##### 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 3, 2007ORo

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

38-3294588(State or other jurisdiction of

(I.R.S. Employerincorporation or organization)

Identification No.)100 Phoenix Drive, Ann Arbor,
    Michigan

48108(Address of principal executive
    offices)

(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
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 Large accelerated
    filer þ     Accelerated
    filer o     Non-accelerated
    filer o
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




---



##### 



BORDERS
    GROUP, INC. INDEX
  
  PagePART IItem 1.


Business


1Item 1A.


Risk
    Factors


8Item 1B.


Unresolved Staff
    Comments


12Item 2.


Properties


12Item 3.


Legal
    Proceedings


13Item 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


15Item 6.


Selected Financial
    Data


18Item 7.


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


19Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


40Item 8.


Financial
    Statements and Supplementary Data


42Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


67Item 9A.


Controls and
    Procedures


67Item 9B.


Other
    Information


69PART IIIItem 10.


Directors,
    Executive Officers and Corporate Governance


69Item 11.


Executive
    Compensation


69Item 12.


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


69Item 13.


Certain
    Relationships and Related Transactions and Director
    Independence


69Item 14.


Principal
    Accounting Fees and Services


70PART IVItem 15.


Exhibits, Financial
    Statement Schedules


70Signatures


74Employment terms between Mr. Armstrong and the CompanyEmployment terms between Mr. Gruen and the CompanySecond Amendment to the Borders Group, Inc. 2004 Long Term Incentive PlanSeverance AgreementSubsidiaries 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
  Form 10-K
  General
    Business
    Strategy
  e-commerce
 1




---



##### Table of Contents



Segment
    Information
    Domestic
    Borders Superstores
  hard-to-find
         2




---



##### Table of Contents



Number ofState

StoresAlaska


1Arizona


12Arkansas


1California


80Colorado


14Connecticut


10Delaware


2District of Columbia


3Florida


24Georgia


15Hawaii


7Idaho


2Illinois


35Indiana


12Iowa


4Kansas


7Kentucky


5Louisiana


1Maine


3Maryland


12Massachusetts


13Michigan


17Minnesota


8Mississippi


1Missouri


10Montana


3Nebraska


2Nevada


6New Hampshire


4New Jersey


17New Mexico


5New York


29North Carolina


10Ohio


19Oklahoma


4Oregon


7Pennsylvania


23Rhode Island


2South Dakota


1Tennessee


7Texas


22Utah


3Vermont


1Virginia


15Washington


12West Virginia


2Wisconsin


6Total


499   Waldenbooks
    Specialty Retail Stores
     3




---



##### Table of Contents



Number ofState

StoresAlabama


3Alaska


2Arizona


6Arkansas


3California


44Colorado


6Connecticut


9Delaware


2District of Columbia


1Florida


36Georgia


14Hawaii


7Idaho


3Illinois


30Indiana


14Iowa


6Kansas


5Kentucky


11Louisiana


5Maine


2Maryland


18Massachusetts


19Michigan


24Minnesota


4Mississippi


4Missouri


8Montana


3Nebraska


4Nevada


4New Hampshire


5New Jersey


21New Mexico


2New York


24North Carolina


16North Dakota


2Ohio


31Oklahoma


9Oregon


7Pennsylvania


46Rhode Island


2South Carolina


10South Dakota


2Tennessee


9Texas


30Utah


3Vermont


3Virginia


16Washington


12West Virginia


6Wisconsin


10Wyoming


1Total


564   International
    Stores
   4




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##### Table of Contents



Number ofCountry

StoresAustralia


20Ireland


1New Zealand


2Puerto Rico


3Singapore


1United Kingdom


41Total


68         Internet
    Distribution
  store-by-store
 5




---



##### Table of Contents



Locality, Country

Number

Square FootageAuckland, New Zealand


1


1,800Bedfordshire, United Kingdom


1


67,000California, United States


1


414,000Christchurch, New Zealand


1


700Indiana, United States


1


96,000Kuala Lumpur, Malaysia


1


4,200Melbourne, Australia


1


35,300Ohio, United States


1


172,000Pennsylvania, United States


1


600,000Perth, Australia


1


12,000Puerto Rico


1


700Singapore


1


8,200St. Columb, United Kingdom


1


100,000Tennessee, United States


3


926,000Total


16


2,437,900   state-of-the-art
  Employees
   6




---



##### Table of Contents



Trademarks
    and Service Marks
  ® ® ® ® ® ® ® ® ® ® ®
  Executive
    Officers of the Company
    Name

Age

PositionGeorge L. Jones


56


President and Chief Executive
    OfficerKenneth H. Armstrong


57


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


57


Executive Vice President of
    Merchandising and MarketingCedric J. Vanzura


42


Executive Vice President Emerging
    Business, Technology, Chief Strategy OfficerEdward W. Wilhelm


48


Executive Vice President, Chief
    Financial OfficerThomas D. Carney


60


Senior Vice President, General
    Counsel and SecretaryDaniel T. Smith


42


Senior Vice President, Human
    Resources          7




---



##### 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
 8




---



##### Table of Contents



Competitive
    Environment
          Planned
    Strategy for Domestic Borders Superstores
  e-commerce e-commerce
  Planned
    Strategy for the Waldenbooks Specialty Retail
    Business
   9




---



##### 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
    Foreign
    Exchange Risk
   10




---



##### Table of Contents



Potential
    for Uninsured Losses
    Litigation
    and Other Claims
    Information
    Technology Systems Risk
    Availability
    of Capital Resources
    Distribution
    and Logistics Network
  state-of-the-art
  Reliance
    on Key Personnel
   11




---



##### Table of Contents



Other
    Risks
    Item 1B.
    Unresolved
    Staff Comments    Item 2.
    Properties    Number ofLease Terms to
    Expire During 12 Months Ending on or About January 31

Stores2008


92009


52010


142011


162012


202013 and later


435Total


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

Stores2008


3542009


972010


632011


292012


92013 and later


12Total


564  12




---



##### Table of Contents



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

Stores2008


2009


22010


2011


2012


12013 and later


65Total


68       Item 3.
    Legal
    Proceedings     13




---



##### Table of Contents



out-of-jurisdiction e-commerce.
   14




---



##### Table of Contents



Item 4.
    Submission
    of Matters to a Vote of Security Holders   PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities    DividendsHigh

Low

DeclaredFiscal 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

$
0.11Fiscal Quarter 2005First Quarter

$
27.47

$
23.59

$
0.09Second Quarter

$
26.20

$
23.92

$
0.09Third Quarter

$
25.30

$
18.96

$
0.09Fourth Quarter

$
24.70

$
18.71

$
0.10        15




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##### Table of Contents



Stock
    Performance Graph
    
  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)


1,266

$
18.95


3,658    (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 3, 2007 there were approximately 4.3 million
    stock options outstanding under the Prior Plans with a
    weighted-average exercise price of $24.92, which, if forfeited
    or cancelled, become available for issuance under the 2004 Plan.(2)
    
    Number of awards outstanding as of February 3, 2007
    includes approximately 695,302 restricted share units and
    approximately 570,693 stock options.(3)
    
    Reflects the weighted-average exercise price of stock options
    outstanding as of February 3, 2007. 16




---



##### Table of Contents



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(3)

or ProgramsOctober 29, 2006 through
    November 25, 2006


150,000

$
23.10


150,000

$
114,380,306November 26, 2006 through
    December 23, 2006


939,635

$
22.92


939,635

$
92,845,391December 24, 2006 through
    February 3, 2007


5,224

$





$
92,845,391Total


1,094,859

$
22.94


1,089,635

$
92,845,391    (1)
    
