##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
    Washington, D.C. 20549
    FORM 10-K
  (MARK ONE)þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    February 2, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to          .   Commission File Number 1-13740
    BORDERS GROUP, INC.
 (Exact name of registrant as
    specified in its charter)
  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)   (734) 477-1100(Registrants telephone
    number, including area code)
    Title of Class

Name of Exchange on which registeredCommon Stock

New York Stock Exchange   Securities
    registered pursuant to Section 12(g) of the act:
    None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
    Large accelerated filer
    þ

Accelerated
    filer o

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    Company o   Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 





BORDERS
    GROUP, INC. INDEX
  
  PagePART IItem 1.


Business


1Item 1A.


Risk Factors


9Item 1B.


Unresolved Staff Comments


13Item 2.


Properties


13Item 3.


Legal Proceedings


14Item 4.


Submission of Matters to a Vote of Security
    Holders


15PART IIItem 5.


Market for the Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


16Item 6.


Selected Financial Data


19Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


20Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


43Item 8.


Financial Statements and Supplementary Data


44Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


74Item 9A.


Controls and Procedures


74Item 9B.


Other Information


76PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


76Item 11.


Executive Compensation


76Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


76Item 13.


Certain Relationships and Related Transactions
    and Director Independence


76Item 14.


Principal Accountant Fees and Services


76PART IVItem 15.


Exhibits, Financial Statement Schedules


77Signatures


81Amendment to Restated Annual Incentive Bonus PlanSubsidiaries of RegistrantConsent of Ernst & Young LLPStatement of George L. Jones, President and Chief Executive Officer pursuant to Section 302Statement of Edward W. Wilhelm, Executive Vice President and Chief Financial Officer pursuant to Section 302Statement of George L. Jones, President and Chief Executive Officer pursuant to Section 906Statement of Edward W. Wilhelm, Executive Vice President and Chief Financial Officer pursuant to Section 906




---



##### Table of Contents



PART I  Item 1.
    Business  Forward-Looking
    Statements
        General
    Business
    Strategy
  e-commerce
 1




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##### Table of Contents



and/or
  Segment
    Information
    Domestic
    Borders Superstores
           2




---



##### Table of Contents



3




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##### Table of Contents



Number ofState

StoresAlaska


1Arizona


12Arkansas


1California


81Colorado


14Connecticut


10Delaware


2District of Columbia


3Florida


25Georgia


15Hawaii


8Idaho


2Illinois


36Indiana


12Iowa


4Kansas


7Kentucky


5Louisiana


1Maine


3Maryland


12Massachusetts


15Michigan


18Minnesota


7Mississippi


1Missouri


10Montana


3Nebraska


3Nevada


6New Hampshire


4New Jersey


15New Mexico


5New York


29North Carolina


10Ohio


20Oklahoma


4Oregon


7Pennsylvania


25Rhode Island


2South Dakota


1Tennessee


7Texas


23Utah


3Vermont


1Virginia


15Washington


13West Virginia


2Wisconsin


6Total


509   Waldenbooks
    Specialty Retail Stores
   4




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##### Table of Contents



Number ofState

StoresAlabama


3Alaska


2Arizona


5Arkansas


3California


34Colorado


5Connecticut


7Delaware


2District of Columbia


1Florida


34Georgia


11Hawaii


6Idaho


2Illinois


25Indiana


11Iowa


6Kansas


5Kentucky


10Louisiana


4Maine


2Maryland


13Massachusetts


16Michigan


21Minnesota


3Mississippi


3Missouri


7Montana


3Nebraska


4Nevada


4New Hampshire


5New Jersey


16New Mexico


2New York


20North Carolina


14North Dakota


1Ohio


30Oklahoma


8Oregon


6Pennsylvania


44Rhode Island


2South Carolina


8South Dakota


2Tennessee


6Texas


29Utah


2Vermont


3Virginia


15Washington


9West Virginia


6Wisconsin


9Wyoming


1Total


490   International
    Stores
     5




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##### Table of Contents



Number ofCountry

StoresAustralia


22New Zealand


5Puerto Rico


3Singapore


2Total


32       Internet
  e-commerce
  Distribution
  store-by-store
 6




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##### Table of Contents



Locality, Country

Number

Square FootageBedfordshire, United Kingdom (services Paperchase)


1


67,000California, United States


1


414,000Melbourne, Australia


1


35,300Ohio, United States


1


172,000Pennsylvania, United States


1


600,000Puerto Rico


1


10,500Singapore


1


8,200Tennessee, United States


3


926,000Total


10


2,233,000     Employees
    Trademarks
    and Service Marks
  ® ® ® ® ® ® ® ® ® ®
 7




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##### Table of Contents



Executive
    Officers of the Company
    Name

Age

PositionGeorge L. Jones


57


President and Chief Executive OfficerKenneth H. Armstrong


58


Executive Vice President of U.S. StoresRobert P. Gruen


58


Executive Vice President of Merchandising and MarketingEdward W. Wilhelm


49


Executive Vice President, Chief Financial OfficerThomas D. Carney


61


Executive Vice President, General Counsel and SecretaryDaniel T. Smith


43


Executive Vice President, Human Resources              8




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##### Table of Contents



Additional
    Information
  Form 10-K, Form 10-Q, Form 8-K Form 8-K.
  48108-2202.
  Form 10-K
  Item 1A.
    Risk
    Factors  Risk
    Factors
  Form 10-K
  Competitive
    Environment
       9




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##### Table of Contents



Availability
    of Capital Resources
        Strategic
    Alternatives Review Process
  and/or
  Planned
    Strategy for Domestic Borders Superstores
  e-commerce e-commerce
  Planned
    Strategy for the Waldenbooks Specialty Retail
    Business
   10




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##### Table of Contents



Planned
    Strategy for International Business
    Planned
    Strategy for
    E-commerce
    Business
  e-commerce e-commerce e-commerce e-commerce e-commerce
  Business
    Strategy
    Seasonality
    Consumer
    Spending Patterns
   11




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##### Table of Contents



Foreign
    Exchange Risk
    Guarantees
    of Disposed Foreign Businesses
      Potential
    for Uninsured Losses
    Litigation
    and Other Claims
    Information
    Technology Systems Risks
       12




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##### Table of Contents



Distribution
    and Logistics Network
    Reliance
    on Key Personnel
    Other
    Risks
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Number ofLease Terms to
    Expire During 12 Months Ending on or About January 31

Stores2009


112010


142011


242012


82013


172014 and later


435Total


509  13




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##### Table of Contents



Number ofLease Terms to
    Expire During 12 Months Ending on or About January 31

Stores2009


2572010


1182011


582012


332013


112014 and later


13Total


490     Number ofLease Terms to
    Expire During 12 Months Ending on or About January 31

Stores2009


22010


2011


2012


22013


12014 and later


27Total


32       Item 3.
    Legal
    Proceedings   14




---



##### Table of Contents



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




---



##### Table of Contents



PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    DividendsHigh

Low

DeclaredFiscal Quarter 2007First Quarter

$
22.34

$
19.52

$
0.11Second Quarter

$
23.41

$
15.02

$
0.11Third Quarter

$
16.32

$
12.28

$
0.11Fourth Quarter

$
13.88

$
9.21

$
0.11Fiscal Quarter 2006First Quarter

$
25.31

$
23.60

$
0.10Second Quarter

$
24.02

$
17.31

$
0.10Third Quarter

$
21.00

$
18.50

$
0.10Fourth Quarter

$
24.14

$
20.49

$
0.11        16




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##### Table of Contents



Stock
    Performance Graph
    COMPARISON OF CUMULATIVE FIVE YEAR TOTAL RETURN
  
 17




---



##### Table of Contents



Equity
    Securities Authorized for Issuance Under Equity Compensation
    Plans
    Number ofNumber of

Weighted-

SharesAwards

Average

AvailablePlan Category

Outstanding(2)

Exercise
    Price(3)

for IssuancePlans approved by stockholders:2004 Long-Term Incentive
    Plan(1)


2,660

$
18.22


4,709   (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
    February 2, 2008 there were approximately 1.4 million
    stock options outstanding under the Prior Plans with a
    weighted-average exercise price of $21.93, which, if forfeited
    or cancelled, become available for issuance under the 2004 Plan.(2)
    
    Number of awards outstanding as of February 2, 2008
    includes approximately 465,127 restricted share units and
    approximately 2,194,634 stock options.(3)
    
    Reflects the weighted-average exercise price of stock options
    outstanding as of February 2, 2008.    Purchases
    of Equity Securities
    ApproximateTotal Number of

Dollar Value ofShares Purchased

Shares that MayTotal

Average

as Part of
    Publicly

Yet Be PurchasedNumber of

Price Paid

Announced Plans

Under the PlansFiscal Period

Shares(1)

per
    Share(2)

or Programs

or ProgramsNovember 4, 2007 through December 1, 2007




$





$
92,845,391December 2, 2007 through December 29, 2007




$





$
92,845,391December 30, 2007 through February 2, 2008


57

$
10.82




$
92,229,224Total


57

$
10.82




$
92,229,224   (1)
    
