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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K

|           |  |                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------
|(MARK ONE) |  |                                                                                        
|          
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	 OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 27, 2002

OR

|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period
from                to                .

Commission File Number 1-13740



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BORDERS GROUP, INC.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Michigan                                                        |  | 38-3294588                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	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)


Securities registered pursuant to section
12(g) of the act:

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

Securities registered pursuant to
Section 12(b) of the act:

None

Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days. Yes x       No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. o

The aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately
$1,903,653,086 based upon the closing market price of
$23.91 per share of Common Stock on the New York Stock
Exchange as of March 28, 2002.

Number of shares of Common Stock outstanding
as of March 28, 2002: 81,635,509

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants Proxy Statement for the May 23, 2002
Annual Meeting of Stockholders are incorporated by reference
into Part III.



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TABLE OF CONTENTS



|                                                                                              |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                       
|Item 1. Business                                                                             
|Item 2. Properties                                                                           
|Item 3. Legal Proceedings                                                                    
|Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                                                                      
|Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|Item 6. Selected Financial Data                                                              
|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|Item 8. Financial Statements and Supplementary Data                                          
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                                     
|Item 10. Directors and Executive Officers of the Registrant                                  
|Item 11. Executive Compensation                                                              
|Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|Item 13. Certain Relationships and Related Party Transactions                                
|Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                    
|EX-10.12 5th Amendment - Mgmt. Stock Purchase Plan                                           
|EX-10.13 6th Amendment - Mgmt. Stock Purchase Plan                                           
|EX-21.1 Subsidiaries of the Registrant                                                       
|EX-23.1 Consent of Ernst & Young LLP                                                         
|EX-23.2 Consent of PricewaterhouseCoopers LLP                                                
|EX-99.1 Forward Looking Statements                                                           



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##### Table of Contents



BORDERS GROUP, INC.

INDEX

|         |  |                                                                                        |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                        |  | Page |   
|         |  |                                                                                        |  |      |   
|PART I   |  |                                                                                        |  |      |    | 
|Item 1.  |  | Business                                                                               |  |      | 2  | 
|Item 2.  |  | Properties                                                                             |  |      | 8  | 
|Item 3.  |  | Legal Proceedings                                                                      |  |      | 8  | 
|Item 4.  |  | Submission of Matters to a Vote of Security
	Holders                                   |  |      | 9  | 
|PART II  |  |                                                                                        |  |      |    | 
|Item 5.  |  | Market for Registrants Common Equity and
	Related Stockholder Matters                 |  |      | 10 | 
|Item 6.  |  | Selected Financial Data                                                                |  |      | 11 | 
|Item 7.  |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |  |      | 12 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
	Market Risk                            |  |      | 21 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                            |  |      | 22 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosure  |  |      | 42 | 
|PART III |  |                                                                                        |  |      |    | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                     |  |      | 42 | 
|Item 11. |  | Executive Compensation                                                                 |  |      | 45 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
	and Management                        |  |      | 45 | 
|Item 13. |  | Certain Relationships and Related Party
	Transactions                                  |  |      | 45 | 
|PART IV  |  |                                                                                        |  |      |    | 
|Item 14. |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |  |      | 46 | 

1



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PART I







Item 1. Business


General

Borders Group, Inc. (the Company), through its
subsidiaries, Borders, Inc. (Borders), Walden Book Company, Inc.
(Waldenbooks), Borders U.K. Limited, Borders Australia PTY
Limited and others, is the second largest operator of book
superstores and the largest operator of mall-based bookstores in
the world based upon both sales and number of stores. At
January 27, 2002, the Company operated 385 superstores
primarily under the Borders name, including 12 in the United
Kingdom, six in Australia, two in Puerto Rico, and one each in
Singapore and New Zealand. The Company also operated 827
mall-based and other bookstores primarily under the Waldenbooks
name and 36 bookstores under the Books etc. name in the United
Kingdom.