    During the fourth quarter of 2006, the company retired
    5,224 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.(3)
    
    In January 2006, the Company announced that the Board of
    Directors authorized $250 million of potential share
    repurchases. 17




---



##### Table of Contents



Item 6.
    Selected
    Financial Data  SELECTED
    CONSOLIDATED FINANCIAL AND OPERATING DATA
    Fiscal Year EndedFeb. 3,


Jan. 28,

Jan. 23,

Jan. 25,


Jan. 26,(dollars in millions except per share data)

2007(1)


2006(1)

2005

2004


2003Statement of Operations
    DataDomestic Borders superstore sales

$
2,750.0


$
2,709.5

$
2,588.9

$
2,470.2


$
2,319.0Waldenbooks Specialty Retail sales


663.9



744.8


779.9


820.9



852.2International sales


650.0



576.4


510.7


407.5



314.9Total sales

$
4,063.9


$
4,030.7

$
3,879.5

$
3,698.6


$
3,486.1Operating income (loss)

$
(136.8
)

$
173.4

$
216.7

$
198.1


$
187.6Income (loss) before cumulative
    effect of accounting change

$
(151.3
)

$
101.0

$
131.9

$
117.3


$
107.6Cumulative effect of accounting
    change (net of tax)












2.1



Net income (loss)

$
(151.3
)

$
101.0

$
131.9

$
115.2


$
107.6Per Share DataDiluted (basic) earnings (loss)
    per common share before cumulative effect of accounting change

$
(2.44
)

$
1.42

$
1.69

$
1.48


$
1.31Diluted loss per common share from
    cumulative effect of accounting change












(0.02
)


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

$
(2.44
)

$
1.42

$
1.69

$
1.46


$
1.31Cash dividends declared per common
    share

$
0.41


$
0.37

$
0.33

$
0.08


$
Balance Sheet DataWorking capital

$
127.7


$
326.7

$
569.4

$
556.0


$
463.0Total assets

$
2,613.4


$
2,572.2

$
2,628.8

$
2,584.6


$
2,378.0Short-term borrowings

$
542.0


$
206.4

$
141.0

$
140.7


$
112.1Long-term debt, including current
    portion

$
5.4


$
5.6

$
55.9

$
57.3


$
50.0Long-term capital lease
    obligations, including current portion

$
0.4


$
0.5

$
0.1

$
0.4


$
19.6Stockholders equity

$
642.0


$
927.8

$
1,088.9

$
1,100.6


$
984.0    (1)
    
    The Companys 2006 and 2005 fiscal years consisted of
    53 weeks. 18




---



##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  General
    Business
    Strategy
    Grow comparable
    store sales and profitability in the domestic Borders
    superstores. In
    2007, the Company will 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. The Company
    will also continue development of a new concept store, which it
    began in 2006 and which is scheduled to open in early 2008. The
    concept store will include 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 will also include a
    Seattles Best Coffee cafe and a Paperchase shop, which
    continue to be drivers of both sales and increased profitability
    for their categories. In addition to the changes to the concept
    store, the Company is making changes to its loyalty program,
    Borders Rewards, which was launched domestically in early 2006
    and has grown to nearly 17 million members. The Company has
    modified Borders Rewards for 2007 to increase profitability, and
    will use the program to drive revenue through partnerships with
    other organizations, and 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 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 mix and formats
    to drive sales and profitability.
  Explore strategic
    alternatives in the International
    segment. The
    Company will suspend growth and investment in its International
    businesses, while focusing on improving the profitability of the
    investments the Company has already made. Strategic alternatives
    for portions of the International businesses are being explored,
    including the U.K. superstores, Books etc. stores, as well as
    the Ireland, Australia and New Zealand superstores. The
    Company believes the Borders brand has global potential,
    however, and believes that future International growth will most
    profitably utilize a franchise business model, which the Company
    has applied successfully in Malaysia and the United Arab
    Emirates.
  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.
 19




---



##### Table of Contents



e-commerce e-commerce e-commerce e-commerce
  Other
    Information
    e-commerce
         20




---



##### Table of Contents



Results
    of Operations
    Feb. 3,


Jan. 28,


Jan. 23,2007


2006


2005Sales


100.0
%


100.0
%


100.0
%Other revenue


1.2



1.2



1.3Total revenue


101.2



101.2



101.3Cost of merchandise sold (includes
    occupancy)


75.4



72.9



72.5Gross margin


25.8



28.3



28.8Selling, general and
    administrative expenses


24.3



23.6



22.9Pre-opening expense


0.3



0.2



0.1Asset impairments and other
    writedowns


4.6



0.2



0.2Operating income (loss)


(3.4
)


4.3



5.6Interest expense


0.8



0.4



0.2Income (loss) before income tax


(4.2
)


3.9



5.4Income tax


(0.5
)


1.4



2.0Net income (loss)


(3.7
)%


2.5
%


3.4
%   Consolidated
    Results  Comparison of 2006 to 2005
  Sales
         21




---



##### Table of Contents



Other
    Revenue
      Gross
    Margin
      Selling,
    General and Administrative Expenses
   22




---



##### Table of Contents



Asset
    Impairments and Other Writedowns
            Interest
    Expense
    Taxes
    Net
    Income (Loss)
   23




---



##### Table of Contents



Consolidated
    Results  Comparison of 2005 to 2004
  Sales
            Other
    Revenue
    12-month
 24




---



##### Table of Contents



Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
   25




---



##### Table of Contents



Interest
    Expense
    Taxes
    Net
    Income
    Domestic
    Borders Superstores
  (dollar amounts in
    millions)

2006


2005


2004Sales

$
2,750.0


$
2,709.5


$
2,588.9Other revenue

$
31.6


$
32.8


$
28.7Operating income

$
92.4


$
174.1


$
177.5Operating income as % of sales


3.4
%


6.4
%


6.9
%Store openings


31



15



19Store closings


5



4



2Store count


499



473



462   Domestic
    Borders Superstores  Comparison of 2006 to
    2005
  Sales
    Other
    Revenue
    Gross
    Margin
   26




---



##### Table of Contents



Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
      Operating
    Income
    Domestic
    Borders Superstores  Comparison of 2005 to
    2004
  Sales
    Other
    Revenue
   27




---



##### Table of Contents



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

2006


2005


2004Sales

$
663.9


$
744.8


$
779.9Other revenue

$
4.3


$
4.8


$
17.4Operating income (loss)

$
(78.0
)

$
2.5


$
25.9Operating income (loss) as % of
    sales


(11.7
)%


0.3
%


3.3
%Store openings


10



23



15Store closings


124



50



43Store count


564



678



705  28




---



##### Table of Contents



Waldenbooks
    Specialty Retail  Comparison of 2006 to
    2005
  Sales
    Other
    Revenue
    Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
      Operating
    Income (Loss)
   29




---



##### Table of Contents



Waldenbooks
    Specialty Retail  Comparison of 2005 to
    2004
  Sales
    Other
    Revenue
    Gross
    Margin
      Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
    Operating
    Income
   30




---



##### Table of Contents



International
  (dollar amounts in
    millions)

2006


2005


2004Sales

$
650.0


$
576.4


$
510.7Other revenue

$
13.7


$
10.9


$
5.8Operating income (loss)

$
(135.9
)

