contents






CONSOLIDATED STATEMENTS OF OPERATIONS


(dollars in millions except per share data)


|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |       |      |         |         |       |      |      | 
|--------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | ---------- | ------------------------------------------ | -------- | ---- | ------- | -------- | ----- | ---- | ------- | ------- | ----- | ---- | ---- | 
|                                                    |                                                      | Fiscal Year Ended                                    |           
|                                                    |                                                      | Jan. 28,                                             |            |                                            | Jan. 23, |      |         | Jan. 25, |      
|                                                    |                                                      | 2006                                                 |            |                                            | 2005     |      |         | 2004     |      
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|Sales                                               |                                                      | $                                                    | 4,030.7    |                                            |          | $    | 3,879.5 |          |       | $    | 3,698.6 |        
|Other revenue                                       |                                                      |                                                      | 48.5       |                                            |          |      | 51.9    |          |       |      | 65.6    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    | Total revenue                                        |                                                      | $          | 4,079.2                                    |          |      | $       | 3,931.4  |       |      | $       | 3,764.2 |      
|Cost of merchandise sold (includes occupancy)       |                                                      |                                                      | 2,939.5    |                                            |          |      | 2,812.4 |          |       |      | 2,698.6 |        
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    | Gross margin                                         |                                                      |            | 1,139.7                                    |          |      |         | 1,119.0  |       |      |         | 1,065.6 |      
|Selling, general and administrative expenses        |                                                      |                                                      | 952.1      |                                            |          |      | 890.3   |          |       |      | 845.0   |        
|Legal settlement expense                            |                                                      |                                                      |           |                                            |          |      |        |          |       |      | 3.5     |        
|Pre-opening expense                                 |                                                      |                                                      | 7.6        |                                            |          |      | 4.8     |          |       |      | 7.0     |        
|Asset impairments and other writedowns              |                                                      |                                                      | 6.6        |                                            |          |      | 7.2     |          |       |      | 12.0    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    | Operating income                                     |                                                      |            | 173.4                                      |          |      |         | 216.7    |       |      |         | 198.1   |      
|Interest expense                                    |                                                      |                                                      | 14.3       |                                            |          |      | 9.1     |          |       |      | 8.7     |        
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    | Income before income tax                             |                                                      |            | 159.1                                      |          |      |         | 207.6    |       |      |         | 189.4   |      
|Income tax provision                                |                                                      |                                                      | 58.1       |                                            |          |      | 75.7    |          |       |      | 72.1    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    | Income before cumulative effect of accounting change |                                                      |            | 101.0                                      |          |      |         | 131.9    |       |      |         | 117.3   |      
|Cumulative effect of accounting change (net of tax) |                                                      |                                                      |           |                                            |          |      |        |          |       |      | 2.1     |        
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    |                                                      | Net income                                           |            | $                                          | 101.0    |      |         | $        | 131.9 |      |         | $       | 115.2 |     
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|Earnings (loss) per common share data (Note 2)      |                                                      |                                                      |            |                                            |          |      |         |          |       |      |         |        
|                                                    | Diluted:                                             |                                                      |            |                                            |          |      |         |          |       |      |         |         |      
|                                                    |                                                      | Income before cumulative effect of accounting change |            | $                                          | 1.42     |      |         | $        | 1.69  |      |         | $       | 1.48  |     
|                                                    |                                                      | Cumulative effect of accounting change (net of tax)  |            |                                            |         |      |         |          |      |      |         |         | (0.02 | )   
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    |                                                      |                                                      | Net income |                                            | $        | 1.42 |         |          | $     | 1.69 |         |         | $     | 1.46 |     
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    |                                                      |                                                      |            | Weighted-average common shares outstanding |          |      | 71.1    |          |       |      | 77.9    |         |       |      | 79.1 | 
|                                                    | Basic:                                               |                                                      |            |                                            |          |      |         |          |       |      |         |         |      
|                                                    |                                                      | Income before cumulative effect of accounting change |            | $                                          | 1.45     |      |         | $        | 1.72  |      |         | $       | 1.51  |     
|                                                    |                                                      | Cumulative effect of accounting change (net of tax)  |            |                                            |         |      |         |          |      |      |         |         | (0.03 | )   
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    |                                                      |                                                      | Net income |                                            | $        | 1.45 |         |          | $     | 1.72 |         |         | $     | 1.48 |     
|                                                    |                                                      |                                                      |            |                                            |          |      |         |          |      
|                                                    |                                                      |                                                      |            | Weighted-average common shares outstanding |          |      | 69.8    |          |       |      | 76.6    |         |       |      | 77.9 | 



45



---



##### Table of Contents






CONSOLIDATED BALANCE SHEETS


(dollars in millions except share amounts)


|                                                            |                                                                                                                                                                     |                                                                   |       |         |          |  |       |         |         | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----- | ------- | -------- |  | ----- | ------- | ------- | 
|                                                            |                                                                                                                                                                     | Fiscal Year Ended                                                 |      
|                                                            |                                                                                                                                                                     | Jan. 28,                                                          |       |         | Jan. 23, | 
|                                                            |                                                                                                                                                                     | 2006                                                              |       |         | 2005     | 
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|Assets                                                     
|Current assets:                                             |                                                                                                                                                                     |                                                                   |       |         |          |  |       |        
|                                                            | Cash and cash equivalents                                                                                                                                           |                                                                   | $     | 81.6    |          |  | $     | 244.8   |        
|                                                            | Investments                                                                                                                                                         |                                                                   |       |        |          |  |       | 95.4    |        
|                                                            | Merchandise inventories                                                                                                                                             |                                                                   |       | 1,405.9 |          |  |       | 1,306.9 |        
|                                                            | Accounts receivable and other current assets                                                                                                                        |                                                                   |       | 150.3   |          |  |       | 118.3   |        
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total current assets                                              |       |         | 1,637.8  |  |       |         | 1,765.4 | 
|Property and equipment, net                                 |                                                                                                                                                                     |                                                                   | 703.9 |         |          |  | 635.6 |        
|Other assets                                                |                                                                                                                                                                     |                                                                   | 79.7  |         |          |  | 84.8  |        
|Deferred income taxes                                       |                                                                                                                                                                     |                                                                   | 26.3  |         |          |  | 14.4  |        
|Goodwill                                                    |                                                                                                                                                                     |                                                                   | 124.5 |         |          |  | 128.6 |        
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total assets                                                      |       | $       | 2,572.2  |  |       | $       | 2,628.8 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                           
|Liabilities, Minority Interest and Stockholders
    Equity
|Current liabilities:                                        |                                                                                                                                                                     |                                                                   |       |         |          |  |       |        
|                                                            | Short-term borrowings and current portion of long-term debt                                                                                                         |                                                                   | $     | 207.1   |          |  | $     | 141.2   |        
|                                                            | Trade accounts payable                                                                                                                                              |                                                                   |       | 660.3   |          |  |       | 615.1   |        
|                                                            | Accrued payroll and other liabilities                                                                                                                               |                                                                   |       | 293.4   |          |  |       | 306.4   |        
|                                                            | Taxes, including income taxes                                                                                                                                       |                                                                   |       | 135.8   |          |  |       | 118.3   |        
|                                                            | Deferred income taxes                                                                                                                                               |                                                                   |       | 14.5    |          |  |       | 15.0    |        
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total current liabilities                                         |       |         | 1,311.1  |  |       |         | 1,196.0 | 
|Long-term debt                                              |                                                                                                                                                                     |                                                                   | 5.4   |         |          |  | 55.8  |        
|Other long-term liabilities                                 |                                                                                                                                                                     |                                                                   | 326.6 |         |          |  | 286.7 |        
|Commitments and contingencies (Note 11)                     |                                                                                                                                                                     |                                                                   |      |         |          |  |      |        
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total liabilities                                                 |       |         | 1,643.1  |  |       |         | 1,538.5 | 
|Minority interest                                           |                                                                                                                                                                     |                                                                   | 1.3   |         |          |  | 1.4   |        
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total liabilities and minority interest                           |       |         | 1,644.4  |  |       |         | 1,539.9 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|Stockholders equity:                                       |                                                                                                                                                                     |                                                                   |       |         |          |  |       |        
|                                                            | Common stock, 200,000,000 shares authorized; 64,149,397 and
    73,875,627 shares issued and outstanding at January 28,
    2006 and January 23, 2005, respectively |                                                                   |       | 294.3   |          |  |       | 525.1   |        
|                                                            | Deferred compensation                                                                                                                                               |                                                                   |       | (0.4    | )        |  |       | (0.5    | )      
|                                                            | Accumulated other comprehensive income                                                                                                                              |                                                                   |       | 19.4    |          |  |       | 25.3    |        
|                                                            | Retained earnings                                                                                                                                                   |                                                                   |       | 614.5   |          |  |       | 539.0   |        
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total stockholders equity                                        |       |         | 927.8    |  |       |         | 1,088.9 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 
|                                                            |                                                                                                                                                                     | Total liabilities, minority interest and stockholders
    equity |       | $       | 2,572.2  |  |       | $       | 2,628.8 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |         |          | 



46



---



##### Table of Contents






CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars in millions)