    During the fourth quarter of 2007, the company retired
    56,947 shares which were acquired pursuant to the
    Companys employee benefit plans.(2)
    
    Average price paid per share includes commissions and is rounded
    to the nearest two decimal places. 18




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##### Table of Contents



Item 6.
    Selected
    Financial Data  SELECTED
    CONSOLIDATED FINANCIAL AND OPERATING DATA
    Fiscal Year EndedFeb. 2,


Feb. 3,


Jan. 28,

Jan. 23,

Jan. 25,(dollars in millions except per share data)

2008


2007(1)


2006(1)

2005

2004Statement of Operations DataDomestic Borders superstore sales

$
2,847.2


$
2,750.0


$
2,709.5

$
2,588.9

$
2,470.2Waldenbooks Specialty Retail sales


562.8



663.9



744.8


779.9


820.9International
    sales(2)


364.8



269.9



221.4


163.9


108.7Total
    sales(2)

$
3,774.8


$
3,683.8


$
3,675.7

$
3,532.7

$
3,399.8Operating income
    (loss)(2)

$
6.6


$
8.5


$
170.4

$
201.2

$
186.3Income (loss) before cumulative effect of accounting
    change(2)

$
(18.5
)

$
(13.0
)

$
96.5

$
117.9

$
108.4Cumulative effect of accounting change (net of
    tax)(2)
















2.1Income (loss) from continuing
    operations(2)


(18.5
)


(13.0
)


96.5


117.9


106.3Income (loss) from operations of discontinued operations


(13.2
)


(138.3
)


4.5


14.0


8.9Loss from disposal of discontinued operations


(125.7
)












Income (loss) from discontinued operations


(138.9
)


(138.3
)


4.5


14.0


8.9Net income (loss)

$
(157.4
)

$
(151.3
)

$
101.0

$
131.9

$
115.2Per Share DataDiluted (basic) earnings (loss) per common share before
    cumulative effect of accounting
    change(2)

$
(0.31
)

$
(0.21
)

$
1.36

$
1.51

$
1.37Diluted loss per common share from cumulative effect of
    accounting
    change(2)
















(0.02
)Diluted (basic) earnings (loss) from continuing operations per
    common
    share(2)


(0.31
)


(0.21
)


1.36


1.51


1.35Diluted (basic) earnings (loss) from discontinued operations per
    common share


(2.37
)


(2.23
)


0.06


0.18


0.11Diluted (basic) earnings (loss) per common share

$
(2.68
)

$
(2.44
)

$
1.42

$
1.69

$
1.46Cash dividends declared per common share

$
0.44


$
0.41


$
0.37

$
0.33

$
0.08Balance Sheet DataWorking capital  continuing
    operations(2)

$
38.2


$
106.6


$
287.5

$
511.1

$
529.2Working capital

$
38.2


$
127.7


$
326.7

$
569.4

$
556.0Total assets  continuing
    operations(2)

$
2,302.7


$
2,347.9


$
2,236.6

$
2,295.6

$
2,292.5Total assets

$
2,302.7


$
2,613.4


$
2,572.2

$
2,628.8

$
2,584.6Short-term borrowings  continuing
    operations(2)

$
548.4


$
501.4


$
183.0

$
141.0

$
132.6Short-term borrowings

$
548.4


$
542.0


$
206.4

$
141.0

$
140.7Long-term debt, including current portion

$
5.6


$
5.4


$
5.6

$
55.9

$
57.3Long-term capital lease obligations, including current portion

$



$
0.4


$
0.5

$
0.1

$
0.4Stockholders equity

$
476.9


$
642.0


$
927.8

$
1,088.9

$
1,100.6   (1)
    
    The Companys 2006 and 2005
    fiscal years consisted of 53 weeks.(2)
    
    Excludes the results of
    discontinued operations (Borders Ireland Limited, Books etc.,
    and U.K. Superstores). 19




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  General
    Business
    Strategy
  Strategic
    alternatives review
    process. On
    March 20, 2008, the Company announced that it would undergo
    a strategic alternative review process. J.P. Morgan
    Securities Inc. and Merrill Lynch & Co. have been
    retained as the Companys financial advisors to assist in
    this process. The review will include the investigation of a
    wide range of alternatives including the sale of the Company
    and/or
    certain divisions for the purpose of maximizing shareholder
    value.
    Grow comparable
    store sales and profitability in the domestic Borders
    superstores. The
    Company continues to focus on improving key retailing practices
    at its domestic superstores, including increasing effectiveness
    of merchandise presentation, improving assortment planning,
    replenishment and supply chain effectiveness, and ensuring
    consistency of execution across the chain. A key component in
    this strategy is the development of a concept store, the first
    of which opened during the first quarter of 2008. The concept
    store includes the implementation of destination
    businesses within certain of the Companys most
    popular categories, which will help to distinguish the
    Companys domestic superstores from competitors. The
    concept store also includes a Seattles Best Coffee cafe
    and a Paperchase shop, which continue to be drivers of both
    sales and increased profitability for their categories. The
    Company plans to open additional concept stores in 2008, and
    will implement select features of the concept store in its
    existing superstores based on financial analysis of costs and
    benefits. To address declining sales in the music category, as
    well as increasing space available for improved merchandising
    presentation and expansion of higher margin categories, the
    Company has begun reducing inventories and reallocating floor
    space in its stores. Also, the Company made changes in 2007 to
    its loyalty program, Borders Rewards, which has grown to over
    25 million members. The changes were intended to increase
    profitability, to drive revenue through partnerships with other
    organizations, and to drive sales by employing customer data to
    tailor promotions that meet specific customer needs and
    interests.
  Right-size the
    Waldenbooks Specialty Retail
    business. The
    Waldenbooks Specialty Retail segment has generally experienced
    negative comparable store sales percentages for the past several
    years, primarily due to the overall decrease in mall traffic,
    sluggish bestsellers and increased competition from all
    channels. The Company is working to aggressively right-size the
    Waldenbooks mall store base, which could result in additional
    asset impairments and store closure costs in the next few years,
    but will position the Company to improve sales, profitability
    and free cash flow in the long term. The Company will retain
    stable locations that meet acceptable profit and return on
    investment objectives and in those stores, change product
    assortment and formats to drive sales and profitability.
  Explore strategic
    alternatives in the International
    segment. As
    previously announced, the Company has suspended growth and
    investment in its International businesses, while focusing on
    improving the
 20




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##### Table of Contents



Leverage
    innovation, technology and strategic alliances to differentiate
    our business. In
    order to achieve the goals of the strategic plan detailed above,
    the Company plans to enhance its current systems environment.
    This includes a focus on the systems supporting the domestic
    Borders superstore business, including merchandise buying,
    replenishment and supply chain, as well as in-store technology
    enhancements. In addition, this effort includes development of a
    proprietary
    e-commerce
    platform, which will include both in-store and online
    e-commerce
    components. The proprietary
    e-commerce
    Web site will also allow the Company to engage in key
    partnerships that are expected to build incremental revenues and
    margins and connect
    e-commerce
    sales to the Companys Borders Rewards loyalty program. The
    Company expects to launch its
    e-commerce
    Web site during the spring of fiscal 2008.
    Other
    Information
  e-commerce
      Discontinued
    Operations
   21




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##### Table of Contents



22




---



##### Table of Contents



Results
    of Operations
    Feb. 2,


Feb. 3,


Jan. 28,2008


2007


2006Sales


100.0
%


100.0
%


100.0
%Other revenue


1.2



1.1



1.1Total revenue


101.2



101.1



101.1Cost of merchandise sold (includes occupancy)


75.2



74.2



72.1Gross margin


26.0



26.9



29.0Selling, general and administrative expenses


25.3



24.7



24.1Pre-opening expense


0.2



0.3



0.2Asset impairments and other writedowns


0.4



1.7



0.1Operating income


0.1



0.2



4.6Interest expense


1.1



0.8



0.4Income (loss) before income tax


(1.0
)


(0.6
)


4.2Income tax


(0.5
)


(0.2
)


1.6Income (loss) from continuing operations


(0.5
)%


(0.4
)%


2.6
%   Consolidated
    Results  Comparison of 2007 to 2006
  Sales
       23




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##### Table of Contents



Other
    Revenue
      Gross
    Margin
     24




---



##### Table of Contents



Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
      Interest
    Expense
   25




---



##### Table of Contents



Taxes
    Loss
    from Continuing Operations
    Consolidated
    Results  Comparison of 2006 to 2005
  Sales
            Other
    Revenue
   26




---



##### Table of Contents



Gross
    Margin
      Selling,
    General and Administrative Expenses
     27




---



##### Table of Contents



Asset
    Impairments and Other Writedowns
      Interest
    Expense
    Taxes
    Income
    (Loss) from Continuing Operations
    Domestic
    Borders Superstores
  (dollar amounts in
    millions)