Borders

Borders is a premier operator of book and music
superstores, offering customers selection and service that the
Company believes to be superior to other book superstore
operators. A key element of the Companys strategy is to
continue its growth and increase its profitability through the
ongoing expansion and refinement of its Borders book and music
superstore operations. In 2001, the Company opened 29 new
Borders book and music superstores. Borders superstore
operations achieved annual growth in net sales and net income
for the year ended January 27, 2002 of 6.0% and 27.6%
respectively. Borders superstores also achieved average sales
per square foot of $245 and average sales per superstore of
$6.4 million in 2001. The Company believes its average
sales per superstore to be higher than the comparable figure of
any publicly reporting book superstore operator. Borders
superstores achieved compound annual growth in net sales for the
three years ended January 27, 2002 and January 28,
2001 of 13.6% and 18.5%, respectively.

Each Borders superstore offers customers a vast
assortment of books, superior customer service, value pricing
and an inviting and comfortable environment designed to
encourage browsing. Borders superstores carry an average of
116,000 book titles, ranging from 73,000 titles to 204,000
titles, across numerous categories, including many hard-to-find
titles. As of January 27, 2002, 349 of the 363 domestic
Borders superstores were in a book and music format, which also
feature an extensive selection of pre-recorded music, with an
emphasis on hard-to-find recordings and categories such as jazz,
classical and foreign music, and a broad assortment of
pre-recorded videotapes and digital video discs, focusing
primarily on classic movies and hard-to-find titles. Each book
and music superstore carries approximately 34,000 titles of
music and over 6,000 titles of videotapes and digital video
discs.

Borders superstores average 26,200 square feet in
size, including approximately 5,000 square feet devoted to
music, approximately 600 square feet devoted to videos and
digital video discs and approximately 1,400 square feet devoted
to a café. Stores opened in fiscal 2001 averaged 24,600
square feet. Each store is distinctive in appearance and
architecture and is designed to complement its local
surroundings, although Borders utilizes certain standardized
specifications to increase the speed and lower the cost of new
store openings.

Borders has entered into an agreement with an
affiliate of Amazon.com under which customers will be able to
order certain book, music and video products on Borders.com or
Amazon.com for pick up in Borders stores. This service is
expected to be available for the 2002 holiday season.

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The number of Borders domestic stores located in
each state and the District of Columbia as of January 27,
2002 are listed below:

|                     |  |           |    | 
|-------------------- |  | --------- | -- | 
|                     |  | Number of |   
|State                |  | Stores    |   
|                     |  |           |   
|Alaska               |  |           | 1  | 
|Arizona              |  |           | 8  | 
|California           |  |           | 55 | 
|Colorado             |  |           | 9  | 
|Connecticut          |  |           | 6  | 
|District of Columbia |  |           | 3  | 
|Delaware             |  |           | 2  | 
|Florida              |  |           | 23 | 
|Georgia              |  |           | 14 | 
|Hawaii               |  |           | 6  | 
|Iowa                 |  |           | 2  | 
|Idaho                |  |           | 1  | 
|Illinois             |  |           | 23 | 
|Indiana              |  |           | 8  | 
|Kansas               |  |           | 6  | 
|Louisiana            |  |           | 1  | 
|Massachusetts        |  |           | 11 | 
|Maryland             |  |           | 10 | 
|Maine                |  |           | 2  | 
|Michigan             |  |           | 15 | 
|Minnesota            |  |           | 5  | 
|Missouri             |  |           | 6  | 
|North Carolina       |  |           | 7  | 
|Nebraska             |  |           | 2  | 
|New Hampshire        |  |           | 3  | 
|New Jersey           |  |           | 13 | 
|New Mexico           |  |           | 2  | 
|Nevada               |  |           | 4  | 
|New York             |  |           | 17 | 
|Ohio                 |  |           | 16 | 
|Oklahoma             |  |           | 4  | 
|Oregon               |  |           | 7  | 
|Pennsylvania         |  |           | 20 | 
|Rhode Island         |  |           | 2  | 
|South Dakota         |  |           | 1  | 
|Tennessee            |  |           | 4  | 
|Texas                |  |           | 16 | 
|Utah                 |  |           | 3  | 
|Virginia             |  |           | 11 | 
|Vermont              |  |           | 1  | 
|Washington           |  |           | 7  | 
|Wisconsin            |  |           | 5  | 
|West Virginia        |  |           | 1  | 

Waldenbooks

Waldenbooks is the leading operator of mall-based
bookstores in terms of sales and number of stores, offering
customers a convenient source for new releases, hardcover and
paperback bestsellers, periodicals, and a standard selection of
other titles. Waldenbooks generates cash flow that the Company
uses to finance the Companys growth initiatives.
Waldenbooks achieved average sales per square foot of $266 and
average sales per store of $1.1 million for 2001, both of
which the company believes are higher than its closest
competitor. Waldenbooks stores average approximately 3,500
square feet in size and typically carry between 15,000 and
40,000 titles.