|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |        |       |       |        |        |       | 
|------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------- | ------ | -------- | ----- | ----- | -------- | ------ | ----- | ----- | ------ | ------ | ----- | 
|                                                 |                                                                         | Fiscal Year Ended                                            |                                
|                                                 |                                                                         | Jan. 28,                                                     |                                 |        | Jan. 23, |       |       | Jan. 25, |       
|                                                 |                                                                         | 2006                                                         |                                 |        | 2005     |       |       | 2004     |       
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Cash provided by (used for):                     |                                                                         |                                                              |                                 |        |          |       |       |          |        |       |       |       
|Operations                                       |                                                                         |                                                              |                                 |        |          |       |       |          |        |       |       |       
|                                                 | Net income                                                              |                                                              | $                               | 101.0  |          |       | $     | 131.9    |        |       | $     | 115.2  |       
|                                                 | Adjustments to reconcile net income to operating cash flows:            |                                                              |                                 |        |          |       |       |          |        |       |       |        |       
|                                                 |                                                                         | Depreciation                                                 |                                 |        | 121.5    |       |       |          | 112.9  |       |       |        | 111.3  |      
|                                                 |                                                                         | Gain on deconsolidation of variable interest entities        |                                 |        |         |       |       |          | (2.9   | )     |       |        |       |      
|                                                 |                                                                         | Gain on sale of investments                                  |                                 |        | (1.2     | )     |       |          |       |       |       |        |       |      
|                                                 |                                                                         | Loss on disposal of assets                                   |                                 |        | 5.3      |       |       |          | 2.4    |       |       |        |       |      
|                                                 |                                                                         | (Increase) decrease in deferred income taxes                 |                                 |        | (13.0    | )     |       |          | 12.6   |       |       |        | 0.8    |      
|                                                 |                                                                         | Increase in other long-term assets                           |                                 |        | (3.9     | )     |       |          | (6.7   | )     |       |        | (14.0  | )    
|                                                 |                                                                         | Increase in other long-term liabilities                      |                                 |        | 29.4     |       |       |          | 13.3   |       |       |        | 17.8   |      
|                                                 |                                                                         | Asset impairments and other writedowns                       |                                 |        | 4.3      |       |       |          | 6.2    |       |       |        | 11.3   |      
|                                                 | Cash provided by (used for) current assets and current
    liabilities: |                                                              |                                 |        |          |       |       |          |        |       |       |        |       
|                                                 |                                                                         | Increase in inventories                                      |                                 |        | (105.0   | )     |       |          | (63.8  | )     |       |        | (37.9  | )    
|                                                 |                                                                         | Increase in accounts receivable                              |                                 |        | (10.0    | )     |       |          | (5.7   | )     |       |        | (3.1   | )    
|                                                 |                                                                         | Increase in prepaid expenses                                 |                                 |        | (24.0    | )     |       |          | (9.9   | )     |       |        | (3.3   | )    
|                                                 |                                                                         | Increase in accounts payable                                 |                                 |        | 48.1     |       |       |          | 13.8   |       |       |        | 25.2   |      
|                                                 |                                                                         | Increase in taxes payable                                    |                                 |        | 25.6     |       |       |          | 3.4    |       |       |        | 20.2   |      
|                                                 |                                                                         | Increase (decrease) in accrued payroll and other liabilities |                                 |        | (8.2     | )     |       |          | 19.3   |       |       |        | (5.2   | )    
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|                                                 |                                                                         |                                                              | Net cash provided by operations |        |          | 169.9 |       |          |        | 226.8 |       |        |        | 238.3 | 
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Investing                                        |                                                                         |                                                              |                                 |        |          |       |       |          |        |       |       |       
|                                                 | Capital expenditures                                                    |                                                              |                                 | (196.3 | )        |       |       | (115.5   | )      |       |       | (110.9 | )     
|                                                 | Proceeds from sale of investments                                       |                                                              |                                 | 105.2  |          |       |       | 118.0    |        |       |       |       |       
|                                                 | Purchase of investments                                                 |                                                              |                                 |       |          |       |       | (95.4    | )      |       |       | (118.0 | )     
|                                                 | Proceeds from sale-leaseback of assets                                  |                                                              |                                 |       |          |       |       | 32.3     |        |       |       |       |       
|                                                 | Acquisition                                                             |                                                              |                                 |       |          |       |       | (31.2    | )      |       |       | (2.9   | )     
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|                                                 |                                                                         | Net cash used for investing                                  |                                 |        | (91.1    | )     |       |          | (91.8  | )     |       |        | (231.8 | )    
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Financing                                        |                                                                         |                                                              |                                 |        |          |       |       |          |        |       |       |       
|                                                 | Net repayment of long-term debt                                         |                                                              |                                 | (0.1   | )        |       |       |         |        |       |       |       |       
|                                                 | Net repayment of long-term capital lease obligations                    |                                                              |                                 | (0.4   | )        |       |       | (0.4     | )      |       |       | (0.3   | )     
|                                                 | Net funding from credit facility                                        |                                                              |                                 | 23.3   |          |       |       | 7.2      |        |       |       | 1.1    |       
|                                                 | Cash dividends paid                                                     |                                                              |                                 | (25.5  | )        |       |       | (25.1    | )      |       |       |       |       
|                                                 | Issuance of common stock                                                |                                                              |                                 | 27.6   |          |       |       | 44.8     |        |       |       | 27.4   |       
|                                                 | Repurchase of common stock                                              |                                                              |                                 | (265.9 | )        |       |       | (177.3   | )      |       |       | (44.0  | )     
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|                                                 |                                                                         | Net cash used for financing                                  |                                 |        | (241.0   | )     |       |          | (150.8 | )     |       |        | (15.8  | )    
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Effect of exchange rates on cash and equivalents |                                                                         |                                                              | (1.0                            | )      |          |       | (0.2  | )        |        |       | 1.0   |       
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Net decrease in cash and equivalents             |                                                                         |                                                              | (163.2                          | )      |          |       | (16.0 | )        |        |       | (8.3  | )     
|Cash and equivalents at beginning of year        |                                                                         |                                                              | 244.8                           |        |          |       | 260.8 |          |        |       | 269.1 |       
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Cash and equivalents at end of year              |                                                                         | $                                                            | 81.6                            |        |          | $     | 244.8 |          |        | $     | 260.8 |       
|                                                 |                                                                         |                                                              |                                 |        |          |       |       |          |       
|Supplemental cash flow disclosures:              |                                                                         |                                                              |                                 |        |          |       |       |          |        |       |       |       
|                                                 | Interest paid                                                           |                                                              | $                               | 13.9   |          |       | $     | 8.5      |        |       | $     | 9.2    |       
|                                                 | Income taxes paid                                                       |                                                              | $                               | 55.0   |          |       | $     | 64.6     |        |       | $     | 56.3   |       



47



---



##### Table of Contents






CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(dollars in millions except share amounts)


|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |   |       |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ | ----------- | - | -------- | ----- | ------ | ------------- |  | - | ------------- | - |  | -------- | ---- | - | ----- | - | ----- | - |  | - | ------- | -
|                                                                  |  |              |             |   |          |       |        | Accumulated   |  |   |               |   | 
|                                                                  |  |              |             |   |          | Other |        |               |  |   |              
|                                                                  |  | Common Stock |             |   | Deferred |       |        | Comprehensive |  |   | Retained      |   |  |         
|                                                                  |  | Shares       |             |   | Amount   |       |        | Compensation  |  |   | Income (Loss) |   |  | Earnings |      |   | Total |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Balance at January 26, 2003                                       |  |              | 78,731,922  |   |          | $     | 657.0  |               |  | $ | (0.2          | ) |  | $        | 4.0  |   |       | $ | 323.2 |   |  | $ | 984.0   |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Net income                                                        |  |              |            |   |          |       |       |               |  |   |              |   |  |          |     |   |       |   | 115.2 |   |  |   | 115.2   |  
|Foreign currency translation adjustments                          |  |              |            |   |          |       |       |               |  |   |              |   |  |          | 18.0 |   |       |   |      |   |  |   | 18.0    |  
|Change in fair value of derivatives, net of tax provision of $0.4 |  |              |            |   |          |       |       |               |  |   |              |   |  |          | 0.7  |   |       |   |      |   |  |   | 0.7     |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Comprehensive income                                              |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |   |       |   |  |   | 133.9   |  
|Cash dividends declared ($0.08 per common share)                  |  |              |            |   |          |       |       |               |  |   |              |   |  |          |     |   |       |   | (6.2  | ) |  |   | (6.2    | )
|Issuance of common stock                                          |  |              | 2,094,005   |   |          |       | 27.4   |               |  |   |              |   |  |          |     |   |       |   |      |   |  |   | 27.4    |  
|Repurchase and retirement of common stock                         |  |              | (2,552,586  | ) |          |       | (44.0  | )             |  |   |              |   |  |          |     |   |       |   |      |   |  |   | (44.0   | )
|Tax benefit of equity compensation                                |  |              |            |   |          |       | 5.9    |               |  |   |              |   |  |          |     |   |       |   |      |   |  |   | 5.9     |  
|Change in deferred compensation                                   |  |              |            |   |          |       |       |               |  |   | (0.4          | ) |  |          |     |   |       |   |      |   |  |   | (0.4    | )
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Balance at January 25, 2004                                       |  |              | 78,273,341  |   |          | $     | 646.3  |               |  | $ | (0.6          | ) |  | $        | 22.7 |   |       | $ | 432.2 |   |  | $ | 1,100.6 |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Net income                                                        |  |              |            |   |          |       |       |               |  |   |              |   |  |          |     |   |       |   | 131.9 |   |  |   | 131.9   |  
|Foreign currency translation adjustments                          |  |              |            |   |          |       |       |               |  |   |              |   |  |          | 2.3  |   |       |   |      |   |  |   | 2.3     |  
|Change in fair value of derivatives, net of tax provision of $0.2 |  |              |            |   |          |       |       |               |  |   |              |   |  |          | 0.3  |   |       |   |      |   |  |   | 0.3     |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Comprehensive income                                              |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |   |       |   |  |   | 134.5   |  
|Cash dividends declared ($0.08 and $0.09 per common share)        |  |              |            |   |          |       |       |               |  |   |              |   |  |          |     |   |       |   | (25.1 | ) |  |   | (25.1   | )
|Issuance of common stock                                          |  |              | 3,222,058   |   |          |       | 44.8   |               |  |   |              |   |  |          |     |   |       |   |      |   |  |   | 44.8    |  
|Repurchase and retirement of common stock                         |  |              | (7,619,772  | ) |          |       | (177.3 | )             |  |   |              |   |  |          |     |   |       |   |      |   |  |   | (177.3  | )
|Tax benefit of equity compensation                                |  |              |            |   |          |       | 11.3   |               |  |   |              |   |  |          |     |   |       |   |      |   |  |   | 11.3    |  
|Change in deferred compensation                                   |  |              |            |   |          |       |       |               |  |   | 0.1           |   |  |          |     |   |       |   |      |   |  |   | 0.1     |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Balance at January 23, 2005                                       |  |              | 73,875,627  |   |          | $     | 525.1  |               |  | $ | (0.5          | ) |  | $        | 25.3 |   |       | $ | 539.0 |   |  | $ | 1,088.9 |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Net income                                                        |  |              |            |   |          |       |       |               |  |   |              |   |  |          |     |   |       |   | 101.0 |   |  |   | 101.0   |  
|Foreign currency translation adjustments                          |  |              |            |   |          |       |       |               |  |   |              |   |  |          | (5.9 | ) |       |   |      |   |  |   | (5.9    | )
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Comprehensive income                                              |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |   |       |   |  |   | 95.1    |  
|Cash dividends declared ($0.09 and $0.10 per common share)        |  |              |            |   |          |       |       |               |  |   |              |   |  |          |     |   |       |   | (25.5 | ) |  |   | (25.5   | )
|Issuance of common stock                                          |  |              | 1,866,917   |   |          |       | 27.6   |               |  |   |              |   |  |          |     |   |       |   |      |   |  |   | 27.6    |  
|Repurchase and retirement of common stock                         |  |              | (11,593,147 | ) |          |       | (265.9 | )             |  |   |              |   |  |          |     |   |       |   |      |   |  |   | (265.9  | )
|Tax benefit of equity compensation                                |  |              |            |   |          |       | 7.5    |               |  |   |              |   |  |          |     |   |       |   |      |   |  |   | 7.5     |  
|Change in deferred compensation                                   |  |              |            |   |          |       |       |               |  |   | 0.1           |   |  |          |     |   |       |   |      |   |  |   | 0.1     |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  
|Balance at January 28, 2006                                       |  |              | 64,149,397  |   |          | $     | 294.3  |               |  | $ | (0.4          | ) |  | $        | 19.4 |   |       | $ | 614.5 |   |  | $ | 927.8   |  
|                                                                  |  |              |             |   |          |       |        |               |  |   |               |   |  |          |      |   |       |  



48



---



##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in millions except per share data)




|         |                                           
|-------- | ------------------------------------------
|NOTE 1  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business: Borders Group, Inc., through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc.
(Waldenbooks), Borders (UK) Limited, Borders
Australia Pty Limited and others (individually and collectively,
the Company), is the second largest operator of
book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and
number of stores. At January 28, 2006, the Company operated
528 superstores under the Borders name, including 473 in
the United States, 35 in the United Kingdom, 14 in
Australia, three in Puerto Rico, two in New Zealand and one in
Singapore. The Company also operated 678 mall-based and
other bookstores primarily under the Waldenbooks name in the
United States and 33 bookstores under the Books etc. name
in the United Kingdom. In addition, the Company owns and
operates United Kingdom-based Paperchase Products Limited
(Paperchase), a designer and retailer of stationery,
cards and gifts. As of January 28, 2006, Paperchase operated
90 stores, primarily in the United Kingdom, and Paperchase
shops have been added to nearly 100 domestic Borders
Superstores.