$
6.4


$
24.4Operating income (loss) as % of
    sales


(20.9
)%


1.1
%


4.8
%Superstores:Store openings


13



13



5Store count


68



55



42Books etc.:Store openings










1Store closings


3



2



2Store count


30



33



35Paperchase stand-alone stores:Stores acquired










11Store openings


6



4



3Store count


24



18



14   International 
    Comparison of 2006 to 2005
  Sales
    Other
    Revenue
    Gross
    Margin
     31




---



##### Table of Contents



Selling,
    General and Administrative Expenses
      Asset
    Impairments and Other Writedowns
      Operating
    Income (Loss)
    International 
    Comparison of 2005 to 2004
  Sales
    Other
    Revenue
    Gross
    Margin
   32




---



##### Table of Contents



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

2006


2005


2004Operating loss

$
(15.3
)

$
(9.6
)

$
(11.1
)     Corporate 
    Comparison of 2006 to 2005
   33




---



##### Table of Contents



Corporate 
    Comparison of 2005 to 2004
    Liquidity
    and Capital Resources
           34




---



##### Table of Contents



e-commerce
         35




---



##### Table of Contents



Off-Balance
    Sheet Arrangements
    Significant
    Contractual Obligations
    Fiscal Year2012 and(dollars in millions)

2007

2008-2009

2010-2011

Thereafter

TotalCredit Agreement borrowings

$
539.6

$


$


$


$
539.6Capital lease obligations


0.4











0.4Operating lease obligations


390.7


726.1


645.7


2,182.9


3,945.4Debt of consolidated VIEs


0.2


0.2


0.2


4.8


5.4Other borrowings


2.4











2.4Total

$
933.3

$
726.3

$
645.9

$
2,187.7

$
4,493.2  36




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##### Table of Contents



Seasonality
    Fiscal 2006(dollars in millions)

Q1


Q2


Q3


Q4Sales

$
860.0


$
856.0


$
851.6


$
1,496.3Operating Loss


(27.2
)


(22.8
)


(54.9
)


(31.9
)% of full year:Sales


21.2
%


21.1
%


20.9
%


36.8
%Operating Loss


19.9



16.7



40.1



23.3   Fiscal 2005(dollars in millions)

Q1


Q2


Q3


Q4Sales

$
847.2


$
891.6


$
837.2


$
1,454.7Operating income (loss)


(6.2
)


5.4



(19.3
)


193.5% of full year:Sales


21.0
%


22.1
%


20.8
%


36.1
%Operating income (loss)


(3.6
)


3.1



(11.1
)


111.6   Fiscal 2004(dollars in millions)

Q1


Q2


Q3


Q4Sales

$
830.8


$
847.1


$
833.3


$
1,368.3Operating income (loss)


5.6



15.0



0.4



195.7% of full year:Sales


21.4
%


21.8
%


21.5
%


35.3
%Operating income (loss)


2.6



6.9



0.2



90.3   Critical
    Accounting Policies and Estimates
    Asset
    Impairments
   37




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##### Table of Contents



Goodwill
    Impairment
        Inventory
     38




---



##### Table of Contents



Leases
    Gift
    Cards
    Advertising
    and Vendor Incentive Programs
    No. 02-16, 02-16),
    Income
    Taxes
     39




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##### Table of Contents



New
    Accounting Guidance
      No. 06-3, 06-3). 06-3 states 06-3 06-3
    Related
    Party Transactions
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk   40




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##### Table of Contents



Interest
    Rate Risk
      Foreign
    Currency Exchange Risk
  and/or
 41




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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 3, 2007, January 28, 2006, and
    January 23, 2005


43Consolidated
    Balance Sheets as of February 3, 2007 and January 28,
    2006


44Consolidated
    Statements of Cash Flows for the fiscal years ended
    February 3, 2007, January 28, 2006, and
    January 23, 2005


45Consolidated
    Statements of Stockholders Equity for the fiscal years
    ended February 3, 2007, January 28, 2006, and
    January 23, 2005


46Notes to
    Consolidated Financial Statements


47Report of
    Independent Registered Public Accounting Firm


68  42




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##### Table of Contents



CONSOLIDATED
    STATEMENTS OF OPERATIONS

(dollars in millions except per share data) Fiscal Year EndedFeb. 3,


Jan. 28,

Jan. 23,2007


2006

2005Sales

$
4,063.9


$
4,030.7

$
3,879.5Other revenue


49.6



48.5


51.9Total revenue

$
4,113.5


$
4,079.2

$
3,931.4Cost of merchandise sold (includes
    occupancy)


3,065.2



2,939.5


2,812.4Gross margin


1,048.3



1,139.7


1,119.0Selling, general and
    administrative expenses


987.6



952.1


890.3Pre-opening expense


11.3



7.6


4.8Asset impairments and other
    writedowns


186.2



6.6


7.2Operating income (loss)


(136.8
)


173.4


216.7Interest expense


32.4



14.3


9.1Income (loss) before income tax


(169.2
)


159.1


207.6Income tax provision (benefit)


(17.9
)


58.1


75.7Net income (loss)

$
(151.3
)

$
101.0

$
131.9Earnings (loss) per common share
    data (Note 2)Diluted:Net income (loss)

$
(2.44
)

$
1.42

$
1.69Weighted-average common shares
    outstanding


61.9



71.1


77.9Basic:Net income (loss)

$
(2.44
)

$
1.45

$
1.72Weighted-average common shares
    outstanding


61.9



69.8


76.6    43




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##### Table of Contents



CONSOLIDATED
    BALANCE SHEETS

(dollars in millions except share amounts) Fiscal Year EndedFeb. 3,

Jan. 28,2007

2006AssetsCurrent assets:Cash and cash equivalents

$
120.4

$
81.6Merchandise inventories


1,452.0


1,405.9Accounts receivable and other
    current assets


151.2


150.3Total current assets


1,723.6


1,637.8Property and equipment, net


707.7


703.9Other assets


65.1


79.7Deferred income taxes


76.7


26.3Goodwill


40.3


124.5Total assets

$
2,613.4

$
2,572.2Liabilities, Minority Interest
    and Stockholders EquityCurrent liabilities:Short-term borrowings and current
    portion of long-term debt

$
542.6

$
207.1Trade accounts payable


631.4


660.3Accrued payroll and other
    liabilities


333.1


293.4Taxes, including income taxes


60.4


135.8Deferred income taxes


28.4


14.5Total current liabilities


1,595.9


1,311.1Long-term debt


5.2


5.4Other long-term liabilities


368.3


326.6Commitments and contingencies
    (Note 9)





Total liabilities


1,969.4


1,643.1Minority interest


2.0


1.3Total liabilities and minority
    interest


1,971.4


1,644.4Stockholders equity:Common stock,
    300,000,000 shares authorized; 58,476,306 and
    64,149,397 shares issued and outstanding at
    February 3, 2007 and January 28, 2006, respectively


175.5


293.9Accumulated other comprehensive
    income


28.5


19.4Retained earnings


438.0


614.5Total stockholders equity


642.0


927.8Total liabilities, minority
    interest and stockholders equity

$
2,613.4

$
2,572.2    44




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##### Table of Contents



CONSOLIDATED
    STATEMENTS OF CASH FLOWS

(dollars in millions) Fiscal Year EndedFeb. 3,


Jan. 28,


Jan. 23,2007


2006


2005Cash provided by (used for):OperationsNet income (loss)

$
(151.3
)

$
101.0


$
131.9Adjustments to reconcile net
    income (loss) to operating cash flows:Depreciation


130.0



121.5



112.9Gain on deconsolidation of
    variable interest entities










(2.9
)Gain on sale of investments


(5.0
)


(1.2
)


Loss on disposal of assets


6.8



5.3



2.4Increase in minority interest


0.6







(Increase) decrease in deferred
    income taxes


(34.5
)


(13.0
)


12.6Increase in other long-term assets


(1.3
)