2007


2006


2005Sales

$
2,847.2


$
2,750.0


$
2,709.5Other revenue

$
35.3


$
31.6


$
32.8Operating income

$
30.6


$
92.4


$
174.1Operating income as % of sales


1.1
%


3.4
%


6.4
%Store openings


18



31



15Store closings


8



5



4Store count


509



499



473   Domestic
    Borders Superstores  Comparison of 2007 to
    2006
  Sales
   28




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##### Table of Contents



Other
    Revenue
    Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
      Operating
    Income
   29




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##### Table of Contents



Domestic
    Borders Superstores  Comparison of 2006 to
    2005
  Sales
    Other
    Revenue
    Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
     30




---



##### Table of Contents



Operating
    Income
    Waldenbooks
    Specialty Retail
  (dollar amounts in
    millions)

2007


2006


2005Sales

$
562.8


$
663.9


$
744.8Other revenue

$
3.8


$
4.3


$
4.8Operating income (loss)

$
(21.4
)

$
(78.0
)

$
2.5Operating income (loss) as % of sales


(3.8
)%


(11.7
)%


0.3
%Store openings


1



10



23Store closings


75



124



50Store count


490



564



678   Waldenbooks
    Specialty Retail  Comparison of 2007 to
    2006
  Sales
    Other
    Revenue
    Gross
    Margin
      Selling,
    General and Administrative Expenses
   31




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##### Table of Contents



Asset
    Impairments and Other Writedowns
      Operating
    Loss
    Waldenbooks
    Specialty Retail  Comparison of 2006 to
    2005
  Sales
    Other
    Revenue
    Gross
    Margin
      Selling,
    General and Administrative Expenses
   32




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##### Table of Contents



Asset
    Impairments and Other Writedowns
      Operating
    Income (Loss)
    International
  (dollar amounts in
    millions)

2007


2006


2005Sales

$
364.8


$
269.9


$
221.4Other revenue

$
7.0


$
3.9


$
3.8Operating income

$
10.5


$
9.4


$
3.4Operating income as % of sales


2.9
%


3.5
%


1.5
%Superstores:Store openings


6



6



4Store count


32



26



20Paperchase stand-alone stores:Stores acquired










Store openings


9



6



4Store count


33



24



18   International 
    Comparison of 2007 to 2006
  Sales
    Other
    Revenue
   33




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##### Table of Contents



Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
      Operating
    Income
    International 
    Comparison of 2006 to 2005
  Sales
    Other
    Revenue
   34




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##### Table of Contents



Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
    Operating
    Income (Loss)
    Corporate
  (dollar amounts in
    millions)

2007


2006


2005Operating loss

$
(13.1
)

$
(15.3
)

$
(9.6
)     Corporate 
    Comparison of 2007 to 2006
    Corporate 
    Comparison of 2006 to 2005
   35




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##### Table of Contents



Liquidity
    and Capital Resources
  e-commerce
    e-commerce
  e-commerce
   36




---



##### Table of Contents



e-commerce
       37




---



##### Table of Contents



38




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##### Table of Contents



Off-Balance
    Sheet Arrangements
        Significant
    Contractual Obligations
    Fiscal Year2013 and(dollars in millions)

2008


2009-2010


2011-2012


Thereafter


TotalCredit Agreement borrowings

$
547.3


$



$



$



$
547.3Operating lease obligations


340.3



622.3



563.5



1,590.7



3,116.8Debt of consolidated VIEs


0.2



0.4



0.5



4.1



5.2Other borrowings


1.1



0.4











1.5Total

$
888.9


$
623.1


$
564.0


$
1,594.8


$
3,670.8    39




---



##### Table of Contents



Seasonality
    Fiscal 2007(dollars in millions)

Q1


Q2


Q3


Q4Sales

$
792.3


$
852.7


$
805.2


$
1,324.6Operating income (loss)


(40.1
)


(22.2
)


(56.2
)


125.1% of full year:Sales


21.0
%


22.6
%


21.3
%


35.1
%   Fiscal 2006(dollars in millions)

Q1


Q2


Q3


Q4Sales

$
784.6


$
780.0


$
764.6


$
1,354.6Operating income (loss)


(18.1
)


(9.2
)


(48.0
)


83.8% of full year:Sales


21.3
%


21.2
%


20.7
%


36.8
%   Critical
    Accounting Policies and Estimates
    Asset
    Impairments
      Goodwill
    Impairment
   40




---



##### Table of Contents



Inventory
      Leases
    Gift
    Cards
    Advertising
    and Vendor Incentive Programs
   41




---



##### Table of Contents



No. 02-16, (EITF 02-16),
    Income
    Taxes
      New
    Accounting Guidance
     42




---



##### Table of Contents



Related
    Party Transactions
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk    Interest
    Rate Risk
      Foreign
    Currency Exchange Risk
  and/or
 43




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##### Table of Contents



Item 8.
    Financial
    Statements and Supplementary Data  INDEX TO
    FINANCIAL STATEMENTS
  PageConsolidated Statements of Operations for the
    fiscal years ended February 2, 2008, February 3, 2007,
    and January 28, 2006


45Consolidated Balance Sheets as of
    February 2, 2008 and February 3, 2007


46Consolidated Statements of Cash Flows for the
    fiscal years ended February 2, 2008, February 3, 2007,
    and January 28, 2006


47Consolidated Statements of Stockholders
    Equity for the fiscal years ended February 2, 2008,
    February 3, 2007, and January 28, 2006


48Notes to Consolidated Financial Statements


49Report of Independent Registered Public
    Accounting Firm


73  44




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##### Table of Contents



CONSOLIDATED
    STATEMENTS OF OPERATIONS

(dollars in millions except per share data) Fiscal Year EndedFeb. 2,


Feb. 3,


Jan. 28,2008


2007


2006Sales

$
3,774.8


$
3,683.8


$
3,675.7Other revenue


46.1



39.8



41.4Total revenue

$
3,820.9


$
3,723.6


$
3,717.1Cost of merchandise sold (includes occupancy)


2,838.3



2,733.0



2,650.4Gross margin


982.6



990.6



1,066.7Selling, general and administrative expenses


956.1



912.1



885.7Pre-opening expense


6.8



9.4



5.7Asset impairments and other writedowns


13.1



60.6



4.9Operating income


6.6



8.5



170.4Interest expense


42.9



29.7



13.6Income (loss) before income tax


(36.3
)


(21.2
)


156.8Income tax provision (benefit)


(17.8
)


(8.2
)


60.3Income (loss) from continuing operations

$
(18.5
)

$
(13.0
)

$
96.5Income (loss) from operations of discontinued operations (net of
    income tax benefit of $6.1, $9.7 and $2.2)


(13.2
)


(138.3
)


4.5Loss from disposal of discontinued operations (net of income tax
    benefit of $5.8, $0.0 and $0.0)


(125.7
)






Income (loss) from discontinued operations (net of tax)


(138.9
)


(138.3
)


4.5Net income (loss)

$
(157.4
)

$
(151.3
)

$
101.0Earnings (loss) per common share data (Note 2)Diluted:Earnings (loss) from continuing operations per common share

$
(0.31
)

$
(0.21
)

$
1.36Earnings (loss) from discontinued operations per common share

$
(2.37
)

$
(2.23
)

$
0.06Net income (loss) per common share

$
(2.68
)

$
(2.44
)

$
1.42Weighted-average common shares outstanding


58.7



61.9



71.1Basic:Earnings (loss) from continuing operations per common share

$
(0.31
)

$
(0.21
)

$
1.39Earnings (loss) from discontinued operations per common share

$
(2.37
)

$
(2.23
)

$
0.06Net income (loss) per common share

$
(2.68
)

$
(2.44
)

$
1.45Weighted-average common shares outstanding


58.7



61.9



69.8    45




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##### Table of Contents



CONSOLIDATED
    BALANCE SHEETS

(dollars in millions except share amounts) Fiscal Year EndedFeb. 2,


Feb. 3,2008


2007AssetsCurrent assets:Cash and cash equivalents

$
61.0


$
108.6Merchandise inventories


1,327.2



1,347.3Accounts receivable and other current assets


117.8



128.7Current assets of discontinued operations






139.0Total current assets


1,506.0



1,723.6Property and equipment, net


638.8



604.2Other assets


64.9



65.1Deferred income taxes


52.5



53.7Goodwill


40.5



40.3Noncurrent assets of discontinued operations






126.5Total assets

$
2,302.7


$
2,613.4Liabilities, Minority Interest and Stockholders
    EquityCurrent liabilities:Short-term borrowings and current portion of long-term debt

$
548.6


$
502.0Trade accounts payable


550.3



562.0Accrued payroll and other liabilities


344.6



336.9Taxes, including income taxes


18.3



61.0Deferred income taxes


6.0



16.1Current liabilities of discontinued operations






117.9Total current liabilities


1,467.8



1,595.9Long-term debt


5.4



5.2Other long-term liabilities


350.4



313.2Noncurrent liabilities of discontinued operations






55.1Contingencies (Note 6)