Principles of
Consolidation: The
consolidated financial statements include the accounts of the
Company and all majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated.


Use of Estimates: The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual
results could differ from those estimates.


Fiscal Year: On
December 10, 2004, the Board of Directors of the Company
approved a change in the Companys fiscal year-end.
Effective with respect to fiscal 2005, the Company elected to
change its fiscal year to a
52/53-week fiscal year
ending on the Saturday closest to the last day of January. The
Company implemented this change in order to conform to industry
standards and for certain administrative purposes. As a result
of the change, the Companys 2005 fiscal year consisted of
53 weeks, and ended on January 28, 2006. The
Companys fiscal years had previously ended on the Sunday
immediately preceding the last Wednesday in January. Fiscal 2004
consisted of 52 weeks and ended January 23, 2005.
Fiscal 2003 consisted of 52 weeks and ended
January 25, 2004. References herein to years are to the
Companys fiscal years.


Foreign Currency and Translation of Foreign
Subsidiaries: The functional
currencies of the Companys foreign operations are the
respective local currencies. All assets and liabilities of the
Companys foreign operations are translated into
U.S. dollars at fiscal period-end exchange rates. Income
and expense items are translated at average exchange rates
prevailing during the year. The resulting translation
adjustments are recorded as a component of stockholders
equity and comprehensive income. Foreign currency transaction
gains/(losses) were $2.1, $(0.2), and $(0.4) in 2005, 2004,
and 2003, respectively.


Cash and Equivalents: Cash and equivalents include short-term investments with
original maturities of 90 days or less.


Investments: Investments
include primarily short-term investments in auction rate
securities.


Inventories: Merchandise
inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using
the retail inventory method. The Company includes certain
distribution and other expenses in its inventory costs, totaling
$102.1 and $91.4 as of January 28, 2006, and
January 23, 2005, respectively.


Property and Equipment: Property and equipment are recorded at cost, including
capitalized interest, and depreciated over their estimated
useful lives on a straight-line basis for financial statement
purposes and


49



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)






Goodwill: Pursuant to the
provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(FAS 142), the Companys goodwill is
tested for impairment annually (or more frequently if impairment
indicators arise). Pursuant to FAS 142, a reporting unit is
defined as an operating segment or one level below an operating
segment (a component), for which discrete financial information
is available and reviewed by management. The Companys
reporting units were identified as the operating segments of
Domestic Borders superstores, Waldenbooks Specialty Retail and
Corporate, and the country components of the International
operating segment. The carrying amounts of the net assets of the
applicable reporting units (including goodwill) are compared to
the estimated fair values of those reporting units. Fair value
is estimated using a discounted cash flow model which depends
on, among other factors, estimates of future sales and expense
trends, liquidity and capitalization. The discount rate used
approximates the weighted average cost of capital of a
hypothetical third party buyer.


Leases: All leases are
reviewed for capital or operating classification at their
inception under the guidance of Statement of Financial
Accounting Standards No. 13, Accounting for
Leases (FAS 13), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification, and defines initial lease term to include the
construction build-out period, but to exclude lease extension
period(s). The Company conducts operations primarily under
operating leases. For leases that contain rent escalations, the
Company records the total rent payable during the lease term, as
defined above, on a straight-line basis over the term of the
lease and records the difference between the rents paid and the
straight-line rent as a deferred rent liability, under
Other long-term liabilities on the Companys
consolidated balance sheets, totaling $154.7 and $144.9 as of
January 28, 2006 and January 23, 2005, respectively.


Landlord Allowances: The
Company classifies landlord allowances as deferred rent
liabilities, under Other long-term liabilities on
the Companys consolidated balance sheets, totaling $132.0
and $116.3 as of January 28, 2006 and January 23,
2005, respectively, in accordance with the provisions of FASB
Technical
Bulletin No. 88-1,
Issues Relating to Accounting for Leases (FTB
88-1), and as an
operating activity on the Companys consolidated statements
of cash flows. Also in accordance with the provisions of FTB
88-1, the Company
classifies the amortization of landlord allowances as a
reduction of occupancy expense, included as a component of
Cost of merchandise sold (includes occupancy) in the
Companys consolidated statements of operations.


Financial Instruments: The recorded values of the Companys financial instruments,
which include accounts receivable, accounts payable and
indebtedness, approximate their fair values.




50



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




Accumulated Other Comprehensive Income
(Loss): Accumulated other
comprehensive income (loss) for the Company includes fair
value changes of derivatives (net of tax) and exchange rate
fluctuations. Disclosure of comprehensive income (loss) is
incorporated into the consolidated statements of
stockholders equity for all years presented. Accumulated
other comprehensive income (loss) includes $0.0 and $0.1
for derivatives and $19.4 and $25.2 for exchange rate
fluctuations as of January 28, 2006 and January 23,
2005, respectively.


Revenue: Revenue is
recognized, net of estimated returns, at the point of sale for
all of the Companys segments. Revenue excludes sales taxes
and any value-added taxes.






Pre-Opening Costs: The
Company expenses pre-opening costs as incurred in accordance
with SOP 98-5, Reporting on the Costs of Start-Up
Activities.


Closing Costs: Pursuant
to the provisions of Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (FAS 146), the Company
expenses when incurred all amounts related to the discontinuance
of operations of stores identified for closure.


Preferred Reader Program: Until October 2004, Waldenbooks sold memberships in its
Preferred Reader Program, which offered members discounts on
purchases and other benefits. The Company recognized membership
income on a straight-line basis over the 12-month term of the
membership, and categorized the income as Other
revenue in the Companys consolidated statements of
operations. Discounts on purchases were netted against
Sales in the Companys consolidated statements
of operations.


Gift Cards: The Company
sells gift cards to its customers and records a liability for
the face value of all certificates issued and unredeemed within
the last 12 months. For certificates older than
12 months, the Company records a liability for a portion of
the certificates face value based upon historical
redemption


51



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




Advertising Costs: The
Company expenses advertising costs as incurred, and recorded
approximately $39.4, $44.7 and $35.9 of gross advertising
expenses in 2005, 2004 and 2003, respectively.










Income Taxes: Income
taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, Accounting
for Income Taxes (FAS 109). FAS 109 requires
recognition of deferred tax assets and liabilities for the
expected future tax consequences of temporary differences
between the book carrying amounts and the tax basis of assets
and liabilities. FAS 109 also requires that deferred tax assets
be reduced by a valuation allowance if it is more likely than
not that some portion of or all of the deferred tax asset will
not be realized.




Equity-Based
Compensation: The Company
accounts for equity-based compensation under the guidance of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
No. 25). As permitted, the Company has adopted the
disclosure-only option of Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based
Compensation (FAS 123), as amended by
Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure. The following table illustrates
the effect on net income and earnings per


52



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                                                                                                                          |                       |      |       |      |      |   |       |      |  |   |       |      | 
|------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ----- | ---- | ---- | - | ----- | ---- |  | - | ----- | ---- | 
|                                                                                                                          |                       | 2005 |       |      | 2004 |   |       | 2003 | 
|                                                                                                                          |                       |      |       |      |      |   |       |      | 
|Net income, as reported                                                                                                   |                       | $    | 101.0 |      |      | $ | 131.9 |      |  | $ | 115.2 |     
|Add: Stock-based employee compensation expense included in
    reported net income, net of related tax effects            |                       |      | 0.9   |      |      |   | 0.7   |      |  |   | 0.1   |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value method for all awards, net of tax |                       |      | 1.8   |      |      |   | 4.1   |      |  |   | 7.4   |     
|                                                                                                                          |                       |      |       |      |      |   |       |      | 
|Pro forma net income                                                                                                      |                       | $    | 100.1 |      |      | $ | 128.5 |      |  | $ | 107.9 |     
|                                                                                                                          |                       |      |       |      |      |   |       |      | 
|Earnings per share:                                                                                                       |                       |      |       |      |      |   |       |      |  |   |       |     
|                                                                                                                          | Diluted  as reported |      | $     | 1.42 |      |   | $     | 1.69 |  |   | $     | 1.46 | 
|                                                                                                                          | Diluted  pro forma   |      | $     | 1.41 |      |   | $     | 1.65 |  |   | $     | 1.36 | 
|                                                                                                                          | Basic  as reported   |      | $     | 1.45 |      |   | $     | 1.72 |  |   | $     | 1.48 | 
|                                                                                                                          | Basic  pro forma     |      | $     | 1.43 |      |   | $     | 1.68 |  |   | $     | 1.39 | 



New Accounting Guidance: In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)), which is a revision
of FAS 123. FAS 123(R) supersedes APB No. 25, and
amends FAS No. 95, Statement of Cash Flows.
Generally, the approach in FAS 123(R) is similar to the
approach described in FAS 123. However, FAS 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. The Company will adopt
FAS 123(R) in the first quarter of 2006 using the
modified-prospective method in which compensation cost is
recognized beginning with the adoption date based on
(a) the requirements of FAS 123(R) for all share-based
payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date. As of
January 28, 2006, there were 0.6 million stock option
awards granted to employees that remain unvested.






53



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)






13-1, 13-1). 13-1 13-1 13-1




Reclassifications: Certain prior year amounts have been reclassified to conform to
current year presentation. Among these, the Company has
reclassified its income and expense related to sales of
merchandise to other retailers from Selling, general and
administrative expense in the Companys consolidated
statements of operations to Other revenue and
Cost of merchandise sold, (includes occupancy). In
addition, the Company has reclassified income related to
unredeemed gift cards from Selling, general and
administrative expense to Other revenue. The
reclassification had no impact on earnings or cash flows.