(3.9
)


(6.7
)Increase in other long-term
    liabilities


29.8



29.4



13.3Asset impairments and other
    writedowns


179.0



4.3



6.2Cash provided by (used for)
    current assets and current liabilities:Increase in inventories


(33.4
)


(105.0
)


(63.8
)Increase in accounts receivable


(4.2
)


(10.0
)


(5.7
)(Increase) decrease in prepaid
    expenses


11.4



(24.0
)


(9.9
)Increase (decrease) in accounts
    payable


(34.2
)


48.1



13.8Increase (decrease) in taxes
    payable


(75.8
)


25.6



3.4Increase (decrease) in accrued
    payroll and other liabilities


29.8



(8.2
)


19.3Net cash provided by operations


47.7



169.9



226.8InvestingCapital expenditures


(204.2
)


(196.3
)


(115.5
)Proceeds from sale of investments


21.6



105.2



118.0Purchase of investments










(95.4
)Proceeds from sale-leaseback of
    assets










32.3Acquisition










(31.2
)Net cash used for investing


(182.6
)


(91.1
)


(91.8
)FinancingNet repayment of long-term debt






(0.1
)


Net repayment of long-term capital
    lease obligations


(0.1
)


(0.4
)


(0.4
)Net funding from credit facility


317.3



23.3



7.2Proceeds from the excess tax
    benefit of options exercised


4.3







Cash dividends paid


(25.2
)


(25.5
)


(25.1
)Issuance of common stock


26.0



27.6



44.8Repurchase of common stock


(148.7
)


(265.9
)


(177.3
)Net cash provided by (used for)
    financing


173.6



(241.0
)


(150.8
)Effect of exchange rates on cash
    and equivalents


0.1



(1.0
)


(0.2
)Net increase (decrease) in cash
    and equivalents


38.8



(163.2
)


(16.0
)Cash and equivalents at beginning
    of year


81.6



244.8



260.8Cash and equivalents at end of year

$
120.4


$
81.6


$
244.8Supplemental cash flow disclosures:Interest paid

$
34.0


$
13.9


$
8.5Income taxes paid

$
63.5


$
55.0


$
64.6    45




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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 25, 2004


78,273,341


$
645.7


$
22.7


$
432.2


$
1,100.6Net income














131.9



131.9Foreign currency translation
    adjustments










2.3







2.3Change in fair value of
    derivatives, net of tax provision of $0.2










0.3







0.3Comprehensive income


















134.5Cash dividends declared ($0.33 per
    common share)














(25.1
)


(25.1
)Issuance of common stock


3,222,058



44.8











44.8Repurchase and retirement of
    common stock


(7,619,772
)


(177.3
)










(177.3
)Tax benefit of equity compensation






11.3











11.3Change in deferred compensation






0.1











0.1Balance 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


$
642.0    46




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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 (UK) Limited, Borders
    Australia Pty Limited and others (individually and collectively,
    the Company), is the second largest operator of
    book, music and movie superstores and the largest operator of
    mall-based bookstores in the world based upon both sales and
    number of stores. At February 3, 2007, the Company operated
    567 superstores under the Borders name, including 499 in the
    United States, 41 in the United Kingdom, 20 in Australia, three
    in Puerto Rico, two in New Zealand and one each in Singapore and
    Ireland. The Company also operated 564 mall-based and other
    bookstores primarily under the Waldenbooks name in the United
    States and 30 bookstores under the Books etc. name in the United
    Kingdom. In addition, the Company owns and operates United
    Kingdom-based Paperchase Products Limited
    (Paperchase), a designer and retailer of stationery,
    cards and gifts. As of February 3, 2007, Paperchase
    operated 99 stores, primarily in the United Kingdom, and
    Paperchase shops have been added to nearly 250 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 2006
    consisted of 53 weeks, and ended on February 3, 2007.
    Fiscal 2005 consisted of 53 weeks and ended
    January 28, 2006. Fiscal 2004 consisted of 52 weeks
    and ended January 23, 2005. References herein to years are
    to the Companys fiscal years.



Foreign Currency
    and Translation of Foreign
    Subsidiaries:The
    functional currencies of the Companys foreign operations
    are the respective local currencies. All assets and liabilities
    of the Companys foreign operations are translated into
    U.S. dollars at fiscal period-end exchange rates. Income
    and expense items are translated at average exchange rates
    prevailing during the year. The resulting translation
    adjustments are recorded as a component of stockholders
    equity and comprehensive income. Foreign currency transaction
    gains/(losses) were $(1.3), $2.1, and $(0.2) in 2006, 2005, and
    2004, 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 $114.1 and $102.1 as of February 3, 2007, and
    January 28, 2006, 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
    approximate 3% for buildings and 10% to 33% for other fixtures
    and equipment. Amortization of assets under capital leases is
    included in depreciation expense.

47




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
       Goodwill: Pursuant
    to the provisions of Statement of Financial Accounting Standards
    No. 142, Goodwill and Other Intangible Assets
    (FAS 142), the Companys goodwill is
    tested for impairment annually (or more frequently if impairment
    indicators arise). Pursuant to FAS 142, a reporting unit is
    defined as an operating segment or one level below an operating
    segment (a component), for which discrete financial information
    is available and reviewed by management. The Companys
    reporting units were identified as the operating segments of
    Domestic Borders superstores, Waldenbooks Specialty Retail and
    Corporate, and the 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
 48




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##### 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 $150.5
    and $132.0 as of February 3, 2007 and January 28,
    2006, respectively, in accordance with the provisions of FASB
    Technical
    Bulletin No. 88-1,
    Issues Relating to Accounting for Leases (FTB
    88-1),
    and as an operating activity on the Companys consolidated
    statements of cash flows. Also in accordance with the provisions
    of FTB 88-1,
    the Company classifies the amortization of landlord allowances
    as a reduction of occupancy expense, included as a component of
    Cost of merchandise sold (includes occupancy) in the
    Companys consolidated statements of operations.
  Financial
    Instruments: The
    recorded values of the Companys financial instruments,
    which include accounts receivable, accounts payable and
    indebtedness, approximate their fair values.
    Accumulated Other
    Comprehensive Income
    (Loss): Accumulated
    other comprehensive income (loss) for the Company includes fair
    value changes of derivatives (net of tax) and exchange rate
    fluctuations. Disclosure of comprehensive income (loss) is
    incorporated into the consolidated statements of
    stockholders equity for all years presented. Accumulated
    other comprehensive income (loss) includes $28.5 and $19.4 for
    exchange rate fluctuations as of February 3, 2007 and
    January 28, 2006, 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.
 49




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
   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 through
    January 31. The Company accrues the full cost of all
    rewards as they are earned by members. This cost is categorized
    as Cost of merchandise sold on the consolidated
    statements of operations.
  Preferred Reader
    Program: Until
    October 2004, Waldenbooks sold memberships in its Preferred
    Reader Program, which offered members discounts on purchases and
    other benefits. The Company recognized membership income on a
    straight-line basis over the
    12-month
    term of the membership, and categorized the income as
    Other revenue in the Companys consolidated
    statements of operations. Discounts on purchases were netted
    against Sales in the Companys consolidated
    statements of operations.
  Gift
    Cards: The Company
    sells gift cards to its customers and records a liability for
    the face value of all certificates issued and unredeemed within
    the last 12 months. For certificates older than
    12 months, the Company records a liability for a portion of
    the certificates face value based upon historical
    redemption 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
    $151.7 and $145.4 as of February 3, 2007 and
    January 28, 2006, respectively.
  Advertising
    Costs: The Company
    expenses advertising costs as incurred, and recorded
    approximately $41.9, $39.4 and $44.7 of gross advertising
    expenses in 2006, 2005 and 2004, respectively.
    No. 02-16, 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.
 50