Total liabilities


1,823.6



1,969.4Minority interest


2.2



2.0Total liabilities and minority interest


1,825.8



1,971.4Stockholders equity:Common stock, 300,000,000 shares authorized; 58,794,224 and
    58,476,306 shares issued and outstanding at
    February 2, 2008 and February 3, 2007, respectively


184.0



175.5Accumulated other comprehensive income


42.4



28.5Retained earnings


250.5



438.0Total stockholders equity


476.9



642.0Total liabilities, minority interest and stockholders
    equity

$
2,302.7


$
2,613.4    46




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##### Table of Contents



CONSOLIDATED
    STATEMENTS OF CASH FLOWS

(dollars in millions) Fiscal Year EndedFeb. 2,


Feb. 3,


Jan. 28,2008


2007


2006Cash provided by (used for):Net income (loss)

$
(157.4
)

$
(151.3
)

$
101.0Net income (loss) from discontinued operations


(138.9
)


(138.3
)


4.5Net income (loss) from continuing operations


(18.5
)


(13.0
)


96.5OperationsAdjustments to reconcile net income (loss) from continuing
    operations to operating cash flows:Depreciation


109.9



115.8



109.6Gain on sale of investments






(5.0
)


(1.2
)Loss on disposal of assets


5.1



6.8



5.3Increase in minority interest


0.4



0.6



Increase in deferred income taxes


(4.8
)


(29.1
)


(12.9
)(Increase) decrease in other long-term assets


0.3



(1.3
)


(3.9
)Increase in other long-term liabilities


10.3



12.8



18.0Asset impairments and other writedowns


6.7



53.4



2.6Cash provided by (used for) current assets and current
    liabilities:(Increase) decrease in inventories


30.4



(34.5
)


(86.7
)(Increase) decrease in accounts receivable


10.5



(5.4
)


(14.1
)(Increase) decrease in prepaid expenses


(3.6
)


8.4



(21.0
)Increase (decrease) in accounts payable


(15.6
)


(57.4
)


47.4Increase (decrease) in taxes payable


(30.4
)


(70.1
)


29.4Increase (decrease) in accrued payroll and other liabilities


0.8



56.7



(7.8
)Net cash provided by operating activities of continuing
    operations


101.5



38.7



161.2InvestingCapital expenditures


(142.7
)


(175.4
)


(162.2
)Investment in Paperchase


(0.8
)






Proceeds from the sale of discontinued operations


20.4







Proceeds from sale of investments






21.6



105.2Net cash used for investing activities of continuing operations


(123.1
)


(153.8
)


(57.0
)FinancingRepayment of long-term debt










(0.1
)Issuance of long-term debt


0.4







Repayment of long-term capital lease obligations


(0.4
)


(0.1
)


(0.1
)Net funding from (repayment of) credit facility


43.4



303.4



(1.2
)Proceeds from the excess tax benefit of options exercised


0.9



4.3



Payment of cash dividends


(19.4
)


(25.2
)


(25.5
)Issuance of common stock


8.2



26.0



27.6Repurchase of common stock


(0.6
)


(148.7
)


(265.9
)Net cash provided by (used for) financing activities of
    continuing operations


32.5



159.7



(265.2
)Effect of exchange rates on cash and cash equivalents of
    continuing operations


(4.8
)


(2.0
)


(4.0
)Net cash provided by (used for) operating activities of
    discontinued operations


(12.8
)


6.1



24.8Net cash used for investing activities of discontinued operations


(4.4
)


(28.8
)


(34.1
)Net cash provided by (used for) financing activities of
    discontinued operations


(41.9
)


13.9



24.2Effect of exchange rates on cash and cash equivalents of
    discontinued operations


5.4



2.1



3.0Net cash provided by (used for) discontinued operations


(53.7
)


(6.7
)


17.9Net increase (decrease) in cash and cash equivalents


(47.6
)


35.9



(147.1
)Cash and cash equivalents at beginning of year


108.6



72.7



219.8Cash and cash equivalents at end of year

$
61.0


$
108.6


$
72.7Supplemental cash flow disclosures:Interest paid

$
45.7


$
34.0


$
13.9Income taxes paid

$
14.0


$
63.5


$
55.0    47




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##### Table of Contents



CONSOLIDATED
    STATEMENTS OF STOCKHOLDERS EQUITY

(dollars in millions except share amounts) AccumulatedOtherCommon Stock


Comprehensive


RetainedShares


Amount


Income (Loss)


Earnings


TotalBalance at January 23, 2005


73,875,627


$
524.6


$
25.3


$
539.0


$
1,088.9Net income














101.0



101.0Foreign currency translation adjustments










(5.9
)






(5.9
)Comprehensive income


















95.1Cash dividends declared ($0.37 per common share)














(25.5
)


(25.5
)Issuance of common stock


1,866,917



27.6











27.6Repurchase and retirement of common stock


(11,593,147
)


(265.9
)










(265.9
)Tax benefit of equity compensation






7.5











7.5Change in deferred compensation






0.1











0.1Balance at January 28, 2006


64,149,397


$
293.9


$
19.4


$
614.5


$
927.8Net loss














(151.3
)


(151.3
)Foreign currency translation adjustments










9.1







9.1Comprehensive income


















(142.2
)Cash dividends declared ($0.41 per common share)














(25.2
)


(25.2
)Issuance of common stock


1,544,904



26.0











26.0Repurchase and retirement of common stock


(7,217,995
)


(148.7
)










(148.7
)Tax benefit of equity compensation






4.3











4.3Balance at February 3, 2007


58,476,306


$
175.5


$
28.5


$
438.0


$
642.0Net loss














(157.4
)


(157.4
)Discontinued operations currency translation adjustment










8.7







8.7Foreign currency translation adjustments










5.2







5.2Comprehensive income


















(143.5
)Adoption of FIN 48














(4.2
)


(4.2
)Cash dividends declared ($0.44 per common share)














(25.9
)


(25.9
)Issuance of common stock


450,855



8.2











8.2Repurchase and retirement of common stock


(132,937
)


(0.6
)










(0.6
)Tax benefit of equity compensation






0.9











0.9Balance at February 2, 2008


58,794,224


$
184.0


$
42.4


$
250.5


$
476.9    48




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##### 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 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
    February 2, 2008, the Company operated 541 superstores
    under the Borders name, including 509 in the United States, 22
    in Australia, five in New Zealand, three in Puerto Rico, and two
    in Singapore. The Company also operated 490 mall-based and other
    bookstores, including stores operated under the Waldenbooks,
    Borders Express and Borders Outlet names, as well as
    Borders-branded airport stores. In addition, the Company owned
    and operated United Kingdom-based Paperchase Products Limited
    (Paperchase), a designer and retailer of stationery,
    cards and gifts. As of February 2, 2008, Paperchase
    operated 112 stores, primarily in the United Kingdom, and
    Paperchase shops have been added to 319 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: Effective
    with respect to fiscal 2005, the Companys fiscal year ends
    on the Saturday closest to the last day of January. Fiscal 2007
    consisted of 52 weeks, and ended on February 2, 2008.
    Fiscal 2006 consisted of 53 weeks and ended
    February 3, 2007. Fiscal 2005 consisted of 53 weeks
    and ended January 28, 2006. 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. Excluding discontinued
    operations, foreign currency transaction gains/(losses) were
    $1.4, $(0.1), and $1.4 in 2007, 2006, and 2005, respectively.
  Cash and
    Equivalents: Cash
    and equivalents include short-term investments with original
    maturities of 90 days or less.
  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 $104.8 and $107.6 as of February 2, 2008, and
    February 3, 2007, 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 on
    accelerated methods for income tax purposes. Store properties
    are leased and improvements are amortized over the shorter of
    their estimated useful lives or the initial term of the related
    lease, generally over three to 20 years. Other annual rates
    used in computing depreciation for financial statement purposes
 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 and Waldenbooks Specialty Retail,
    and the regional 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 principally 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. Changes in any of the
    assumptions underlying these estimates may result in the future
    impairment of goodwill.
      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
 50




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    Landlord
    Allowances: The
    Company classifies landlord allowances as deferred rent
    liabilities, under Other long-term liabilities on
    the Companys consolidated balance sheets, totaling $123.0
    and $119.2 as of February 2, 2008 and February 3,
    2007, 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 amortizes landlord allowances over the life of the
    initial lease term, and classifies this amortization 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.
    Accumulated Other
    Comprehensive Income
    (Loss): Accumulated
    other comprehensive income (loss) for the Company includes
    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 $42.4 and $28.5 for
    exchange rate fluctuations as of February 2, 2008 and
    February 3, 2007, 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.
  Borders
    Rewards: The
    Company launched the Borders Rewards loyalty program during the
    first quarter of 2006. Membership in Borders Rewards is free,
    with no enrollment costs or annual fees. Five percent of all
    qualifying purchases made by members throughout 2006 were
    credited to personal Holiday Savings accounts, which were used
    on holiday purchases made from November 15, 2006 through
    January 31, 2007. Beginning April 12, 2007, the
    Company replaced the programs previous member benefits
    with Borders
 51