54



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


NOTE 2  WEIGHTED-AVERAGE SHARES OUTSTANDING




|                                                     |  |      |        |  |      |  |        |      |  |  |        | 
|---------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                     |  | 2005 |        |  | 2004 |  |        | 2003 | 
|                                                     |  |      |        |  |      |  |        |      | 
|Weighted-average common shares outstanding  basic   |  |      | 69,785 |  |      |  | 76,553 |      |  |  | 77,905 | 
|Dilutive effect of employee stock options            |  |      | 1,303  |  |      |  | 1,387  |      |  |  | 1,206  | 
|                                                     |  |      |        |  |      |  |        |      | 
|Weighted-average common shares outstanding  diluted |  |      | 71,088 |  |      |  | 77,940 |      |  |  | 79,111 | 
|                                                     |  |      |        |  |      |  |        |      | 



NOTE 3  ASSET IMPAIRMENTS AND OTHER WRITEDOWNS


Asset Impairments: In
accordance with the provisions of FAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the
Company evaluates the carrying values of long-lived assets
whenever changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. In the fourth quarter of
2005, the Company recorded a charge of $4.3 related to the
impairment of certain long-lived assets (primarily leasehold
improvements, furniture, and fixtures), consisting of the
following: $2.1 related to underperforming domestic Borders
superstores, $0.5 related to underperforming Waldenbooks
Specialty Retail stores and $1.7 related to underperforming
Books etc. stores.








Store Closings: In
accordance with the provisions of FAS 146, Accounting
for Costs Associated with Exit or Disposal Activities, the
Company expenses when incurred all amounts related to the
discontinuance of operations of stores identified for closure.
These expenses typically pertain to inventory markdowns, asset
impairments, and store payroll and other costs. When the Company
closes any of its stores, the inventory of the closed stores is
either returned to vendors or marked down and sold. Stores
leasehold improvements, furniture, fixtures and equipment are
generally discarded or sold for nominal amounts.




55



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)










|                                    |                         |   |     |      |  
|----------------------------------- | ----------------------- | - | --- | ---- | -
|Reserve balance at January 26, 2003 |                         | $ | 2.6 |     
|                                    |                         |   |    
|                                    | 2003 Charge             |   |     | 2.3  |  
|                                    | 2003 Reserve adjustment |   |     | (0.9 | )
|                                    | 2003 Cash payments      |   |     | (2.9 | )
|                                    |                         |   |    
|Reserve balance at January 25, 2004 |                         | $ | 1.1 |     
|                                    |                         |   |    
|                                    | 2004 Charge             |   |     | 2.4  |  
|                                    | 2004 Reserve adjustment |   |     | (0.2 | )
|                                    | 2004 Cash payments      |   |     | (2.7 | )
|                                    |                         |   |    
|Reserve balance at January 23, 2005 |                         | $ | 0.6 |     
|                                    |                         |   |    
|                                    | 2005 Charge             |   |     | 3.5  |  
|                                    | 2005 Reserve adjustment |   |     | (0.1 | )
|                                    | 2005 Cash payments      |   |     | (3.3 | )
|                                    |                         |   |    
|Reserve balance at January 28, 2006 |                         | $ | 0.7 |     
|                                    |                         |   |    



|               |  |      |      |   |      |   |      |      |  |   |      |  
|-------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|               |  | 2005 |      |   | 2004 |   |      | 2003 | 
|               |  |      |      |   |      |   |      |      | 
|Sales          |  | $    | 25.9 |   |      | $ | 19.2 |      |  | $ | 30.3 |  
|Operating loss |  |      | (0.3 | ) |      |   | (0.6 | )    |  |   | (0.9 | )

56



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




NOTE 4  EFFECT OF TERRORIST ATTACKS ON
SEPTEMBER 11, 2001








NOTE 5  LEGAL SETTLEMENT




NOTE 6  SALE-LEASEBACK TRANSACTION




20-year


NOTE 7  ACQUISITION OF PAPERCHASE PRODUCTS,
LTD.




57



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)






|         |                                          
|-------- | -----------------------------------------
|NOTE 8  | SEATTLES BEST COFFEE LICENSING AGREEMENT





|         |                       
|-------- | ----------------------
|NOTE 9  | PROPERTY AND EQUIPMENT



|                                                 |                          |      |         |       |      |   |         |       | 
|------------------------------------------------ | ------------------------ | ---- | ------- | ----- | ---- | - | ------- | ----- | 
|                                                 |                          | 2005 |         |       | 2004 |  
|                                                 |                          |      |         |       |      |  
|Property and equipment                           |                          |      |         |       |      |   |         |      
|                                                 | Buildings                |      | $       | 6.9   |      |   | $       | 6.9   | 
|                                                 | Leasehold improvements   |      |         | 647.7 |      |   |         | 600.6 | 
|                                                 | Furniture and fixtures   |      |         | 979.5 |      |   |         | 914.7 | 
|                                                 | Construction in progress |      |         | 36.3  |      |   |         | 25.6  | 
|                                                 |                          |      |         |       |      |  
|                                                 |                          |      | 1,670.4 |       |      |   | 1,547.8 |      
|Less  accumulated depreciation and amortization |                          |      | (966.5  | )     |      |   | (912.2  | )    
|                                                 |                          |      |         |       |      |  
|Property and equipment, net                      |                          | $    | 703.9   |       |      | $ | 635.6   |      
|                                                 |                          |      |         |       |      |  



|          |             
|--------- | ------------
|NOTE 10  | INCOME TAXES



|                           |                 |      |      |       |      |   |      |      |  |   |      |      |  
|-------------------------- | --------------- | ---- | ---- | ----- | ---- | - | ---- | ---- |  | - | ---- | ---- | -
|                           |                 | 2005 |      |       | 2004 |   |      | 2003 | 
|                           |                 |      |      |       |      |   |      |      | 
|Current                    |                 |      |      |       |      |   |      |      |  |   |      |     
|                           | Federal         |      | $    | 61.6  |      |   | $    | 52.6 |  |   | $    | 61.6 |  
|                           | State and local |      |      | 9.5   |      |   |      | 10.7 |  |   |      | 9.1  |  
|                           | Foreign         |      |      | 0.5   |      |   |      | 1.1  |  |   |      | 0.4  |  
|Deferred                   |                 |      |      |       |      |   |      |      |  |   |      |     
|                           | Federal         |      |      | (11.9 | )    |   |      | 8.0  |  |   |      | (2.1 | )
|                           | State and local |      |      | (0.8  | )    |   |      | 0.7  |  |   |      |     |  
|                           | Foreign         |      |      | (0.8  | )    |   |      | 2.6  |  |   |      | 3.1  |  
|                           |                 |      |      |       |      |   |      |      | 
|Total income tax provision |                 | $    | 58.1 |       |      | $ | 75.7 |      |  | $ | 72.1 |     
|                           |                 |      |      |       |      |   |      |      | 

58



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                                                  |  |      |      |   |      |   |      |      |  |   |      |  
|------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                  |  | 2005 |      |   | 2004 |   |      | 2003 | 
|                                                  |  |      |      |   |      |   |      |      | 
|Federal statutory rate                            |  | $    | 55.7 |   |      | $ | 72.7 |      |  | $ | 66.3 |  
|State and local taxes, net of federal tax benefit |  |      | 5.7  |   |      |   | 7.4  |      |  |   | 5.9  |  
|Impact of foreign operations                      |  |      | (2.2 | ) |      |   | (2.8 | )    |  |   | (1.3 | )
|Other                                             |  |      | (1.1 | ) |      |   | (1.6 | )    |  |   | 1.2  |  
|                                                  |  |      |      |   |      |   |      |      | 
|Total income tax provision                        |  | $    | 58.1 |   |      | $ | 75.7 |      |  | $ | 72.1 |  
|                                                  |  |      |      |   |      |   |      |      | 



|                                      |                                        |      |      |       |      |   |      |       |  
|------------------------------------- | -------------------------------------- | ---- | ---- | ----- | ---- | - | ---- | ----- | -
|                                      |                                        | 2005 |      |       | 2004 |  
|                                      |                                        |      |      |       |      |  
|Deferred tax assets                   |                                        |      |      |       |      |   |      |      
|                                      | Accruals and other current liabilities |      | $    | 4.2   |      |   | $    | 2.7   |  
|                                      | Deferred revenue                       |      |      | 4.6   |      |   |      | 0.6   |  
|                                      | Other long-term liabilities            |      |      | 3.0   |      |   |      | 3.1   |  
|                                      | Deferred compensation                  |      |      | 2.2   |      |   |      | 2.2   |  
|                                      | Deferred rent                          |      |      | 70.0  |      |   |      | 73.4  |  
|                                      | State deferred tax assets              |      |      | 1.9   |      |   |      |      |  
|                                      | Foreign deferred tax assets            |      |      | 20.6  |      |   |      | 22.6  |  
|                                      | Asset impairments and other writedowns |      |      | 8.7   |      |   |      | 10.2  |  
|                                      | Valuation allowance                    |      |      | (9.4  | )    |   |      | (8.5  | )
|                                      |                                        |      |      |       |      |  
|                                      | Total deferred tax assets              |      |      | 105.8 |      |   |      | 106.3 |  
|                                      |                                        |      |      |       |      |  
|Deferred tax liabilities              |                                        |      |      |       |      |   |      |      
|                                      | Inventory                              |      |      | 18.2  |      |   |      | 17.6  |  
|                                      | Property and equipment                 |      |      | 64.5  |      |   |      | 74.6  |  
|                                      | Net state deferred tax liability       |      |      |      |      |   |      | 0.4   |  
|                                      | Foreign deferred tax liabilities       |      |      | 11.3  |      |   |      | 14.3  |  
|                                      |                                        |      |      |       |      |  
|                                      | Total deferred tax liabilities         |      |      | 94.0  |      |   |      | 106.9 |  
|                                      |                                        |      |      |       |      |  
|Net deferred tax assets (liabilities) |                                        | $    | 11.8 |       |      | $ | (0.6 | )    
|                                      |                                        |      |      |       |      |  







59



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


NOTE 11  COMMITMENTS AND CONTINGENCIES


Litigation: Two former
employees, individually and on behalf of a purported class
consisting of all current and former employees who work or
worked as Inventory Managers or Sales Managers in Borders stores
in the State of California at any time from September 30,
2001 through the trial date, have filed an action against the
Company in the Superior Court of California for the County of
San Francisco. The Complaint alleges, among other things, that
the individual plaintiffs and the purported class members were
improperly classified as exempt employees and that the Company
violated the California Labor Code and the California Business
and Professions Code by failing to (i) pay required
overtime, (ii) provide meal periods, rest periods, and
accurate itemized wage statements, (iii) keep accurate
records of employees hours of work, and (iv) pay all
compensation owed at the time of termination of employment to
certain members of the purported class. The relief sought
includes damages, restitution, penalties, injunctive relief,
interest, costs, and attorneys fees and such other relief
as the court deems proper. The Company intends to vigorously
defend the action. The Company has not included any liability in
its consolidated financial statements in connection with this
matter and has expensed as incurred all legal costs to date.