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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.
    2005


2004Net income, as reported

$
101.0


$
131.9Add: Stock-based employee
    compensation expense included in reported net income, net of
    related tax effects


0.9



0.7Deduct: Total stock-based employee
    compensation expense determined under fair value method for all
    awards, net of tax


1.8



4.1Pro forma net income

$
100.1


$
128.5Earnings per share:Diluted  as reported

$
1.42


$
1.69Diluted  pro forma

$
1.41


$
1.65Basic  as reported

$
1.45


$
1.72Basic  pro forma

$
1.43


$
1.68     New Accounting
    Guidance: In
    February 2006, the FASB issued Statement of Financial Accounting
    Standards No. 155, Accounting for Certain Hybrid
    Instruments (FAS 155). FAS 155
    allows financial instruments that have embedded derivatives to
    be accounted for as a whole (eliminating the need to bifurcate
    the derivative from its host) if the holder elects to account
    for the whole instrument on a fair value basis. This statement
    is effective for all financial instruments acquired or issued
    after the beginning of an entitys first fiscal year that
    begins after September 15, 2006. The Company does not
    expect the adoption of FAS 155 to have a material impact on
    its consolidated financial position or results of operations.
   51




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    No. 06-3, 06-3). 06-3 states 06-3 06-3
    Reclassifications: Certain
    prior year amounts have been reclassified to conform to current
    year presentation.
  NOTE 2 
    WEIGHTED-AVERAGE SHARES OUTSTANDING
    2006


2005


2004Weighted-average common shares
    outstanding  basic


61,940



69,785



76,553Dilutive effect of employee stock
    options






1,303



1,387Weighted-average common shares
    outstanding  diluted


61,940



71,088



77,940     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. As a
 52




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
            Goodwill
    Impairment: In
    accordance with the provisions of FAS 142, Goodwill
    and Other Intangible Assets, the Company evaluates the
    carrying values of goodwill annually or more frequently when
    impairment indicators arise. As a result of the decline in sales
    and profits of the U.K. Superstores and Books etc. chains,
    driven by the economic factors discussed above, the carrying
    amount of the net assets of the U.K. reporting unit exceeded its
    fair value, as calculated using principally a discounted future
    cash flows approach. As a result, the Company determined that
    the entire amount of goodwill allocated to the U.K. reporting
    unit was impaired, and recorded a charge of $84.4 in the fourth
    quarter of 2006. Subsequent to this impairment, all of the
    Companys remaining goodwill relates to the domestic
    Borders superstores. As of February 3, 2007, no impairment
    of domestic goodwill existed.
    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.
   53




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
              Reserve balance at
    January 25, 2004

$
1.12004 Charge


2.42004 Reserve adjustment


(0.2
)2004 Cash payments


(2.7
)Reserve balance at
    January 23, 2005

$
0.62005 Charge


2.52005 Reserve adjustment


(0.1
)2005 Cash payments


(2.3
)Reserve balance at
    January 28, 2006

$
0.72006 Charge


4.92006 Reserve adjustment


2006 Cash payments


(2.8
)Reserve balance at
    February 3, 2007

$
2.8  54




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
     2006


2005


2004Sales

$
76.0


$
25.9


$
19.2Operating loss


(4.9
)


(0.3
)


(0.6
)     NOTE 4 
    SALE-LEASEBACK TRANSACTION
    20-year
  NOTE 5 
    ACQUISITION OF PAPERCHASE PRODUCTS, LTD.
    NOTE 6 
    SEATTLES BEST COFFEE LICENSING AGREEMENT
   55




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
   NOTE 7 
    PROPERTY AND EQUIPMENT
    2006


2005Property and equipmentBuildings

$
6.9


$
6.9Leasehold improvements


754.5



647.7Furniture and fixtures


1,107.0



979.5Construction in progress


23.2



36.31,891.6



1,670.4Less  accumulated
    depreciation and amortization


(1,183.9
)


(966.5
)Property and equipment, net

$
707.7


$
703.9   NOTE 8 
    INCOME TAXES
    2006


2005


2004CurrentFederal

$
14.5


$
61.6


$
52.6State and local


2.3



9.5



10.7Foreign


1.8



0.5



1.1DeferredFederal


(22.0
)


(11.9
)


8.0State and local


(7.6
)


(0.8
)


0.7Foreign


(6.9
)


(0.8
)


2.6Total income tax provision
    (benefit)

$
(17.9
)

$
58.1


$
75.7     2006


2005


2004Federal statutory rate

$
(59.2
)

$
55.7


$
72.7State and local taxes, net of
    federal tax benefit


(0.6
)


5.7



7.4Impact of foreign operations


41.7



(2.2
)


(2.8
)Other


0.2



(1.1
)


(1.6
)Total income tax provision
    (benefit)

$
(17.9
)

$
58.1


$
75.7  56




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
     2006


2005Deferred tax assetsAccruals and other current
    liabilities

$
7.9


$
4.2Deferred revenue


8.6



4.6Other long-term liabilities


2.6



3.0Deferred compensation


2.0



2.2Deferred rent


59.3



70.0State deferred tax assets


9.5



1.9Foreign deferred tax assets


36.5



20.6Asset impairments and other
    writedowns


21.8



8.7Valuation allowance


(14.6
)


(9.4
)Total deferred tax assets


133.6



105.8Deferred tax liabilitiesInventory


18.6



18.2Property and equipment


51.6



64.5Foreign deferred tax liabilities


15.1



11.3Total deferred tax liabilities


85.3



94.0Net deferred tax assets

$
48.3


$
11.8         NOTE 9 
    COMMITMENTS AND CONTINGENCIES
  Litigation: Two
    former employees, individually and on behalf of a purported
    class consisting of all current and former employees who work or
    worked as Inventory Managers or Sales Managers in Borders stores
    in the State of California at any time from September 30,
    2001 through the trial date, have filed an action against the
    Company in the Superior Court of California for the County of
    San Francisco. The Complaint alleges, among other things,
    that the individual plaintiffs and the purported class members
    were improperly classified as exempt employees and that the
    Company violated the California Labor Code and the California
    Business and Professions Code by failing to (i) pay
    required overtime, (ii) provide meal periods, rest periods,
    and accurate itemized wage statements, (iii) keep accurate
    records of employees
 57




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
      out-of-jurisdiction e-commerce.
      NOTE 10 
    DEBT
  Credit
    Facility: The
    Company has a Multicurrency Revolving Credit Agreement (the
    Credit Agreement), which was restated as of
    July 31, 2006 and which will expire in July 2011. The
    Credit Agreement provides for borrowings of up to $1,125.0
    secured by eligible inventory and accounts receivable and
    related assets. Borrowings under the Credit Agreement are
    limited to a specified percentage of eligible inventories and
    accounts receivable and bear interest at a variable base rate
    plus 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. The Company had borrowings
    outstanding under the Credit Agreement (or a prior
 58