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    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 trends, and records the related income as a component
    of Other revenue in the Companys consolidated
    statements of operations. The Company has included the liability
    for gift cards as a component of Accrued payroll and other
    liabilities on its consolidated balance sheets, totaling
    $145.2 and $147.5 as of February 2, 2008 and
    February 3, 2007, respectively.
  Advertising
    Costs: The Company
    expenses advertising costs as incurred, and recorded
    approximately $35.8, $36.8 and $35.4 of gross advertising
    expenses in 2007, 2006 and 2005, respectively.
    No. 02-16, (EITF 02-16),
      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.
   52




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
      Equity-Based
    Compensation: Beginning
    in 2006, the Company accounted for equity-based compensation in
    accordance with the provisions of Statement of Financial
    Accounting Standards No. 123 (revised 2004),
    Share-Based Payment (FAS 123(R)).
    The Company adopted FAS 123(R) using the modified
    prospective method. Under the modified prospective method,
    compensation cost is recognized for all share-based payments
    granted after the adoption of FAS 123(R) and for all awards
    granted to employees prior to the adoption date of
    FAS 123(R) that remain unvested on the adoption date.
    Accordingly, no restatements were made to prior periods. The
    Company records compensation cost for equity-based compensation
    in the Selling, general and administrative line of
    the consolidated statements of operations.
    2005Net income, as reported

$
101.0Add: Stock-based employee compensation expense included in
    reported net income, net of related tax effects


0.9Deduct: Total stock-based employee compensation expense
    determined under fair value method for all awards, net of tax


1.8Pro forma net income

$
100.1Earnings per share:Diluted  as reported

$
1.42Diluted  pro forma

$
1.41Basic  as reported

$
1.45Basic  pro forma

$
1.43     New Accounting
    Guidance: In
    September 2006, the FASB issued Statement of Financial
    Accounting Standards No. 157, Fair Value
    Measurements (FAS 157). FAS 157
    provides guidance for using fair value to measure assets and
    liabilities and only applies when other standards require or
    permit the fair value measurement of assets and liabilities.
    FAS 157 does not expand the use of fair value measurement.
    FAS 157 is effective for fiscal years beginning after
    November 15, 2007. The Company does not expect the adoption
    of FAS 157 to have a material impact on its consolidated
    financial position or results of operations.
 53




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
         Reclassifications: Certain
    prior year amounts have been reclassified to conform to current
    year presentation.
  NOTE 2 
    WEIGHTED-AVERAGE
    SHARES OUTSTANDING    2007


2006


2005Weighted-average common shares outstanding  basic


58,742



61,940



69,785Dilutive effect of employee stock options










1,303Weighted-average common shares outstanding  diluted


58,742



61,940



71,088     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. When an indicator of
    impairment is present, the Company evaluates the recoverability
    of the affected assets.
 54




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
           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)
        2007


2006


2005Sales

$
28.0


$
6.9


$
7.2Operating loss


(3.8
)


(2.0
)


(2.2
)     2007


2006


2005Sales

$
37.1


$
76.0


$
25.9Operating loss


(3.2
)


(4.9
)


(0.3
)   NOTE 4 
    PROPERTY
    AND EQUIPMENT    2007


2006Property and equipmentBuildings

$
6.3


$
6.3Leasehold improvements


628.0



583.0Furniture and fixtures


1,035.8



953.1Construction in progress


11.5



21.71,681.6



1,564.1Less  accumulated depreciation and amortization


(1,042.8
)


(959.9
)Property and equipment, net

$
638.8


$
604.2  56




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
  NOTE 5 
    INCOME
    TAXES    2007


2006


2005CurrentFederal

$
(24.5
)

$
3.8


$
61.6State and local


(3.5
)


2.3



9.5Foreign


1.3



11.5



2.7DeferredFederal


4.5



(11.8
)


(11.9
)State and local


0.9



(7.6
)


(0.8
)Foreign


3.5



(6.4
)


(0.8
)Total income tax provision

$
(17.8
)

$
(8.2
)

$
60.3     2007


2006


2005Federal statutory rate

$
(12.6
)

$
(7.4
)

$
54.9State and local taxes, net of federal tax benefit


(2.6
)


(0.6
)


5.6Effect of foreign tax rates


(1.6
)


(5.6
)


0.8Foreign net operating loss impact


(1.3
)


5.2



1.0Other


0.3



0.2



(2.0
)Total income tax provision

$
(17.8
)

$
(8.2
)

$
60.3  57




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    2007


2006Deferred tax assetsAccruals and other current liabilities

$
8.9


$
7.9Deferred revenue


13.3



8.6Other long-term liabilities


3.4



2.6Deferred compensation


4.3



2.0Deferred rent


57.7



59.3State deferred tax assets


8.2



9.5Foreign deferred tax assets


18.1



13.5Asset impairments and other writedowns


19.1



21.8Valuation allowance


(6.5
)


(14.6
)Total deferred tax assets


126.5



110.6Deferred tax liabilitiesInventory


18.4



18.6Property and equipment


56.2



51.6Foreign deferred tax liabilities


5.4



2.8Total deferred tax liabilities


80.0



73.0Net deferred tax assets (liabilities)

$
46.5


$
37.6          58




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
      Opening balance at February 4, 2007

$
8.4Additions to tax positions related to current year


15.3Additions to tax positions related to prior years


0.8Reductions to tax positions related to current year


Reductions to tax positions related to prior years


(3.2
)Reductions to tax positions related to settlements with tax
    authorities


(0.1
)Reductions to tax positions related to lapse of statutory
    limitations


(2.3
)Ending balance at February 2, 2008

$
18.9         NOTE 6 
    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. In February of 2008, the Superior
    Court for the State of California granted final approval of a
    settlement pursuant to which the Company agreed to pay up to
    $3.5 to settle the matter. Based upon claims actually made
    by class
 59




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
      e-commerce.
      NOTE 7 
    DEBT  Credit
    Facility: The
    Company has a Multicurrency Revolving Credit Agreement, as
    amended (the Credit Agreement), which expires in
    July 2011. The Credit Agreement provides for borrowings of up to
    $1,125.0 million 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 the applicable increment or LIBOR plus
    the applicable 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 million. The
    Company had borrowings outstanding under the Credit Agreement
    (or a prior agreement) of $547.3, $499.0 and $130.1 at
    February 2, 2008, February 3, 2007 and
    January 28, 2006,
 60




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    Debt of
    Consolidated
    VIEs: The Company
    includes the debt of two variable interest entities
    (VIEs), consolidated pursuant to Financial
    Accounting Standards Board Interpretation No. 46R,
    Consolidation of Variable Interest Entities
    (FIN 46R), in its consolidated balance sheets.
    Scheduled principal payments of this debt as of February 2,
    2008 total $0.2 in 2008, $0.2 in 2009, $0.2 in 2010, $0.2 in
    2011, $0.3 in 2012, $4.1 in all later years, and in the
    aggregate, total $5.2. See Note 8 
    Leases for further discussion of the Companys
    consolidation of these VIEs.
      NOTE 8 
    LEASES  Operating
    Leases: The
    Company conducts operations primarily in leased facilities.
    Store leases are generally for initial 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).
  Lease
    Commitments: Future
    minimum lease payments under operating leases at
    February 2, 2008 total $340.3 in 2008, $321.0 in 2009,
    $301.3 in 2010, $286.1 in 2011, $277.4 in 2012, and $1,590.7 in
    all later years, and in the aggregate, total $3,116.8.
 61




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
  Rental
    Expenses: A
    summary of operating lease minimum and percentage rental
    expense, excluding discontinued operations, follows:
  2007

2006

2005Minimum rentals

$
362.7

$
356.3

$
331.6Percentage rentals


30.4


23.7


19.0Total

$
393.1

$
380.0

$
350.6   Capitalized
    Leases: The
    Company, at times, accounts for certain items under capital
    leases. The Company has no capitalized leases as of
    February 2, 2008.
  Consolidated
    VIEs: The Company
    is the primary beneficiary of two variable interest entities
    (VIEs) due to the Companys guarantee of the
    debt of these entities. As a result, the Company consolidates
    these VIEs and has recorded property and equipment, net of
    accumulated depreciation, of $4.9, long-term debt (including
    current portion) of $5.2 and minority interest of $0.3 at
    February 2, 2008, and has recorded property and equipment,
    net of accumulated depreciation, of $5.1, long-term debt
    (including current portion) of $5.4 and minority interest of
    $0.3 at February 3, 2007.
  NOTE 9 
    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 401(K) Savings
    Plan. The Companys expense related to this plan was $4.0,
    $4.2, and $4.2 for 2007, 2006 and 2005, respectively.
  NOTE 10 
    STOCK-BASED
    COMPENSATION 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 February 2, 2008,
    4.7 million shares remained available for grant.
         62




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
      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.
    Weighted-