60



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


NOTE 12  DEBT


Credit Facility: The
Company has a Multicurrency Revolving Credit Agreement (the
Credit Agreement), which was amended in October 2005
and will expire in October 2010. The Credit Agreement provides
for borrowings of up to $700.0 secured by eligible inventory and
accounts receivable and related assets. Borrowings under the
Credit Agreement are limited to a specified percentage of
eligible inventories and accounts receivable and bear interest
at a variable base rate plus an increment or LIBOR plus an
increment at the Companys option. The Credit Agreement
(i) includes a fixed charge coverage ratio requirement of
1.1 to 1 that is applicable only if outstanding borrowings under
the facility exceed 90% of permitted borrowings thereunder,
(ii) contains covenants that limit, among other things, the
Companys ability to incur indebtedness, grant liens, make
investments, consolidate or merge or dispose of assets,
(iii) prohibits dividend payments and share repurchases
that would result in borrowings under the facility exceeding 90%
of permitted borrowings thereunder, and (iv) contains
default provisions that are typical for this type of financing,
including a cross default provision relating to other
indebtedness of more than $25.0. The Company had borrowings
outstanding under the Credit Agreement (or a prior agreement) of
$153.6 million at January 28, 2006 and $131.7 at
January 23, 2005. The weighted average interest rate in
2005 and 2004 was approximately 6.0% and 5.9%, respectively.


Term Loan: On
July 30, 2002, the Company issued $50.0 of senior
guaranteed notes (the Notes) due July 30, 2006
and bearing interest at 6.31% (payable semi-annually). The
proceeds of the sale of the Notes were used to refinance
existing indebtedness of the Company and its subsidiaries and
for general corporate purposes. The note purchase agreement
relating to the Notes contains covenants which limit, among
other things, the Companys ability to incur indebtedness,
grant liens, make investments, engage in any merger or
consolidation, dispose of assets or change the nature of its
business, and requires the Company to meet certain financial
measures regarding net worth, total debt coverage and fixed
charge coverage. In July 2004, the note purchase agreement was
amended to permit the amendment to the Credit Agreement
described above and to provide for a parity lien to secure the
Notes on the same collateral as secures borrowings under the
Credit Agreement.


Debt of Consolidated
VIEs: The Company includes
the debt of two variable interest entities (VIEs),
consolidated pursuant to Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), in its
consolidated balance sheets. Scheduled principal payments of
this debt as of January 28, 2006 total $0.2 in 2006, $0.2
in 2007, $0.2 in 2008, $0.2 in 2009, $0.2 in 2010, $4.6 in all
later years, and in the aggregate, total $5.6. See
Note 13  Leases for further
discussion of the Companys consolidation of these VIEs.




NOTE 13  LEASES


Operating Leases: The
Company conducts operations primarily in leased facilities.
Store leases are generally for terms of three to 20 years.
Borders leases generally contain multiple three- to
five-year renewal options which allow Borders the option to
extend the life of the leases up to 25 years beyond the
initial noncancellable term. Waldenbooks Specialty Retails
leases generally do not contain renewal options. Certain leases
provide for additional rental payments based on a percentage of
sales in excess of a specified base. Also, certain leases
provide for the payment by the Company of executory costs
(taxes, maintenance, and insurance).




61



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




Lease Commitments: Future
minimum lease payments under operating leases at
January 28, 2006 total $363.8 in 2006, $354.6 in 2007,
$340.5 in 2008, $320.3 in 2009, $298.5 in 2010, $2,209.6 in all
later years, and in the aggregate, total $3,887.3.


Rental Expenses: A
summary of operating lease minimum and percentage rental expense
follows:


|                   |       |      |       |       |      |   |       |       |  |   |       |       | 
|------------------ | ----- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                   |       | 2005 |       |       | 2004 |   |       | 2003  | 
|                   |       |      |       |       |      |   |       |       | 
|Minimum rentals    |       | $    | 378.0 |       |      | $ | 369.5 |       |  | $ | 351.8 |      
|Percentage rentals |       |      | 18.9  |       |      |   | 8.7   |       |  |   | 2.8   |      
|                   |       |      |       |       |      |   |       |       | 
|                   | Total |      | $     | 396.9 |      |   | $     | 378.2 |  |   | $     | 354.6 | 
|                   |       |      |       |       |      |   |       |       | 

Capitalized Leases: The
Company accounts for certain items under capital leases.
Scheduled principal payments of capitalized leases as of
January 28, 2006 total $0.5, due in 2006.


Lease Financing
Facilities: Prior to 2005,
the Company had two lease financing facilities (the
Original Lease Facility and the New Lease
Facility, collectively, the Lease Financing
Facilities) to finance new stores and other property owned
by unaffiliated entities and leased to the Company or its
subsidiaries. In July 2004, the Company repaid all amounts
outstanding under the Lease Financing Facilities (totaling
$13.8) on behalf of the two borrowing VIEs. The Company recorded
this debt repayment as a prepayment of a portion of the rent
expense for occupancy through 2024, and classified the current
portion as a component of Accounts receivable and other
current assets, and the non-current portion as a component
of Other assets on the consolidated balance sheets
at January 28, 2006. In conjunction with this transaction,
the Lease Financing Facilities were terminated.


Consolidated VIEs: The
Company adopted FIN 46 as of January 25, 2004, which
resulted in the consolidation of four VIEs and an after-tax
charge of $2.1, comprised of non-cash depreciation costs, in
2003. This charge is included as a Cumulative effect of
accounting change (net of tax) in the Companys
consolidated statements of operations in 2003. Of the four VIEs
initially consolidated, only two such entities remain
consolidated at January 28, 2006, as discussed below.






62



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


NOTE 14  EMPLOYEE BENEFIT PLANS


Employee Savings Plan: Employees of the Company who meet certain requirements as to age
and service are eligible to participate in the Companys
Savings Plan. The Companys expense related to this plan
was $5.0, $4.7, and $4.3 for 2005, 2004 and 2003, respectively.


NOTE 15  STOCK-BASED BENEFIT PLANS


2004 Long-Term Incentive
Plan: The Company maintains
the 2004 Long-Term Incentive Plan (the 2004 Plan),
pursuant to which the Company may grant stock-based awards to
employees and non-employee directors of the Company, including
restricted shares and share units of its common stock and
options to purchase its common stock. The 2004 Plan was approved
by shareholders in May 2004, and replaced all prior stock-based
benefit plans on a go-forward basis. Three million shares were
authorized for the grant of stock-based awards under the 2004
Plan (plus any shares forfeited or cancelled under the 2004 Plan
or any prior plan). At January 28, 2006 3.8 million
shares remained available for grant.












Employee Stock Purchase
Plan: The Company maintained
an employee stock purchase plan (the Employee Plan),
which allowed the Companys associates not eligible under
the 2004 Plan to purchase shares of the Companys common
stock at a 15% discount from their fair market value. The
Employee Plan expired as of December 31, 2005.


63



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                                |                  |           |        |           |                |  |       |       | 
|------------------------------- | ---------------- | --------- | ------ | --------- | -------------- |  | ----- | ----- | 
|                                |                  |           |        | Weighted- |               
|                                |                  | Number    |        |           | Average        | 
|All Plans                       |                  | of Shares |        |           | Exercise Price | 
|                                |                  |           |        |           |                |  |      
|Outstanding at January 26, 2003 |                  |           | 15,069 |           |                |  | 18.76 |      
|                                | Granted          |           |        | 1,455     |                |  |       | 21.24 | 
|                                | Exercised        |           |        | 1,907     |                |  |       | 12.90 | 
|                                | Forfeited        |           |        | 1,574     |                |  |       | 20.63 | 
|Outstanding at January 25, 2004 |                  |           | 13,043 |           |                |  | 19.67 |      
|                                | Granted          |           |        | 69        |                |  |       | 23.52 | 
|                                | Exercised        |           |        | 3,121     |                |  |       | 13.85 | 
|                                | Forfeited        |           |        | 995       |                |  |       | 21.81 | 
|Outstanding at January 23, 2005 |                  |           | 8,996  |           |                |  | 21.48 |      
|                                | Granted          |           |        | 13        |                |  |       | 24.43 | 
|                                | Exercised        |           |        | 1,737     |                |  |       | 14.85 | 
|                                | Forfeited        |           |        | 907       |                |  |       | 23.79 | 
|Outstanding at January 28, 2006 |                  |           | 6,365  |           |                |  | 22.98 |      
|Balance exercisable at          |                  |           |        |           |                |  |       |      
|                                | January 25, 2004 |           |        | 8,750     |                |  |       | 19.86 | 
|                                | January 23, 2005 |           |        | 6,985     |                |  |       | 21.95 | 
|                                | January 28, 2006 |           |        | 5,752     |                |  |       | 23.20 | 





|                        |  |      |            |   |      |  |            |      |  |  |            |  
|----------------------- |  | ---- | ---------- | - | ---- |  | ---------- | ---- |  |  | ---------- | -
|                        |  | 2005 |            |   | 2004 |  |            | 2003 | 
|                        |  |      |            |   |      |  |            |      | 
|Risk-free interest rate |  |      | 3.8-4.1    | % |      |  | 2.8-4.7    | %    |  |  | 1.5-3.4    | %
|Expected life           |  |      | 3-5 years  |   |      |  | 3-5 years  |      |  |  | 3-5 years  |  
|Expected volatility     |  |      | 25.6- 27.6 | % |      |  | 29.9- 35.2 | %    |  |  | 35.2- 41.6 | %
|Expected dividends      |  |      | 1.3-1.6    | % |      |  | 1.3-1.6    | %    |  |  | 0.0-1.5    | %

64



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                |  |           |       |             |                  |  |     |                  |             |  |           |  |  |                  |       |  |  |  |       | 
|--------------- |  | --------- | ----- | ----------- | ---------------- |  | --- | ---------------- | ----------- |  | --------- |  |  | ---------------- | ----- |  |  |  | ----- | 
|                |  |           |       | Outstanding |                  |  |     |                  | Exercisable | 
|Range of        |  | Number of |       |             | Weighted-Average |  |     | Weighted-Average |             |  | Number of |  |  | Weighted-Average |      
|Exercise Prices |  | Shares    |       |             | Remaining Life   |  |     | Exercise Price   |             |  | Shares    |  |  | Exercise Price   |      
|                |  |           |       |             |                  |  |     |                  |             |  |           |  |  |                  |      
|$10.23-$13.63   |  |           | 320   |             |                  |  | 3.8 |                  |             |  | 13.28     |  |  |                  | 320   |  |  |  | 13.28 | 
|$13.64-$17.03   |  |           | 834   |             |                  |  | 2.5 |                  |             |  | 14.71     |  |  |                  | 759   |  |  |  | 14.72 | 
|$17.04-$20.44   |  |           | 1,076 |             |                  |  | 3.4 |                  |             |  | 17.54     |  |  |                  | 1,042 |  |  |  | 17.49 | 
|$20.45-$23.84   |  |           | 1,571 |             |                  |  | 2.9 |                  |             |  | 22.29     |  |  |                  | 1,080 |  |  |  | 22.46 | 
|$23.85-$27.25   |  |           | 282   |             |                  |  | 2.3 |                  |             |  | 25.02     |  |  |                  | 269   |  |  |  | 25.00 | 
|$27.26-$30.66   |  |           | 1,853 |             |                  |  | 1.7 |                  |             |  | 29.79     |  |  |                  | 1,853 |  |  |  | 29.79 | 
|$30.67-$34.06   |  |           | 429   |             |                  |  | 2.0 |                  |             |  | 31.72     |  |  |                  | 429   |  |  |  | 31.72 | 