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
    Term
    Loan: On
    July 30, 2002, the Company issued $50.0 of senior
    guaranteed notes (the Notes) due July 30, 2006
    and bearing interest at 6.31% (payable semi-annually). The
    proceeds of the sale of the Notes were used to refinance
    existing indebtedness of the Company and its subsidiaries and
    for general corporate purposes. The Company repaid the Notes
    with funds from the Credit Agreement on July 31, 2006.
  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 3,
    2007 total $0.2 in 2007, $0.2 in 2008, $0.2 in 2009, $0.2 in
    2010, $0.3 in 2011, $4.3 in all later years, and in the
    aggregate, total $5.4. See Note 11 
    Leases for further discussion of the Companys
    consolidation of these VIEs.
    NOTE 11 
    LEASES
  Operating
    Leases: The
    Company conducts operations primarily in leased facilities.
    Store leases are generally for terms of three to 20 years.
    Borders leases generally contain multiple three- to
    five-year renewal options which allow Borders the option to
    extend the life of the leases up to 25 years beyond the
    initial noncancellable term. Waldenbooks Specialty Retails
    leases generally do not contain renewal options. Certain leases
    provide for additional rental payments based on a percentage of
    sales in excess of a specified base. Also, certain leases
    provide for the payment by the Company of executory costs
    (taxes, maintenance, and insurance).
  Lease
    Commitments: Future
    minimum lease payments under operating leases at
    February 3, 2007 total $390.7 in 2007, $373.9 in 2008,
    $352.2 in 2009, $331.4 in 2010, $314.3 in 2011, and $2,182.9 in
    all later years, and in the aggregate, total $3,945.4.
  Rental
    Expenses: A
    summary of operating lease minimum and percentage rental expense
    follows:
  2006

2005

2004Minimum rentals

$
409.6

$
378.0

$
369.5Percentage rentals


21.4


18.9


8.7Total

$
431.0

$
396.9

$
378.2   Capitalized
    Leases: The
    Company accounts for certain items under capital leases.
    Scheduled principal payments of capitalized leases as of
    February 3, 2007 total $0.4, due in 2007.
  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 $5.1, long-term debt (including
    current portion) of $5.4 and minority interest of $0.3 at
    February 3, 2007, and has recorded property and equipment,
    net of accumulated depreciation, of $5.3, long-term debt
    (including current portion) of $5.6 and minority interest of
    $0.3 at January 28, 2006.
 59




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
   NOTE 12 
    EMPLOYEE BENEFIT PLANS
  Employee Savings
    Plan: Employees of
    the Company who meet certain requirements as to age and service
    are eligible to participate in the Companys  Savings Plan.
    The Companys expense related to this plan was $4.9, $5.0,
    and $4.7 for 2006, 2005 and 2004, respectively.
  NOTE 13 
    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 3, 2007,
    3.7 million shares remained available for grant.
            Employee Stock
    Purchase Plan: The
    Company maintained an employee stock purchase plan (the
    Employee Plan), which allowed the Companys
    associates not eligible under the 2004 Plan to purchase shares
    of the Companys common stock at a 15% discount from their
    fair market value. The Employee Plan expired as of
    December 31, 2005.
 60




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##### Table of Contents



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

Aggregate

Weighted-Number

Average

Intrinsic

AverageAll Plans

of Shares

Exercise Price

Value

Contract LifeOutstanding at January 25,
    2004


13,043


19.67Granted


69


23.52Exercised


3,121


13.85Forfeited


995


21.81Outstanding at January 23,
    2005


8,996


21.48Granted


13


24.43Exercised


1,737


14.85Forfeited


907


23.79Outstanding at January 28,
    2006


6,365


22.98Granted


531


18.59Exercised


1,338


16.03Forfeited


717


24.34Outstanding at February 3,
    2007


4,841


24.22

$



2.0Balance exercisable atJanuary 23, 2005


6,985


21.95January 28, 2006


5,752


23.20February 3, 2007


4,238


24.93

$



1.5       2006


2005


2004Risk-free interest rate


4.7-5.1
%


3.8-4.1
%


2.8-4.7
%Expected life


3-5 years



3-5 years



3-5 yearsExpected volatility


25.1-25.5
%


25.6-27.6
%


29.9-35.2
%Expected dividends


1.6-2.3
%


1.3-1.6
%


1.3-1.6
%    61




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##### Table of Contents



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


35


2.6


13.11


35


13.11$13.64-$17.03


281


2.7


14.45


281


14.45$17.04-$20.44


962


4.2


17.45


512


17.34$20.45-$23.84


1,268


1.8


22.28


1,200


22.23$23.85-$27.25


296


2.7


25.02


211


25.14$27.26-$30.66


1,636


0.9


29.79


1,636


29.79$30.67-$34.06


363


1.2


31.78


363


31.78     Number of

Weighted-Average

Weighted-AverageShares

Purchase Price

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


45


17.74


23.592005


32


17.80


26.052006


75


14.17


17.75Employee plan2004


28


20.64


24.292005


26


20.28


23.862006








Stock and stock units issued:Time-vested shares issued:2004 Plan2004


17





23.592005


50





23.962006


114





24.16Performance-based stock units
    issued:2004 Plan2004


288





23.502005


395





26.242006


405





23.59   NOTE 14 
    FINANCIAL INSTRUMENTS
   62




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
        January 28, 2006Notional Amount

Strike Rate

Period

Fair Market Value$50.0


variable


8/03-7/06

$
(0.3
)     NOTE 15 
    SEGMENT INFORMATION
    2006

2005

2004SalesDomestic Borders superstores

$
2,750.0

$
2,709.5

$
2,588.9Waldenbooks Specialty Retail


663.9


744.8


779.9International


650.0


576.4


510.7Total sales

$
4,063.9

$
4,030.7

$
3,879.5Depreciation expenseDomestic Borders superstores

$
86.7

$
84.5

$
80.4Waldenbooks Specialty Retail


20.9


18.2


16.7International


22.4


18.8


15.8Corporate








Total depreciation expense

$
130.0

$
121.5

$
112.9 63




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
  2006


2005


2004Operating income (loss)Domestic Borders superstores

$
92.4


$
174.1


$
177.5Waldenbooks Specialty Retail


(78.0
)


2.5



25.9International


(135.9
)


6.4



24.4Corporate


(15.3
)


(9.6
)


(11.1
)Total operating income

$
(136.8
)

$
173.4


$
216.7Total assetsDomestic Borders superstores

$
1,714.6


$
1,615.2


$
1,484.7Waldenbooks Specialty Retail


322.3



345.8



328.3International


448.1



476.5



452.8Corporate


128.4



134.7



363.0Total assets

$
2,613.4


$
2,572.2


$
2,628.8Capital expendituresDomestic Borders superstores

$
128.9


$
98.1


$
64.5Waldenbooks Specialty Retail


12.0



19.8



12.2International


47.7



45.9



20.6Corporate


15.6



32.5



18.2Total capital expenditures

$
204.2


$
196.3


$
115.5     2006

2005

2004Domestic Borders superstores

$
12.9

$
10.6

$
10.2Waldenbooks Specialty Retail


6.1


4.9


4.8International


0.3


0.2


0.2Total

$
19.3

$
15.7

$
15.2     2006

2005

2004Long-lived assets:Domestic

$
705.3

$
688.4

$
628.0International


184.5


246.0


235.4Total long-lived assets

$
889.8

$
934.4

$
863.4  64




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (dollars in millions except per share data)
   NOTE 16 
    UNAUDITED QUARTERLY FINANCIAL DATA
  Fiscal 2006Q1


Q2


Q3


Q4Total revenue

$
867.8


$
866.3


$
860.4


$
1,519.0Gross margin


200.7



204.8



185.1



457.7Net loss


(20.2
)


(18.4
)


(39.1
)


(73.6
)Diluted loss per common share


(0.31
)


(0.29
)


(0.64
)


(1.25
)Basic loss per common share


(0.31
)


(0.29
)


(0.64
)


(1.25
)   Fiscal 2005Q1


Q2

Q3


Q4Total revenue

$
857.3


$
901.1

$
845.8


$
1,475.0Gross margin


216.6



231.2


203.0



488.9Net income (loss)