Aggregate

Weighted-Number

Average

Intrinsic

AverageAll Plans

of Shares

Exercise Price

Value

Contract LifeOutstanding at January 23, 2005


8,996


21.48Granted


13


24.43Exercised


1,737


14.85

$
15.5Forfeited


907


23.79Outstanding at January 28, 2006


6,365


22.98Granted


531


18.59Exercised


1,338


16.03

$
9.7Forfeited


717


24.34Outstanding at February 3, 2007


4,841


24.22Granted


1,781


18.24Exercised


173


16.43

$
0.9Forfeited


2,813


26.79Outstanding at February 2, 2008


3,636


19.69

$
71.6


4.3Balance exercisable atJanuary 28, 2006


5,752


23.20February 3, 2007


4,238


24.93February 2, 2008


1,666


21.71

$
36.2


2.1    63




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    2007


2006


2005Risk-free interest rate


3.9-5.1
%


4.7-5.1
%


3.8-4.1
%Expected life


3-5 years



3-5 years



3-5 yearsExpected volatility


25.3-29.7
%


25.1-25.5
%


25.6-27.6
%Expected dividends


1.8-4.1
%


1.6-2.3
%


1.3-1.6
%       Outstanding

ExercisableRange of

Number of

Weighted-Average

Weighted-Average

Number of

Weighted-AverageExercise Prices

Shares

Remaining Life

Exercise Price

Shares

Exercise Price$10.23-$13.63


67


4.5


12.22


30


13.10$13.64-$17.03


928


5.6


15.24


202


14.56$17.04-$20.44


1,469


5.6


19.16


320


17.49$20.45-$23.84


742


1.8


21.75


685


21.75$23.85-$27.25


196


2.4


24.85


195


24.85$27.26-$30.66














$30.67-$34.06


234


0.3


32.00


234


32.00  64




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    Number of

Weighted-Average

Weighted-AverageShares

Purchase Price

at Grant Date FMVStock purchased:2004 Plan (or prior plan)2005


32


17.80


26.052006


75


14.17


17.752007


30


16.82


21.37Employee plan2005


26


20.28


23.862006








2007








Stock and stock units issued:Time-vested shares issued:2004 Plan2005


50





23.962006


114





24.162007


250





18.06Performance-based stock units issued:2004 Plan2005


395





26.242006


405





23.592007


46





20.42   NOTE 11 
    ACQUISITION OF PAPERCHASE PRODUCTS, LTD.
      NOTE 12 
    FINANCIAL
    INSTRUMENTS   65




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
        NOTE 13 
    SEGMENT
    INFORMATION    2007


2006


2005SalesDomestic Borders superstores

$
2,847.2


$
2,750.0


$
2,709.5Waldenbooks Specialty Retail


562.8



663.9



744.8International


364.8



269.9



221.4Total

$
3,774.8


$
3,683.8


$
3,675.7Depreciation expenseDomestic Borders superstores

$
90.2


$
86.7


$
84.5Waldenbooks Specialty Retail


7.7



20.9



18.2International


12.0



8.2



6.9Total depreciation expense

$
109.9


$
115.8


$
109.6Operating income (loss)Domestic Borders superstores

$
30.6


$
92.4


$
174.1Waldenbooks Specialty Retail


(21.4
)


(78.0
)


2.5International


10.5



9.4



3.4Corporate


(13.1
)


(15.3
)


(9.6
)Total operating income

$
6.6


$
8.5


$
170.4 66




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
  2007

2006

2005Total assetsDomestic Borders superstores

$
1,719.5

$
1,714.6

$
1,615.2Waldenbooks Specialty Retail


264.9


322.3


345.8International


241.8


182.6


140.9Corporate


76.5


128.4


134.7Total assets of continuing operations

$
2,302.7

$
2,347.9

$
2,236.6Discontinued operations





265.5


335.6Total assets

$
2,302.7

$
2,613.4

$
2,572.2Capital expendituresDomestic Borders superstores

$
103.6

$
128.9

$
98.1Waldenbooks Specialty Retail


7.5


12.0


19.8International


20.7


18.9


11.8Corporate


10.9


15.6


32.5Total capital expenditures

$
142.7

$
175.4

$
162.2     2007

2006

2005Domestic Borders superstores

$
10.4

$
12.9

$
10.6Waldenbooks Specialty Retail


0.1


6.1


4.9International


0.2


0.3


0.2Total

$
10.7

$
19.3

$
15.7     2007

2006

2005Long-lived assets:Domestic

$
714.5

$
705.3

$
688.4International


82.2


58.0


39.7Total long-lived assets of continuing operations

$
796.7

$
763.3

$
728.1Discontinued operations





126.5


206.3Total long-lived assets

$
796.7

$
889.8

$
934.4  67




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    2007

2006

2005SalesBooks

$
2,496.1

$
2,416.7

$
2,429.0Music


276.5


318.5


366.2Video


268.4


248.6


232.9Gifts & stationery


300.0


259.5


211.5Other


433.8


440.5


436.1Total Sales

$
3,774.8

$
3,683.8

$
3,675.7   NOTE 14 
    DISCONTINUED
    OPERATIONS           68




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    2007


2006


2005Total revenue

$
232.1


$
389.9


$
362.1Income (loss) from operations of discontinued operations before
    income tax


(19.3
)


(148.0
)


2.3Income (loss) from operations of discontinued operations (net of
    income tax benefit of $6.1, $9.7 and $2.2, respectively)


(13.2
)


(138.3
)


4.5Income (loss) on disposal of discontinued operations (net of
    income tax benefit of $5.8, $0.0, and $0.0 respectively)


(125.7
)






Income (loss) from discontinued operations (net of income tax
    benefit of $11.9, $9.7 and $2.2, respectively)


(138.9
)


(138.3
)


4.5   February 3,2007Cash and cash equivalents

$
11.8Merchandise inventories


104.7Accounts receivable and other current assets


22.5Current assets of discontinued operations

$
139.0Property and equipment (net of accumulated depreciation)

$
103.5Other assets


23.0Noncurrent assets of discontinued operations

$
126.5Short-term borrowings and current portion of long-term debt

$
40.6Accounts payable


39.4Accrued payroll and other liabilities


26.2Other liabilities


11.7Current liabilities of discontinued operations

$
117.9Long-term liabilities

$
55.1Noncurrent liabilities of discontinued operations

$
55.1  69




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
  NOTE 15 
    UNAUDITED
    QUARTERLY FINANCIAL DATA  Fiscal 2007Q1


Q2


Q3


Q4Total revenue

$
798.7


$
861.5


$
813.6


$
1,347.1Gross margin


184.9



213.2



176.2



408.3Income (loss) from continuing operations


(29.1
)


(19.4
)


(41.7
)


71.7Loss from discontinued operations


(6.8
)


(5.7
)


(119.4
)


(7.0
)Net income (loss)


(35.9
)


(25.1
)


(161.1
)


64.7Diluted:Income (loss) from continuing operations per common share


(0.50
)


(0.33
)


(0.71
)


1.22Loss from discontinued operations per common share


(0.11
)


(0.10
)


(2.03
)


(0.12
)Net income (loss) per common share


(0.61
)


(0.43
)


(2.74
)


1.10Basic:Income (loss) from continuing operations per common share


(0.50
)


(0.33
)


(0.71
)


1.22Loss from discontinued operations per common share


(0.11
)


(0.10
)


(2.03
)


(0.12
)Net income (loss) per common share


(0.61
)


(0.43
)


(2.74
)


1.10   Fiscal 2006Q1


Q2


Q3


Q4Total revenue

$
790.4


$
788.2


$
771.0


$
1,374.0Gross margin


192.1



198.7



173.3



426.5Income (loss) from continuing operations


(14.1
)


(9.3
)


(34.4
)


44.8Loss from discontinued operations


(6.1
)


(9.1
)


(4.7
)


(118.4
)Net income (loss)


(20.2
)


(18.4
)


(39.1
)


(73.6
)Diluted:Income (loss) from continuing operations per common share


(0.22
)


(0.15
)


(0.56
)


0.74Loss from discontinued operations per common share


(0.09
)


(0.14
)


(0.08
)


(1.96
)Net income (loss) per common share


(0.31
)


(0.29
)


(0.64
)


(1.22
)Basic:Income (loss) from continuing operations per common share


(0.22
)


(0.15
)


(0.56
)


0.76Loss from discontinued operations per common share


(0.09
)


(0.14
)


(0.08
)


(2.01
)Net income (loss) per common share


(0.31
)


(0.29
)


(0.64
)


(1.25
)    70




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
  NOTE 16 
    SUBSEQUENT
    EVENTS  and/or
           71




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
       72




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON CONSOLIDATED FINANCIAL STATEMENTS               
    73




---



##### 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 February 2, 2008 (the
    Evaluation Date). Based on such evaluation, such
    officers have concluded that the Companys controls and
    procedures were effective to ensure that information required to
    be disclosed in this annual report is recorded, processed,
    summarized and reported within the time periods specified in the
    SECs rules and forms, and that such information is
    accumulated and communicated to management, including the
    Companys Chief Executive Officer (principal executive
    officer) and Chief Financial Officer (principal financial
    officer), to allow timely decisions regarding required
    disclosure.
  Changes in
    Internal
    Control: There
    have been no changes in our internal control over financial
    reporting that occurred in the last fiscal quarter that have
    materially affected, or are reasonably likely to materially
    affect, our internal control over financial reporting.
  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 February 2,
    2008. 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
    February 2, 2008, 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 effectiveness of internal control over financial
    reporting as of February 2, 2008, which is included herein.
 74