|                              |                                       |           |  |  |                  |  |  |                   |       |  |  |  |       | 
|----------------------------- | ------------------------------------- | --------- |  |  | ---------------- |  |  | ----------------- | ----- |  |  |  | ----- | 
|                              |                                       | Number of |  |  | Weighted-Average |  |  | Weighted-Average  |      
|                              |                                       | Shares    |  |  | Purchase Price   |  |  | at Grant Date FMV |      
|                              |                                       |           |  |  |                  |  |  |                   |      
|Stock purchased:              |                                       |           |  |  |                  |  |  |                   |       |  |  | 
|                              | 2004 Plan (or prior plan)             |           |  |  |                  |  |  |                   |       |  |  |  |      
|                              |                                       | 2003      |  |  | 82               |  |  |                   | 13.56 |  |  |  | 17.29 | 
|                              |                                       | 2004      |  |  | 45               |  |  |                   | 17.74 |  |  |  | 23.59 | 
|                              |                                       | 2005      |  |  | 32               |  |  |                   | 17.80 |  |  |  | 26.05 | 
|                              | Employee plan                         |           |  |  |                  |  |  |                   |       |  |  |  |      
|                              |                                       | 2003      |  |  | 34               |  |  |                   | 15.24 |  |  |  | 17.92 | 
|                              |                                       | 2004      |  |  | 28               |  |  |                   | 20.64 |  |  |  | 24.29 | 
|                              |                                       | 2005      |  |  | 26               |  |  |                   | 20.28 |  |  |  | 23.86 | 
|Stock and stock units issued: |                                       |           |  |  |                  |  |  |                   |       |  |  | 
|                              | Time-vested shares issued:            |           |  |  |                  |  |  |                   |       |  |  |  |      
|                              | 2004 Plan                             |           |  |  |                  |  |  |                   |       |  |  |  |      
|                              |                                       | 2004      |  |  | 17               |  |  |                   |      |  |  |  | 23.59 | 
|                              |                                       | 2005      |  |  | 50               |  |  |                   |      |  |  |  | 23.96 | 
|                              | Performance-based stock units issued: |           |  |  |                  |  |  |                   |       |  |  |  |      
|                              | 2004 Plan                             |           |  |  |                  |  |  |                   |       |  |  |  |      
|                              |                                       | 2004      |  |  | 288              |  |  |                   |      |  |  |  | 23.50 | 
|                              |                                       | 2005      |  |  | 395              |  |  |                   |      |  |  |  | 26.24 | 

NOTE 16  FINANCIAL INSTRUMENTS




65



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)








|                 |      |  |             |          |        |  |           |                   |  |   |      |  
|---------------- | ---- |  | ----------- | -------- | ------ |  | --------- | ----------------- |  | - | ---- | -
|January 28, 2006 |     
|Notional Amount  |      |  | Strike Rate |          | Period |  |           | Fair Market Value | 
|                 |      |  |             |          |        |  |           |                   | 
|$                | 50.0 |  |             | variable |        |  | 8/03-7/06 |                   |  | $ | (0.3 | )

|                 |      |     |             |          |        |  |            |                   |  |   |     | 
|---------------- | ---- | --- | ----------- | -------- | ------ |  | ---------- | ----------------- |  | - | --- | 
|January 23, 2005 |     
|Notional Amount  |      |     | Strike Rate |          | Period |  |            | Fair Market Value | 
|                 |      |     |             |          |        |  |            |                   | 
|$                | 37.6 | (a) |             | 4.9%     |        |  | 10/98-6/05 |                   |  | $ |    | 
|$                | 37.6 | (a) |             | 4.7%     |        |  | 9/98-6/05  |                   |  | $ |    | 
|$                | 50.0 |     |             | variable |        |  | 8/03-7/06  |                   |  | $ | 0.1 | 



| |     |                                                                          
| | --- | -------------------------------------------------------------------------
| | (a) | Notional amount is the U.S. dollar equivalent of
    20.0 British pounds.

NOTE 17  SEGMENT INFORMATION




|      |                              |             |   |         |         |  |   |         |         |  |   |         |         | 
|----- | ---------------------------- | ----------- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|      |                              | 2005        |   |         | 2004    |  |   | 2003    |        
|      |                              |             |   |         |         |  |   |         |        
|Sales |                              |             |   |         |         |  |   |         |         |  |   |        
|      | Domestic Borders superstores |             | $ | 2,709.5 |         |  | $ | 2,588.9 |         |  | $ | 2,470.2 |        
|      | Waldenbooks Specialty Retail |             |   | 744.8   |         |  |   | 779.9   |         |  |   | 820.9   |        
|      | International                |             |   | 576.4   |         |  |   | 510.7   |         |  |   | 407.5   |        
|      |                              |             |   |         |         |  |   |         |        
|      |                              | Total sales |   | $       | 4,030.7 |  |   | $       | 3,879.5 |  |   | $       | 3,698.6 | 
|      |                              |             |   |         |         |  |   |         |        

66



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


|                               |                              |                            |   |         |         |  |   |         |         |  |   |         |         | 
|------------------------------ | ---------------------------- | -------------------------- | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                               |                              | 2005                       |   |         | 2004    |  |   | 2003    |        
|                               |                              |                            |   |         |         |  |   |         |        
|Interest expense (income)      |                              |                            |   |         |         |  |   |         |         |  |   |        
|                               | Domestic Borders superstores |                            | $ | (14.4   | )       |  | $ | (5.4    | )       |  | $ | (1.9    | )      
|                               | Waldenbooks Specialty Retail |                            |   | (43.8   | )       |  |   | (42.2   | )       |  |   | (38.8   | )      
|                               | International                |                            |   | 21.6    |         |  |   | 19.1    |         |  |   | 19.0    |        
|                               | Corporate                    |                            |   | 50.9    |         |  |   | 37.6    |         |  |   | 30.4    |        
|                               |                              |                            |   |         |         |  |   |         |        
|                               |                              | Total interest expense     |   | $       | 14.3    |  |   | $       | 9.1     |  |   | $       | 8.7     | 
|                               |                              |                            |   |         |         |  |   |         |        
|Income tax provision (benefit) |                              |                            |   |         |         |  |   |         |         |  |   |        
|                               | Domestic Borders superstores |                            | $ | 73.2    |         |  | $ | 70.9    |         |  | $ | 61.8    |        
|                               | Waldenbooks Specialty Retail |                            |   | 18.1    |         |  |   | 26.6    |         |  |   | 30.5    |        
|                               | International                |                            |   | (7.4    | )       |  |   | (0.3    | )       |  |   | (3.6    | )      
|                               | Corporate                    |                            |   | (25.8   | )       |  |   | (21.5   | )       |  |   | (16.6   | )      
|                               |                              |                            |   |         |         |  |   |         |        
|                               |                              | Total income tax expense   |   | $       | 58.1    |  |   | $       | 75.7    |  |   | $       | 72.1    | 
|                               |                              |                            |   |         |         |  |   |         |        
|Depreciation expense           |                              |                            |   |         |         |  |   |         |         |  |   |        
|                               | Domestic Borders superstores |                            | $ | 84.5    |         |  | $ | 80.4    |         |  | $ | 79.5    |        
|                               | Waldenbooks Specialty Retail |                            |   | 18.2    |         |  |   | 16.7    |         |  |   | 18.5    |        
|                               | International                |                            |   | 18.8    |         |  |   | 15.8    |         |  |   | 13.3    |        
|                               | Corporate                    |                            |   |        |         |  |   |        |         |  |   |        |        
|                               |                              |                            |   |         |         |  |   |         |        
|                               |                              | Total depreciation expense |   | $       | 121.5   |  |   | $       | 112.9   |  |   | $       | 111.3   | 
|                               |                              |                            |   |         |         |  |   |         |        
|Net income (loss)              |                              |                            |   |         |         |  |   |         |         |  |   |        
|                               | Domestic Borders superstores |                            | $ | 115.3   |         |  | $ | 112.0   |         |  | $ | 97.3    |        
|                               | Waldenbooks Specialty Retail |                            |   | 28.2    |         |  |   | 41.5    |         |  |   | 48.8    |        
|                               | International                |                            |   | (7.8    | )       |  |   | 5.6     |         |  |   | (1.3    | )      
|                               | Corporate                    |                            |   | (34.7   | )       |  |   | (27.2   | )       |  |   | (29.6   | )      
|                               |                              |                            |   |         |         |  |   |         |        
|                               |                              | Total net income           |   | $       | 101.0   |  |   | $       | 131.9   |  |   | $       | 115.2   | 
|                               |                              |                            |   |         |         |  |   |         |        
|Total assets                   |                              |                            |   |         |         |  |   |         |         |  |   |        
|                               | Domestic Borders superstores |                            | $ | 1,615.2 |         |  | $ | 1,484.7 |         |  | $ | 1,469.7 |        
|                               | Waldenbooks Specialty Retail |                            |   | 345.8   |         |  |   | 328.3   |         |  |   | 321.7   |        
|                               | International                |                            |   | 476.5   |         |  |   | 452.8   |         |  |   | 374.6   |        
|                               | Corporate                    |                            |   | 134.7   |         |  |   | 363.0   |         |  |   | 418.6   |        
|                               |                              |                            |   |         |         |  |   |         |        
|                               |                              | Total assets               |   | $       | 2,572.2 |  |   | $       | 2,628.8 |  |   | $       | 2,584.6 | 
|                               |                              |                            |   |         |         |  |   |         |        
|Capital expenditures           |                              |                            |   |         |         |  |   |         |         |  |   |        
|                               | Domestic Borders superstores |                            | $ | 98.1    |         |  | $ | 64.5    |         |  | $ | 69.8    |        
|                               | Waldenbooks Specialty Retail |                            |   | 19.8    |         |  |   | 12.2    |         |  |   | 6.5     |        
|                               | International                |                            |   | 45.9    |         |  |   | 20.6    |         |  |   | 20.7    |        
|                               | Corporate                    |                            |   | 32.5    |         |  |   | 18.2    |         |  |   | 13.9    |        
|                               |                              |                            |   |         |         |  |   |         |        
|                               |                              | Total capital expenditures |   | $       | 196.3   |  |   | $       | 115.5   |  |   | $       | 110.9   | 
|                               |                              |                            |   |         |         |  |   |         |        