(5.3
)


1.3


(14.1
)


119.1Diluted earnings (loss) per common
    share


(0.07
)


0.02


(0.20
)


1.78Basic earnings (loss) per common
    share


(0.07
)


0.02


(0.20
)


1.80     NOTE 17 
    SUBSEQUENT EVENT
   65




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON CONSOLIDATED FINANCIAL STATEMENTS               
    66




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##### 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 3, 2007 (the
    Evaluation Date). Based on such evaluation, such
    officers have concluded that, as of the Evaluation Date, the
    Companys disclosure controls and procedures were effective
    in alerting them on a timely basis to material information
    relating to the Company (including its consolidated
    subsidiaries) required to be included in the Companys
    periodic filings under the Exchange Act.
  Changes in
    Internal
    Control: During
    the quarter ended February 3, 2007, the Company
    substantially completed implementation of a new merchandising
    system in Waldenbooks, which it began during the third quarter
    of 2005. The Company believes the controls over the processes
    affected by the implementation are functioning effectively as of
    February 3, 2007. Also during the quarter ended
    February 3, 2007, the Company substantially completed the
    review of both its disclosure controls and procedures and its
    internal control over financial reporting specific to the
    International segment. The Company believes these controls are
    functioning effectively as of February 3, 2007.
  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 3,
    2007. 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 3, 2007, the Companys internal control over
    financial reporting was effective to provide reasonable
    assurance regarding the reliability of financial reporting and
    the preparation of financial statements for external purposes in
    accordance with generally accepted accounting principles. The
    Companys independent registered public accounting firm,
    Ernst & Young LLP, has issued an audit report on the
    Companys assessment of the effectiveness of internal
    control over financial reporting as of February 3, 2007,
    which is included herein.
 67




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON INTERNAL CONTROL OVER FINANCIAL REPORTING
                 
    68




---



##### 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   69




---



##### Table of Contents



Item 14:
    Principal
    Accounting Fees and Services   PART IV  Item 15.
    Exhibits,
    Financial Statement Schedules    PageConsolidated Statements of
    Operations for the fiscal years ended February 3, 2007,
    January 28, 2006 and January 23, 2005


43Consolidated Balance Sheets as of
    February 3, 2007 and January 28, 2006


44Consolidated Statements of Cash
    Flows for the fiscal years ended February 3, 2007,
    January 28, 2006 and January 23, 2005


45Consolidated Statements of
    Stockholders Equity for the fiscal years ended
    February 3, 2007, January 28, 2006 and
    January 23, 2005


46Notes to Consolidated Financial
    Statements


47Report of Independent Registered
    Public Accounting Firm


68         ExhibitNumber

Description2
.1(3)

Agreement and plan of Merger dated
    as of April 8, 1997 between Michigan Borders Group, Inc.
    and Borders Group, Inc.3
.1(5)

Restated Articles of Incorporation
    of Borders Group, Inc.3
.2(7)

Restated bylaws of Borders Group,
    Inc.3
.3(21)

First Amendment to the Restated By
    laws of Borders Group, Inc.10
.2(3)

Borders Group, Inc. Stock Option
    Plan10
.3(7)

Amendment to the Borders Group,
    Inc. Stock Option Plan10
.4(1)

Borders Group, Inc. Employee Stock
    Purchase Plan10
.5(2)

First Amendment to the Borders
    Group, Inc. Employee Stock Purchase Plan10
.6(5)

Second Amendment to the Borders
    Group, Inc. Employee Stock Purchase Plan10
.7(5)

Third Amendment to the Borders
    Group, Inc. Employee Stock Purchase Plan10
.8(15)

Restated Borders Group, Inc.
    Annual Incentive Bonus Plan10
.9(4)

Borders Group, Inc. Stock Option
    Plan for International Employees10
.10(5)

1998 Borders Group, Inc. Stock
    Option Plan 70




---



##### Table of Contents



ExhibitNumber

Description10
.11(5)

Participation Agreement dated as
    of December 1, 1998 by and among Borders Group, Inc.,
    Borders, Inc. and Parties thereto10
.12(6)

Amendment No. 1 to 1998
    Borders Group, Inc. Stock Option Plan10
.13(7)

Participation Agreement dated as
    of January 22, 2001 by and among Borders Group, Inc.,
    Borders, Inc. and Parties thereto10
.14(8)

Note Purchase Agreement dated
    as of July 30, 2002 relating to the 6.31% Senior
    Guaranteed Notes of Borders Group, Inc.10
.15(9)

Borders Group, Inc. Long Term
    Incentive Plan10
.16(10)

Participation Agreement dated as
    of November 15, 2002 by and among Borders Group, Inc.,
    Borders, Inc. and Parties thereto10
.17(11)

Borders Group, Inc. 2004 Long-Term
    Incentive Plan10
.18(12)

First Amendment to the Borders
    Group, Inc. 2004 Long Term Incentive Plan dated as of
    May 20, 200410
.19(12)

Security Agreement dated as of
    July 30, 2004 among Borders Group, Inc., its subsidiaries
    and Parties thereto10
.20(12)

Amendment No. 1 to the
    Note Purchase Agreement dated as of July 30, 2004
    among Borders Group, Inc., its subsidiaries and Parties thereto10
.21(14)

Restricted Share Unit Grant
    Agreement10
.22(16)

Restricted Share Grant Agreement10
.23(17)

Increase of Total Commitment and
    Amendment No. 1 dated as of October 25, 2005 to the
    Amended and Restated Multicurrency Revolving Credit Agreement,
    among Borders Group, Inc., its subsidiaries and Parties thereto10
.24(18)

Employment and Consultancy
    Agreement between Mr. Josefowicz and the Company10
.25(13)

Non-Qualified Deferred
    Compensation Plan10
.26(19)

2006 Restricted Share Unit Grant
    Agreement10
.27(19)

Summary of terms of fiscal 2006
    compensation for non-employee directors and executive officers10
.28(20)

Revised Form of Severance
    Agreement for Executive Officers (other than Mr. Josefowicz10
.29(21)

Summary of Employment Agreement
    between Mr. Jones and the Company10
.30(21)

Employment Agreement between Mr.
    Jones and the Company10
.31(22)

Second Amended and Restated
    Multicurrency Revolving Credit Agreement dated as of
    July 31, 2006 among Borders Group, Inc., its subsidiaries
    and Parties thereto10
.32(23)

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
.33(24)

Description of Special Incentive
    Program for 200710
.34

Employment terms between
    Mr. Armstrong and the Company10
.35

Employment terms between
    Mr. Gruen and the Company10
.36

Second Amendment to the Borders
    Group, Inc. 2004 Long Term Incentive Plan dated as of
    March 30, 200710
.37

Severance Agreement between
    Mr. Altruda and the Company 71




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##### Table of Contents



ExhibitNumber

Description14
.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 Registration
    Statement on
    Form S-1
    (File
    No. 333-90918).(2)
    
    Incorporated by reference from the Companys Registration
    Statement on
    Form S-1
    (File
    No. 333-80643).(3)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).(4)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 26, 1998 (File
    No. 1-13740).(5)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 24, 1999 (File
    No. 1-13740).(6)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended October 24, 1999 (File
    No. 1-13740).(7)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 28, 2001 (File
    No. 1-13740).(8)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 28, 2002 (File
    No. 1-13740).(9)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 27, 2003 (Filed
    No. 1-13740).(10)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 25, 2004 (Filed
    No. 1-13740).(11)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File
    No. 1-13740).(12)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 25, 2004 (File
    No. 1-13740).(13)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated November 5, 2004 (File
    No. 1-13740).(14)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 16, 2005 (File
    No. 1-13740).(15)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File
    No. 1-13740). 72