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON INTERNAL CONTROL OVER FINANCIAL REPORTING
                 
   75




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##### Table of Contents



Item 9B.
    Other
    Information   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance      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 and Director
    Independence    Item 14:
    Principal
    Accounting Fees and Services   76




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##### Table of Contents



PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules    PageConsolidated Statements of Operations for the fiscal years ended
    February 2, 2008, February 3, 2007 and
    January 28, 2006


45Consolidated Balance Sheets as of February 2, 2008 and
    February 3, 2007


46Consolidated Statements of Cash Flows for the fiscal years ended
    February 2, 2008, February 3, 2007 and
    January 28, 2006


47Consolidated Statements of Stockholders Equity for the
    fiscal years ended February 2, 2008, February 3, 2007
    and January 28, 2006


48Notes to Consolidated Financial Statements


49Report of Independent Registered Public Accounting Firm


73         ExhibitNumber

Description2
.1(1)

Agreement and plan of Merger dated as of April 8, 1997
    between Michigan Borders Group, Inc. and Borders Group, Inc.3
.1(3)

Restated Articles of Incorporation of Borders Group, Inc.3
.2(20)

Amendment to the Restated Articles of Incorporation of Borders
    Group, Inc.3
.3(5)

Restated bylaws of Borders Group, Inc.3
.4(16)

First Amendment to the Restated By laws of Borders Group, Inc.3
.5(20)

Second Amendment to the Restated By laws of Borders Group, Inc.3
.6(23)

Third Amendment to the Restated By laws of Borders Group, Inc.3
.7(24)

Fourth Amendment to the Restated By laws of Borders Group, Inc.4
.1(27)

Warrant and Registration Rights Agreement, dated as of April 9,
    2008, among Borders Group, Inc. and Computershare Inc. and
    Computershare Trust Company, N.A., as Warrant Agent.4
.2(27)

Side Letter, dated as of April 9, 2008, between Pershing
    Square Capital Management, L.P. and Borders Group, Inc.10
.1(11)

Restated Borders Group, Inc. Annual Incentive Bonus Plan10
.2

First Amendment to the Restated Borders Group, Inc. Annual
    Incentive Bonus Plan dated as of March 31, 200810
.3(7)

Borders Group, Inc. 2004 Long-Term Incentive Plan10
.4(8)

First Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of May 20, 2004 77




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##### Table of Contents



ExhibitNumber

Description10
.5(26)

Second Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of March 30, 200710
.6(1)

Borders Group, Inc. Stock Option Plan10
.7(5)

Amendment to the Borders Group, Inc. Stock Option Plan10
.8(2)

Borders Group, Inc. Stock Option Plan for International Employees10
.9(3)

1998 Borders Group, Inc. Stock Option Plan10
.10(4)

Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
    Plan10
.11(9)

Non-Qualified Deferred Compensation Plan10
.12(10)

Restricted Share Unit Grant Agreement10
.13(12)

Restricted Share Grant Agreement10
.14(14)

2006 Restricted Share Unit Grant Agreement10
.15(14)

Summary of terms of fiscal 2006 compensation for non-employee
    directors and executive officers10
.16(18)

Summary of terms of fiscal 2006 compensation for
    Mr. Lawrence I. Pollock related to his role as
    non-executive chairman of the board of directors10
.17(13)

Employment and Consultancy Agreement between Mr. Josefowicz
    and the Company10
.18(15)

Revised Form of Severance Agreement for Executive Officers
    (other than Mr. Josefowicz)10
.19(16)

Summary of Employment Agreement between Mr. Jones and the
    Company10
.20(16)

Employment Agreement between Mr. Jones and the Company10
.21(25)

Employment terms between Mr. Armstrong and the Company10
.22(25)

Employment terms between Mr. Gruen and the Company10
.23(3)

Participation Agreement dated as of December 1, 1998 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto10
.24(5)

Participation Agreement dated as of January 22, 2001 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto10
.25(6)

Participation Agreement dated as of November 15, 2002 by
    and among Borders Group, Inc., Borders, Inc. and Parties thereto10
.26(8)

Security Agreement dated as of July 30, 2004 among Borders
    Group, Inc., its subsidiaries and Parties thereto10
.27(17)

Second Amended and Restated Multicurrency Revolving Credit
    Agreement dated as of July 31, 2006 among Borders Group,
    Inc., its subsidiaries and Parties thereto10
.28(19)

Amendment No. 1 to the Second Amended and Restated
    Multicurrency Revolving Credit Agreement dated as of
    April 2, 2007, among the Company, its subsidiaries named
    therein and the lenders named therein10
.29(21)

Amendment No. 2 to the Second Amended and Restated
    Multicurrency Revolving Credit Agreement dated as of
    July 31, 2006 among Borders Group, Inc. its subsidiaries
    and Parties thereto10
.30(27)

Amendment No. 3 to the Second Amended and Restated
    Multicurrency Revolving Credit Agreement among Borders Group,
    Inc. its subsidiaries and Parties thereto10
.31(22)

Deed of Tax Covenant between BGI (UK) limited and Bookshop
    Acquisitions Limited 78




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##### Table of Contents



ExhibitNumber

Description10
.32(22)

Brand License Agreement between Borders Properties, Inc. and
    Borders (UK) Limited and Borders Books Ireland Limited10
.33(22)

Transitional Services Agreement between Borders International
    Services, Inc. and Borders (UK) Limited and Borders Books
    Ireland Limited10
.34(22)

Subscription and Shareholders Agreement between Bookshop
    Acquisitions Limited and, Luk Johnson and BGI (UK) Limited10
.35(26)

Commitment Letter from Pershing Square Capital Management, L.P.
    to Borders Group, Inc., dated as of March 19, 200810
.36(27)

Purchase Offer Letter, dated as of April 9, 2008, between
    Pershing Square Capital Management, L.P. and Borders Group, Inc.10
.37(27)

Deed of Charge Over Shares between BGP (UK) Limited (as Chargor)
    and Pershing Square Capital Management, L.P. (as Collateral
    Agent).10
.38(27)

Senior Secured Credit Agreement among Borders Group, Inc. (the
    Borrower), Pershing Square Capital Management, L.P. (as
    Administrative Agent and as Collateral Agent) and the lenders
    named therein, dated as of April 9, 2008.14
.1(10)

Code of Ethics Relating to Financial Reporting14
.2(10)

Business Conduct Policy21
.1

Subsidiaries of Registrant23
.1

Consent of Ernst & Young LLP31
.1

Statement of George L. Jones, President and Chief Executive
    Officer of Borders Group, Inc. pursuant to Section 302 of
    the Sarbanes-Oxley Act of 200231
.2

Statement of Edward W. Wilhelm, Executive Vice President and
    Chief Financial Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200232
.1

Statement of George L. Jones, President and Chief Executive
    Officer of Borders Group, Inc. pursuant to Section 906 of
    the Sarbanes-Oxley Act of 200232
.2

Statement of Edward W. Wilhelm, Executive 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 Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).(2)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended July 26, 1998 (File
    No. 1-13740).(3)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 24, 1999 (File
    No. 1-13740).(4)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended October 24, 1999 (File
    No. 1-13740).(5)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 28, 2001 (File
    No. 1-13740).(6)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 25, 2004 (Filed
    No. 1-13740).(7)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File
    No. 1-13740). 79




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##### Table of Contents



(8)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended July 25, 2004 (File
    No. 1-13740).(9)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated November 5, 2004 (File
    No. 1-13740).(10)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 16, 2005 (File
    No. 1-13740).(11)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File
    No. 1-13740).(12)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 21, 2005 (File
    No. 1-13740).(13)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated January 25, 2006 (File
    No. 1-13740).(14)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 24, 2006 (File
    No. 1-13740).(15)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended April 29, 2006 (File
    No. 1-13740).(16)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated July 13, 2006 (File
    No. 1-13740).(17)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated July 31, 2006 (File
    No. 1-13740).(18)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated September 14, 2006 (File
    No. 1-13740).(19)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated April 2, 2007 (File
    No. 1-13740).(20)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated May 25, 2007 (File
    No. 1-13740).(21)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated August 28, 2007 (File
    No. 1-13740).(22)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated September 21, 2007 (File
    No. 1-13740).(23)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated October 2, 2007 (File
    No. 1-13740).(24)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated January 17, 2008 (File
    No. 1-13740).(25)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended February 3, 2007 (Filed
    No. 1-13740).(26)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 19, 2008 (File
    No. 1-13740).(27)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated April 9, 2008 (File
    No. 1-13740).         80




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##### Table of Contents



SIGNATURES    
  By:
    /s/  GEORGE
    L. JONES   Chief Executive Officer and President
    Name