67



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                             |       |      |      |      |      |   |      |      |  |   |      |      | 
|---------------------------- | ----- | ---- | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | ---- | 
|                             |       | 2005 |      |      | 2004 |   |      | 2003 | 
|                             |       |      |      |      |      |   |      |      | 
|Domestic Borders superstores |       | $    | 10.6 |      |      | $ | 10.2 |      |  | $ | 11.6 |     
|Waldenbooks Specialty Retail |       |      | 4.9  |      |      |   | 4.8  |      |  |   | 6.0  |     
|International                |       |      | 0.2  |      |      |   | 0.2  |      |  |   |     |     
|                             |       |      |      |      |      |   |      |      | 
|                             | Total |      | $    | 15.7 |      |   | $    | 15.2 |  |   | $    | 17.6 | 
|                             |       |      |      |      |      |   |      |      | 



|                   |               |                         |   |       |       |  |   |       |       |  |   |       |       | 
|------------------ | ------------- | ----------------------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                   |               | 2005                    |   |       | 2004  |  |   | 2003  |      
|                   |               |                         |   |       |       |  |   |       |      
|Long-lived assets: |               |                         |   |       |       |  |   |       |       |  |   |      
|                   | Domestic      |                         | $ | 688.4 |       |  | $ | 628.0 |       |  | $ | 644.4 |      
|                   | International |                         |   | 246.0 |       |  |   | 235.4 |       |  |   | 227.5 |      
|                   |               |                         |   |       |       |  |   |       |      
|                   |               | Total long-lived assets |   | $     | 934.4 |  |   | $     | 863.4 |  |   | $     | 871.9 | 
|                   |               |                         |   |       |       |  |   |       |      

NOTE 18  UNAUDITED QUARTERLY FINANCIAL DATA


|                  |                                          |                           |       |       |      |   |       |         |  |   |         |       |   |   |         |      | 
|----------------- | ---------------------------------------- | ------------------------- | ----- | ----- | ---- | - | ----- | ------- |  | - | ------- | ----- | - | - | ------- | ---- | 
|                  |                                          | Fiscal 2005 Quarter Ended |      
|                  |                                          |                           |      
|                  |                                          | April                     |       |       | July |   |       | October |  |   | January |      
|                  |                                          |                           |       |       |      |   |       |         |  |   |         |      
|Total revenue     |                                          | $                         | 857.3 |       |      | $ | 901.1 |         |  | $ | 845.8   |       |   | $ | 1,475.0 |     
|Gross margin      |                                          |                           | 216.6 |       |      |   | 231.2 |         |  |   | 203.0   |       |   |   | 488.9   |     
|Net income (loss) |                                          |                           | (5.3  | )     |      |   | 1.3   |         |  |   | (14.1   | )     |   |   | 119.1   |     
|                  | Diluted earnings (loss) per common share |                           |       | (0.07 | )    |   |       | 0.02    |  |   |         | (0.20 | ) |   |         | 1.78 | 
|                  | Basic earnings (loss) per common share   |                           |       | (0.07 | )    |   |       | 0.02    |  |   |         | (0.20 | ) |   |         | 1.80 | 

|                  |                                          |                           |       |      |      |   |       |         |  |   |         |       |   |   |         |      | 
|----------------- | ---------------------------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- |  | - | ------- | ----- | - | - | ------- | ---- | 
|                  |                                          | Fiscal 2004 Quarter Ended |      
|                  |                                          |                           |      
|                  |                                          | April                     |       |      | July |   |       | October |  |   | January |      
|                  |                                          |                           |       |      |      |   |       |         |  |   |         |      
|Total revenue     |                                          | $                         | 842.3 |      |      | $ | 858.5 |         |  | $ | 843.8   |       |   | $ | 1,386.8 |     
|Gross margin      |                                          |                           | 212.9 |      |      |   | 226.7 |         |  |   | 215.6   |       |   |   | 463.8   |     
|Net income (loss) |                                          |                           | 2.3   |      |      |   | 7.9   |         |  |   | (1.1    | )     |   |   | 122.8   |     
|                  | Diluted earnings (loss) per common share |                           |       | 0.03 |      |   |       | 0.10    |  |   |         | (0.01 | ) |   |         | 1.62 | 
|                  | Basic earnings (loss) per common share   |                           |       | 0.03 |      |   |       | 0.10    |  |   |         | (0.01 | ) |   |         | 1.65 | 



68



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


10-Q:


|                  |                                          |                           |       |       |      |   |       |         |  |   |       |       |  
|----------------- | ---------------------------------------- | ------------------------- | ----- | ----- | ---- | - | ----- | ------- |  | - | ----- | ----- | -
|                  |                                          | Fiscal 2005 Quarter Ended |      
|                  |                                          |                           |      
|                  |                                          | April                     |       |       | July |   |       | October | 
|                  |                                          |                           |       |       |      |   |       |         | 
|Total revenue     |                                          | $                         | 853.0 |       |      | $ | 895.8 |         |  | $ | 840.9 |      
|Gross margin      |                                          |                           | 213.8 |       |      |   | 226.7 |         |  |   | 200.0 |      
|Net income (loss) |                                          |                           | (5.3  | )     |      |   | 1.3   |         |  |   | (14.1 | )    
|                  | Diluted earnings (loss) per common share |                           |       | (0.07 | )    |   |       | 0.02    |  |   |       | (0.20 | )
|                  | Basic earnings (loss) per common share   |                           |       | (0.07 | )    |   |       | 0.02    |  |   |       | (0.20 | )

69



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON CONSOLIDATED FINANCIAL STATEMENTS


















| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





70



---



##### Table of Contents








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






Item 9A. Controls and Procedures


Controls and Procedures: The Companys Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Companys
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e)
and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), as of January 28, 2006 (the Evaluation
Date). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Companys
disclosure controls and procedures were effective in alerting
them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be
included in the Companys periodic filings under the
Exchange Act.


Changes in Internal
Control: During the quarter
ended January 28, 2006, the Company continued
implementation of a new merchandising system in Waldenbooks,
which it began during the third quarter of 2005. The Company
believes the controls over the processes affected by the
implementation are functioning effectively as of
January 28, 2006. Also during the quarter ended
January 28, 2006, the Company continued its review of its
internal controls over the selection and monitoring of
appropriate assumptions and factors affecting lease accounting
practices. As a result, the Company implemented additional
controls over international leases during the quarter ending
January 28, 2006. The Company believes these controls are
functioning effectively as of January 28, 2006.


Managements Annual Report on Internal Control over
Financial Reporting: Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended).
Management assessed the effectiveness of the Companys
internal control over financial reporting as of January 28,
2006. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal
Control  Integrated Framework. Based on this
assessment, management has concluded that, as of
January 28, 2006, the Companys internal control over
financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. The
Companys independent registered public accounting firm,
Ernst & Young LLP, has issued an audit report on the
Companys assessment of the effectiveness of internal
control over financial reporting as of January 28, 2006,
which is included herein.


71



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING














72



---



##### Table of Contents









| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





73



---



##### Table of Contents






Item 9B. Other Information







PART III





Item 10. Directors and Executive Officers of the
Registrant




Section 16(a) Beneficial Ownership Reporting
Compliance




Code of Ethics and Other Corporate Governance
Information







Item 11. Executive Compensation









|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters






Item 13. Certain Relationships and Related
Transactions







Item 14: Principal Accounting Fees and Services




74



---



##### Table of Contents






PART IV





Item 15. Exhibits, Financial Statement Schedules




|                                                                                                                                           |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                                           |  | Page |   
|                                                                                                                                           |  |      |   
|Consolidated Statements of Operations for the fiscal years ended
    January 28, 2006, January 23, 2005 and
    January 25, 2004           |  |      | 45 | 
|Consolidated Balance Sheets as of January 28, 2006 and
    January 23, 2005                                                                |  |      | 46 | 
|Consolidated Statements of Cash Flows for the fiscal years ended
    January 28, 2006, January 23, 2005 and
    January 25, 2004           |  |      | 47 | 
|Consolidated Statements of Stockholders Equity for the
    fiscal years ended January 28, 2006, January 23, 2005
    and January 25, 2004 |  |      | 48 | 
|Notes to Consolidated Financial Statements                                                                                                 |  |      | 49 | 
|Report of Independent Registered Public Accounting Firm                                                                                    |  |      | 70 | 







|        |    |             |  |                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(3)       |  | Agreement and plan of Merger dated as of April 8, 1997
    between Michigan Borders Group, Inc. and Borders Group, Inc.     
|        | 3  | .1(5)       |  | Restated Articles of Incorporation of Borders Group, Inc.                                                                   
|        | 3  | .2(7)       |  | Restated bylaws of Borders Group, Inc.                                                                                      
|        | 10 | .1(8)       |  | Form of Severance Agreement                                                                                                 
|        | 10 | .2(3)       |  | Borders Group, Inc. Stock Option Plan                                                                                       
|        | 10 | .3(8)       |  | Amendment to the Borders Group, Inc. Stock Option Plan                                                                      
|        | 10 | .4(1)       |  | Borders Group, Inc. Employee Stock Purchase Plan                                                                            
|        | 10 | .5(2)       |  | First Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                 
|        | 10 | .6(5)       |  | Second Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                
|        | 10 | .7(5)       |  | Third Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                 
|        | 10 | .8(16)      |  | Restated Borders Group, Inc. Annual Incentive Bonus Plan                                                                    
|        | 10 | .9(4)       |  | Borders Group, Inc. Stock Option Plan for International Employees                                                           
|        | 10 | .10(5)      |  | 1998 Borders Group, Inc. Stock Option Plan                                                                                  
|        | 10 | .11(5)      |  | Participation Agreement dated as of December 1, 1998 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto
|        | 10 | .12(6)      |  | Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
    Plan                                                           
|        | 10 | .13(8)      |  | Participation Agreement dated as of January 22, 2001 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto

75



---



##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .14(9)      |  | Note Purchase Agreement dated as of July 30, 2002 relating
    to the 6.31% Senior Guaranteed Notes of Borders Group, Inc.                                                                                                     
|        | 10 | .15(10)     |  | Borders Group, Inc. Long Term Incentive Plan                                                                                                                                                                                   
|        | 10 | .16(11)     |  | Participation Agreement dated as of November 15, 2002 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto                                                                                                  
|        | 10 | .17(12)     |  | Borders Group, Inc. 2004 Long-Term Incentive Plan                                                                                                                                                                              
|        | 10 | .18(13)     |  | First Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of May 20, 2004                                                                                                                          
|        | 10 | .19(13)     |  | Amended and Restated Multicurrency Revolving Credit Agreement
    dated as of July 30, 2004 among Borders Group, Inc., its
    subsidiaries and Parties thereto                                                                
|        | 10 | .20(13)     |  | Security Agreement dated as of July 30, 2004 among Borders
    Group, Inc., its subsidiaries and Parties thereto                                                                                                               
|        | 10 | .21(13)     |  | Amendment No. 1 to the Note Purchase Agreement dated as of
    July 30, 2004 among Borders Group, Inc., its subsidiaries
    and Parties thereto                                                                               
|        | 10 | .22(15)     |  | Restricted Share Unit Grant Agreement                                                                                                                                                                                          
|        | 10 | .23(17)     |  | Restricted Share Grant Agreement                                                                                                                                                                                               
|        | 10 | .24(18)     |  | Increase of Total Commitment and Amendment No. 1 dated as
    of October 25, 2005 to the Amended and Restated
    Multicurrency Revolving Credit Agreement, among Borders Group,
    Inc., its subsidiaries and Parties thereto
|        | 10 | .25(19)     |  | Employment and Consultancy Agreement between Mr. Josefowicz and
    the Company                                                                                                                                                
|        | 10 | .26(14)     |  | Non-Qualified Deferred Compensation Plan                                                                                                                                                                                       
|        | 10 | .27(20)     |  | 2006 Restricted Share Unit Grant Agreement                                                                                                                                                                                     
|        | 10 | .28(20)     |  | Summary of terms of fiscal 2006 compensation for non-employee
    directors and executive officers, including revision to standard
    form of severance agreement                                                             
|        | 14 | .1(11)      |  | Code of Ethics Relating to Financial Reporting                                                                                                                                                                                 
|        | 14 | .2(11)      |  | Business Conduct Policy                                                                                                                                                                                                        
|        | 21 | .1          |  | Subsidiaries of Registrant                                                                                                                                                                                                     
|        | 23 | .1          |  | Consent of Ernst & Young LLP                                                                                                                                                                                                   
|        | 31 | .1          |  | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                   
|        | 31 | .2          |  | Statement of Edward W. Wilhelm, Senior Vice President and
    Chief Financial Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                     
|        | 32 | .1          |  | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                   
|        | 32 | .2          |  | Statement of Edward W. Wilhelm, Senior Vice President and
    Chief Financial Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                     



|    |                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-1
    (File No. 333-90918).
|   
|(2) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-1
    (File No. 333-80643).