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##### Table of Contents



(16)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 21, 2005 (File
    No. 1-13740).(17)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated October 28, 2005 (File
    No. 1-13740).(18)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated January 25, 2006 (File
    No. 1-13740).(19)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 24, 2006 (File
    No. 1-13740).(20)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended April 29,
    2006 (File No. 1-13740).(21)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated July 13, 2006 (File
    No. 1-13740).(22)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated July 31, 2006 (File
    No. 1-13740).(23)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated September 14, 2006 (File
    No. 1-13740).(24)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated March 27, 2007 (File No. 1-13740).         73




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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

March 30, 2007/s/  Edward
    W. WilhelmEdward
    W. Wilhelm

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

March 30, 2007/s/  Donald
    G. CampbellDonald
    G. Campbell

Director

March 30, 2007/s/  Joel
    J. CohenJoel
    J. Cohen

Director

March 30, 2007/s/  Amy
    B. LaneAmy
    B. Lane

Director

March 30, 2007/s/  Brian
    T. LightBrian
    T. Light

Director

March 30, 2007/s/  Victor
    L. LundVictor
    L. Lund

Director

March 30, 2007/s/  Dr.
    Edna Greene
    MedfordDr.
    Edna Greene Medford

Director

March 30, 2007/s/  Lawrence
    I. PollockLawrence
    I. Pollock

Director, Non-Executive Chairman

March 30, 2007/s/  Michael
    WeissMichael
    Weiss

Director

March 30, 2007  74




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Description2
.1(3)

Agreement and plan of Merger dated
    as of April 8, 1997 between Michigan Borders Group, Inc.
    and Borders Group, Inc.3
.1(5)

Restated Articles of Incorporation
    of Borders Group, Inc.3
.2(7)

Restated bylaws of Borders Group,
    Inc.3
.3(21)

First Amendment to the Restated By
    laws of Borders Group, Inc.10
.2(3)

Borders Group, Inc. Stock Option
    Plan10
.3(7)

Amendment to the Borders Group,
    Inc. Stock Option Plan10
.4(1)

Borders Group, Inc. Employee Stock
    Purchase Plan10
.5(2)

First Amendment to the Borders
    Group, Inc. Employee Stock Purchase Plan10
.6(5)

Second Amendment to the Borders
    Group, Inc. Employee Stock Purchase Plan10
.7(5)

Third Amendment to the Borders
    Group, Inc. Employee Stock Purchase Plan10
.8(15)

Restated Borders Group, Inc.
    Annual Incentive Bonus Plan10
.9(4)

Borders Group, Inc. Stock Option
    Plan for International Employees10
.10(5)

1998 Borders Group, Inc. Stock
    Option Plan10
.11(5)

Participation Agreement dated as
    of December 1, 1998 by and among Borders Group, Inc.,
    Borders, Inc. and Parties thereto10
.12(6)

Amendment No. 1 to 1998
    Borders Group, Inc. Stock Option Plan10
.13(7)

Participation Agreement dated as
    of January 22, 2001 by and among Borders Group, Inc.,
    Borders, Inc. and Parties thereto10
.14(8)

Note Purchase Agreement dated
    as of July 30, 2002 relating to the 6.31% Senior
    Guaranteed Notes of Borders Group, Inc.10
.15(9)

Borders Group, Inc. Long Term
    Incentive Plan10
.16(10)

Participation Agreement dated as
    of November 15, 2002 by and among Borders Group, Inc.,
    Borders, Inc. and Parties thereto10
.17(11)

Borders Group, Inc. 2004 Long-Term
    Incentive Plan10
.18(12)

First Amendment to the Borders
    Group, Inc. 2004 Long Term Incentive Plan dated as of
    May 20, 200410
.19(12)

Security Agreement dated as of
    July 30, 2004 among Borders Group, Inc., its subsidiaries
    and Parties thereto10
.20(12)

Amendment No. 1 to the
    Note Purchase Agreement dated as of July 30, 2004
    among Borders Group, Inc., its subsidiaries and Parties thereto10
.21(14)

Restricted Share Unit Grant
    Agreement10
.22(16)

Restricted Share Grant Agreement10
.23(17)

Increase of Total Commitment and
    Amendment No. 1 dated as of October 25, 2005 to the
    Amended and Restated Multicurrency Revolving Credit Agreement,
    among Borders Group, Inc., its subsidiaries and Parties thereto10
.24(18)

Employment and Consultancy
    Agreement between Mr. Josefowicz and the Company10
.25(13)

Non-Qualified Deferred
    Compensation Plan10
.26(19)

2006 Restricted Share Unit Grant
    Agreement




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##### Table of Contents



ExhibitNumber

Description10
.27(19)

Summary of terms of fiscal 2006
    compensation for non-employee directors and executive officers10
.28(20)

Revised Form of Severance
    Agreement for Executive Officers (other than Mr. Josefowicz10
.29(21)

Summary of Employment Agreement
    between Mr. Jones and the Company10
.30(21)

Employment Agreement between Mr.
    Jones and the Company10
.31(22)

Second Amendment and Restated
    Multicurrency Revolving Credit Agreement dated as of
    July 31, 2006 among Borders Group, Inc., its subsidiaries
    and Parties thereto10
.32(23)

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
.33(24)

Description of Special Incentive
    Program for 200710
.34

Employment terms between
    Mr. Armstrong and the Company10
.35

Employment terms between
    Mr. Gruen and the Company10
.36

Second Amendment to the Borders
    Group, Inc. 2004 Long Term Incentive Plan dated as of
    March 30, 200710
.37

Severance Agreement between Mr.
    Altruda and the Company14
.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 Registration
    Statement on
    Form S-1
    (File
    No. 333-90918).(2)
    
    Incorporated by reference from the Companys Registration
    Statement on
    Form S-1
    (File
    No. 333-80643).(3)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).(4)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 26, 1998 (File
    No. 1-13740).(5)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 24, 1999 (File
    No. 1-13740).(6)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended October 24, 1999 (File
    No. 1-13740).(7)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 28, 2001 (File
    No. 1-13740).(8)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 28, 2002 (File
    No. 1-13740).




---



##### Table of Contents



(9)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 27, 2003 (Filed
    No. 1-13740).(10)
    
    Incorporated by reference from the Companys Annual Report
    on
    Form 10-K
    for the year ended January 25, 2004 (Filed
    No. 1-13740).(11)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File
    No. 1-13740).(12)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form
    10-Q for the
    quarter ended July 25, 2004 (File
    No. 1-13740).(13)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated November 5, 2004 (File
    No. 1-13740).(14)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 16, 2005 (File
    No. 1-13740).(15)
    
    Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File
    No. 1-13740).(16)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 21, 2005 (File
    No. 1-13740).(17)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated October 28, 2005 (File
    No. 1-13740).(18)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated January 25, 2006 (File
    No. 1-13740).(19)
    
    Incorporated by reference from the Companys Current Report
    on
    Form 8-K
    dated March 24, 2006 (File
    No. 1-13740).(20)
    
    Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended April 29,
    2006 (File No. 1-13740).(21)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated July 13, 2006
    (File No. 1-13740).(22)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated July 31, 2006
    (File No. 1-13740).(23)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated September 14, 2006 (File
    No. 1-13740).(24)
    
    Incorporated by reference from the Companys Current Report
    on Form 8-K dated March 27, 2007 (File
    No. 1-13740).