Title

Date/s/  George
    L. JonesGeorge
    L. Jones

Chief Executive Officer and President

April 14, 2008/s/  Edward
    W. WilhelmEdward
    W. Wilhelm

Executive Vice President and 
    Chief Financial Officer (Principal Financial and Accounting
    Officer)

April 14, 2008/s/  Michael
    G. ArchboldMichael
    G. Archbold

Director

April 14, 2008/s/  Donald
    G. CampbellDonald
    G. Campbell

Director

April 14, 2008/s/  Joel
    J. CohenJoel
    J. Cohen

Director

April 14, 2008/s/  Amy
    B. LaneAmy
    B. Lane

Director

April 14, 2008/s/  Brian
    T. LightBrian
    T. Light

Director

April 14, 2008/s/  Victor
    L. LundVictor
    L. Lund

Director

April 14, 2008/s/  Dr. Edna
    MedfordDr. Edna
    Medford

Director

April 14, 2008/s/  Richard
    McGuireRichard
    McGuire

Director

April 14, 2008/s/  Lawrence
    I. PollockLawrence
    I. Pollock

Director, Non-Executive Chairman

April 14, 2008/s/  Michael
    WeissMichael
    Weiss

Director

April 14, 2008  81




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##### Table of Contents



EXHIBIT INDEX
   ExhibitNumber

Description2
.1(1)

Agreement and plan of Merger dated as of April 8, 1997
    between Michigan Borders Group, Inc. and Borders Group, Inc.3
.1(3)

Restated Articles of Incorporation of Borders Group, Inc.3
.2(20)

Amendment to the Restated Articles of Incorporation of Borders
    Group, Inc.3
.3(5)

Restated bylaws of Borders Group, Inc.3
.4(16)

First Amendment to the Restated By laws of Borders Group, Inc.3
.5(20)

Second Amendment to the Restated By laws of Borders Group, Inc.3
.6(23)

Third Amendment to the Restated By laws of Borders Group, Inc.3
.7(24)

Fourth Amendment to the Restated By laws of Borders Group, Inc.4
.1(27)

Warrant and Registration Rights Agreement, dated as of April 9,
    2008, among Borders Group, Inc. and Computershare Inc. and
    Computershare Trust Company, N.A., as Warrant Agent.4
.2(27)

Side Letter, dated as of April 9, 2008, between Pershing
    Square Capital Management, L.P. and Borders Group, Inc.10
.1(11)

Restated Borders Group, Inc. Annual Incentive Bonus Plan10
.2

First Amendment to the Restated Borders Group, Inc. Annual
    Incentive Bonus Plan dated as of March 31, 200810
.3(7)

Borders Group, Inc. 2004 Long-Term Incentive Plan10
.4(8)

First Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of May 20, 200410
.5(26)

Second Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of March 30, 200710
.6(1)

Borders Group, Inc. Stock Option Plan10
.7(5)

Amendment to the Borders Group, Inc. Stock Option Plan10
.8(2)

Borders Group, Inc. Stock Option Plan for International Employees10
.9(3)

1998 Borders Group, Inc. Stock Option Plan10
.10(4)

Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
    Plan10
.11(9)

Non-Qualified Deferred Compensation Plan10
.12(10)

Restricted Share Unit Grant Agreement10
.13(12)

Restricted Share Grant Agreement10
.14(14)

2006 Restricted Share Unit Grant Agreement10
.15(14)

Summary of terms of fiscal 2006 compensation for non-employee
    directors and executive officers10
.16(18)

Summary of terms of fiscal 2006 compensation for
    Mr. Lawrence I. Pollock related to his role as
    non-executive chairman of the board of directors10
.17(13)

Employment and Consultancy Agreement between Mr. Josefowicz
    and the Company10
.18(15)

Revised Form of Severance Agreement for Executive Officers
    (other than Mr. Josefowicz)10
.19(16)

Summary of Employment Agreement between Mr. Jones and the
    Company10
.20(16)

Employment Agreement between Mr. Jones and the Company10
.21(25)

Employment terms between Mr. Armstrong and the Company10
.22(25)

Employment terms between Mr. Gruen and the Company10
.23(3)

Participation Agreement dated as of December 1, 1998 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto10
.24(5)

Participation Agreement dated as of January 22, 2001 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto




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##### Table of Contents



ExhibitNumber

Description10
.25(6)

Participation Agreement dated as of November 15, 2002 by
    and among Borders Group, Inc., Borders, Inc. and Parties thereto10
.26(8)

Security Agreement dated as of July 30, 2004 among Borders
    Group, Inc., its subsidiaries and Parties thereto10
.27(17)

Second Amended and Restated Multicurrency Revolving Credit
    Agreement dated as of July 31, 2006 among Borders Group,
    Inc., its subsidiaries and Parties thereto10
.28(19)

Amendment No. 1 to the Second Amended and Restated
    Multicurrency Revolving Credit Agreement dated as of
    April 2, 2007, among the Company, its subsidiaries named
    therein and the lenders named therein10
.29(21)

Amendment No. 2 to the Second Amended and Restated
    Multicurrency Revolving Credit Agreement dated as of
    July 31, 2006 among Borders Group, Inc. its subsidiaries
    and Parties thereto10
.30(27)

Amendment No. 3 to the Second Amended and Restated
    Multicurrency Revolving Credit Agreement among Borders Group,
    Inc. its subsidiaries and Parties thereto10
.31(22)

Deed of Tax Covenant between BGI (UK) limited and Bookshop
    Acquisitions Limited10
.32(22)

Brand License Agreement between Borders Properties, Inc. and
    Borders (UK) Limited and Borders Books Ireland Limited10
.33(22)

Transitional Services Agreement between Borders International
    Services, Inc. and Borders (UK) Limited and Borders Books
    Ireland Limited10
.34(22)

Subscription and Shareholders Agreement between Bookshop
    Acquisitions Limited and, Luk Johnson and BGI (UK) Limited10
.35(26)

Commitment Letter from Pershing Square Capital Management, L.P.
    to Borders Group, Inc., dated as of March 19, 200810
.36(27)

Purchase Offer Letter, dated as of April 9, 2008, between
    Pershing Square Capital Management, L.P. and Borders Group, Inc.10
.37(27)

Deed of Charge Over Shares between BGP (UK) Limited (as Chargor)
    and Pershing Square Capital Management, L.P. (as Collateral
    Agent).10
.38(27)

Senior Secured Credit Agreement among Borders Group, Inc. (the
    Borrower), Pershing Square Capital Management, L.P. (as
    Administrative Agent and as Collateral Agent) and the lenders
    named therein, dated as of April 9, 2008.14
.1(10)

Code of Ethics Relating to Financial Reporting14
.2(10)

Business Conduct Policy21
.1

Subsidiaries of Registrant23
.1

Consent of Ernst & Young LLP31
.1

Statement of George L. Jones, President and Chief Executive
    Officer of Borders Group, Inc. pursuant to Section 302 of
    the Sarbanes-Oxley Act of 200231
.2

Statement of Edward W. Wilhelm, Executive Vice President and
    Chief Financial Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200232
.1

Statement of George L. Jones, President and Chief Executive
    Officer of Borders Group, Inc. pursuant to Section 906 of
    the Sarbanes-Oxley Act of 200232
.2

Statement of Edward W. Wilhelm, Executive 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 Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).(2)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended July 26, 1998 (File
    No. 1-13740).




---



##### Table of Contents



(3)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 24, 1999 (File
    No. 1-13740).(4)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended October 24, 1999 (File
    No. 1-13740).(5)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 28, 2001 (File
    No. 1-13740).(6)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 25, 2004 (Filed
    No. 1-13740).(7)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File
    No. 1-13740).(8)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended July 25, 2004 (File
    No. 1-13740).(9)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated November 5, 2004 (File
    No. 1-13740).(10)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 16, 2005 (File
    No. 1-13740).(11)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File
    No. 1-13740).(12)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 21, 2005 (File
    No. 1-13740).(13)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated January 25, 2006 (File
    No. 1-13740).(14)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 24, 2006 (File
    No. 1-13740).(15)
    
    Incorporated by reference from the Companys Quarterly
    Report on
    Form 10-Q
    for the quarter ended April 29, 2006 (File
    No. 1-13740).(16)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated July 13, 2006 (File
    No. 1-13740).(17)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated July 31, 2006 (File
    No. 1-13740).(18)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated September 14, 2006 (File
    No. 1-13740).(19)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated April 2, 2007 (File
    No. 1-13740).(20)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated May 25, 2007 (File
    No. 1-13740).(21)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated August 28, 2007 (File
    No. 1-13740).(22)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated September 21, 2007 (File
    No. 1-13740).(23)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated October 2, 2007 (File
    No. 1-13740).(24)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated January 17, 2008 (File
    No. 1-13740).(25)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended February 3, 2007 (Filed
    No. 1-13740).(26)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 19, 2008 (File
    No. 1-13740).(27)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated April 9, 2008 (File
    No. 1-13740).