76



---



##### Table of Contents





|     |                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(3)  | Incorporated by reference from the Companys Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).                  
|    
|(4)  | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 26, 1998 (File
    No. 1-13740).   
|    
|(5)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 24, 1999 (File
    No. 1-13740).          
|    
|(6)  | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended October 24, 1999 (File
    No. 1-13740).
|    
|(7)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 28, 2001 (File
    No. 1-13740).          
|    
|(8)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 27, 2002 (File
    No. 1-13740).          
|    
|(9)  | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 28, 2002 (File
    No. 1-13740).   
|    
|(10) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 27, 2003 (Filed
    No. 1-13740).  
|    
|(11) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 25, 2004 (Filed
    No. 1-13740).         
|    
|(12) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File
    No. 1-13740).                                        
|    
|(13) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 25, 2004 (File
    No. 1-13740).   
|    
|(14) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    November 5, 2004 (File
    No. 1-13740).                       
|    
|(15) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    March 16, 2005 (File
    No. 1-13740).                         
|    
|(16) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File
    No. 1-13740).                                        
|    
|(17) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    March 21, 2005 (File
    No. 1-13740).                         
|    
|(18) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    October 28, 2005 (File No. 1-13740).                           
|    
|(19) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    January 25, 2006 (File
    No. 1-13740).                       
|    
|(20) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    March 24, 2006 (File
    No. 1-13740).                         









77



---



##### Table of Contents






SIGNATURES






| |                    
| | -------------------
| | Borders Group, Inc.
| | (Registrant)       



| |     |                          
| | --- | -------------------------
| | By: | /s/ GREGORY P. JOSEFOWICZ

| |                                                
| | -----------------------------------------------
| |                                                
| | Gregory P. Josefowicz                          
| | Chairman, Chief Executive Officer and President



|                                                       |  |                                                                                                    |  |                |  | 
|------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                                       |  | Title                                                                                              |  | Date          
|Name                                                   |  |                                                                                                    |  |               
|                                                       |  |                                                                                                    |  |               
|                                                      
|/s/ Gregory P.
    JosefowiczGregory P. Josefowicz     |  | Chairman, Chief Executive Officer, and President                                                   |  | April 5, 2006 
|                                                      
|/s/ Edward W. WilhelmEdward W. Wilhelm                 |  | Senior Vice President and Chief Financial Officer (Principal
    Financial and Accounting Officer) |  | April 5, 2006 
|                                                      
|/s/ Donald G. CampbellDonald G. Campbell               |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Joel J. CohenJoel J. Cohen                         |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Amy B. LaneAmy B. Lane                             |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Brian T. LightBrian T. Light                       |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Victor L. LundVictor L. Lund                       |  | Director                                                                                           |  | April  5, 2006
|                                                      
|/s/ Dr. Edna Greene
    MedfordDr. Edna Greene Medford |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Lawrence I. PollockLawrence I. Pollock             |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Beth M. PritchardBeth M. Pritchard                 |  | Director                                                                                           |  | April 5, 2006 
|                                                      
|/s/ Michael WeissMichael Weiss                         |  | Director                                                                                           |  | April 5, 2006 

78



---



##### Table of Contents



EXHIBIT INDEX


|        |    |         |             |                                                                                                                                                                
|------- | -- | ------- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|Number  |    |         | Description
|        |    |         |            
|        | 2  | .1(3)   |             | Agreement and plan of Merger dated as of April 8, 1997
    between Michigan Borders Group, Inc. and Borders Group, Inc.                                        
|        | 3  | .1(5)   |             | Restated Articles of Incorporation of Borders Group, Inc.                                                                                                      
|        | 3  | .2(7)   |             | Restated bylaws of Borders Group, Inc.                                                                                                                         
|        | 10 | .1(8)   |             | Form of Severance Agreement                                                                                                                                    
|        | 10 | .2(3)   |             | Borders Group, Inc. Stock Option Plan                                                                                                                          
|        | 10 | .3(8)   |             | Amendment to the Borders Group, Inc. Stock Option Plan                                                                                                         
|        | 10 | .4(1)   |             | Borders Group, Inc. Employee Stock Purchase Plan                                                                                                               
|        | 10 | .5(2)   |             | First Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                                                    
|        | 10 | .6(5)   |             | Second Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                                                   
|        | 10 | .7(5)   |             | Third Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                                                    
|        | 10 | .8(16)  |             | Restated Borders Group, Inc. Annual Incentive Bonus Plan                                                                                                       
|        | 10 | .9(4)   |             | Borders Group, Inc. Stock Option Plan for International Employees                                                                                              
|        | 10 | .10(5)  |             | 1998 Borders Group, Inc. Stock Option Plan                                                                                                                     
|        | 10 | .11(5)  |             | Participation Agreement dated as of December 1, 1998 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto                                   
|        | 10 | .12(6)  |             | Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
    Plan                                                                                              
|        | 10 | .13(8)  |             | Participation Agreement dated as of January 22, 2001 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto                                   
|        | 10 | .14(9)  |             | Note Purchase Agreement dated as of July 30, 2002 relating
    to the 6.31% Senior Guaranteed Notes of Borders Group, Inc.                                     
|        | 10 | .15(10) |             | Borders Group, Inc. Long Term Incentive Plan                                                                                                                   
|        | 10 | .16(11) |             | Participation Agreement dated as of November 15, 2002 by
    and among Borders Group, Inc., Borders, Inc. and Parties thereto                                  
|        | 10 | .17(12) |             | Borders Group, Inc. 2004 Long-Term Incentive Plan                                                                                                              
|        | 10 | .18(13) |             | First Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of May 20, 2004                                                          
|        | 10 | .19(13) |             | Amended and Restated Multicurrency Revolving Credit Agreement
    dated as of July 30, 2004 among Borders Group, Inc., its
    subsidiaries and Parties thereto
|        | 10 | .20(13) |             | Security Agreement dated as of July 30, 2004 among Borders
    Group, Inc., its subsidiaries and Parties thereto                                               
|        | 10 | .21(13) |             | Amendment No. 1 to the Note Purchase Agreement dated as of
    July 30, 2004 among Borders Group, Inc., its subsidiaries
    and Parties thereto               
|        | 10 | .22(15) |             | Restricted Share Unit Grant Agreement                                                                                                                          
|        | 10 | .23(17) |             | Restricted Share Grant Agreement                                                                                                                               



---



##### Table of Contents



|        |    |         |             |                                                                                                                                                                                                                                
|------- | -- | ------- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|Number  |    |         | Description
|        |    |         |            
|        | 10 | .24(18) |             | Increase of Total Commitment and Amendment No. 1 dated as
    of October 25, 2005 to the Amended and Restated
    Multicurrency Revolving Credit Agreement, among Borders Group,
    Inc., its subsidiaries and Parties thereto
|        | 10 | .25(19) |             | Employment and Consultancy Agreement between Mr. Josefowicz and
    the Company                                                                                                                                                
|        | 10 | .26(14) |             | Non-Qualified Deferred Compensation Plan                                                                                                                                                                                       
|        | 10 | .27(20) |             | 2006 Restricted Share Unit Grant Agreement                                                                                                                                                                                     
|        | 10 | .28(20) |             | Summary of terms of fiscal 2006 compensation for non-employee
    directors and executive officers, including revision to standard
    form of severance agreement                                                             
|        | 14 | .1(11)  |             | Code of Ethics Relating to Financial Reporting                                                                                                                                                                                 
|        | 14 | .2(11)  |             | Business Conduct Policy                                                                                                                                                                                                        
|        | 21 | .1      |             | Subsidiaries of Registrant                                                                                                                                                                                                     
|        | 23 | .1      |             | Consent of Ernst & Young LLP                                                                                                                                                                                                   
|        | 31 | .1      |             | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                   
|        | 31 | .2      |             | Statement of Edward W. Wilhelm, Senior Vice President and Chief
    Financial Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002                                                     
|        | 32 | .1      |             | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                   
|        | 32 | .2      |             | Statement of Edward W. Wilhelm, Senior Vice President and Chief
    Financial Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                     



|    |                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-1 (File
    No. 333-90918).                                 
|   
|(2) | Incorporated by reference from the Companys Registration
    Statement on
    Form S-1 (File
    No. 333-80643).                                 
|   
|(3) | Incorporated by reference from the Companys Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).               
|   
|(4) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 26, 1998 (File
    No. 1-13740).
|   
|(5) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 24, 1999 (File
    No. 1-13740).       
|   
|(6) | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for
    the quarter ended October 24, 1999 (File
    No. 1-13740). 
|   
|(7) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 28, 2001 (File
    No. 1-13740).       
|   
|(8) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 27, 2002 (File
    No. 1-13740).       
|   
|(9) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 28, 2002 (File
    No. 1-13740).



---



##### Table of Contents





|     |                                                                                                                                                    
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 27, 2003 (Filed
    No. 1-13740).
|    
|(11) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for
    the year ended January 25, 2004 (Filed
    No. 1-13740).       
|    
|(12) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File
    No. 1-13740).                                      
|    
|(13) | Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q for the
    quarter ended July 25, 2004 (File
    No. 1-13740). 
|    
|(14) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    November 5, 2004 (File
    No. 1-13740).                     
|    
|(15) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    March 16, 2005 (File
    No. 1-13740).                       
|    
|(16) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File
    No. 1-13740).                                      
|    
|(17) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    March 21, 2005 (File
    No. 1-13740).                       
|    
|(18) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    October 28, 2005 (File
    No. 1-13740).                     
|    
|(19) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    January 25, 2006 (File
    No. 1-13740).                     
|    
|(20) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated
    March 24, 2006 (File
    No. 1-13740).