Waldenbooks operates one of the longest-running
customer loyalty programs in the nation, the Preferred Reader
Program. The lessons learned via this program are helping the
Company in considering the development of customer loyalty
programs across its other business channels.

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The number of Waldenbooks stores located in each
state and the District of Columbia as of January 27, 2002
are listed below:

|                     |  |           |    | 
|-------------------- |  | --------- | -- | 
|                     |  | Number of |   
|State                |  | Stores    |   
|                     |  |           |   
|Alaska               |  |           | 5  | 
|Alabama              |  |           | 6  | 
|Arkansas             |  |           | 7  | 
|Arizona              |  |           | 10 | 
|California           |  |           | 62 | 
|Colorado             |  |           | 12 | 
|Connecticut          |  |           | 14 | 
|District of Columbia |  |           | 2  | 
|Delaware             |  |           | 3  | 
|Florida              |  |           | 50 | 
|Georgia              |  |           | 24 | 
|Hawaii               |  |           | 12 | 
|Iowa                 |  |           | 13 | 
|Idaho                |  |           | 4  | 
|Illinois             |  |           | 38 | 
|Indiana              |  |           | 20 | 
|Kansas               |  |           | 7  | 
|Kentucky             |  |           | 12 | 
|Louisiana            |  |           | 8  | 
|Massachusetts        |  |           | 24 | 
|Maryland             |  |           | 22 | 
|Maine                |  |           | 2  | 
|Michigan             |  |           | 28 | 
|Minnesota            |  |           | 7  | 
|Missouri             |  |           | 18 | 
|Mississippi          |  |           | 7  | 
|Montana              |  |           | 4  | 
|North Carolina       |  |           | 29 | 
|North Dakota         |  |           | 3  | 
|Nebraska             |  |           | 5  | 
|New Hampshire        |  |           | 5  | 
|New Jersey           |  |           | 23 | 
|New Mexico           |  |           | 5  | 
|Nevada               |  |           | 4  | 
|New York             |  |           | 45 | 
|Ohio                 |  |           | 42 | 
|Oklahoma             |  |           | 11 | 
|Oregon               |  |           | 10 | 
|Pennsylvania         |  |           | 54 | 
|Rhode Island         |  |           | 5  | 
|South Carolina       |  |           | 13 | 
|South Dakota         |  |           | 2  | 
|Tennessee            |  |           | 16 | 
|Texas                |  |           | 54 | 
|Utah                 |  |           | 3  | 
|Virginia             |  |           | 29 | 
|Vermont              |  |           | 4  | 
|Washington           |  |           | 17 | 
|Wisconsin            |  |           | 16 | 
|West Virginia        |  |           | 9  | 
|Wyoming              |  |           | 2  | 

International

The Companys international initiative began
in 1997 with the acquisition of Books etc. in the United Kingdom
and the opening of a superstore in Singapore. Since then,
Borders has expanded its international operations to establish a
presence on four continents. The Company opened eight
international superstores in 2001, and as of January 27,
2002, operated 12 superstores in the United Kingdom, six in
Australia, two in Puerto Rico, and one each in Singapore and New
Zealand.

International superstores range between 16,000
and 43,000 square feet in size, and tend to be multi-level
facilities located in older buildings in urban locations. The
Company believes it has a competitive advantage due to the depth
of Borders system-driven assortment and level of service.
In 2001, international sales increased 14.8% to
$251.7 million. Currently, four of the ten highest volume
Borders superstores are international stores.

Borders U.K. Limited also operated 36 stores
under the Books etc. name in the United Kingdom as of
January 27, 2002, all of which are small-format stores
located primarily in central London or in various airports in
the United Kingdom. These stores generally range from 2,000 to
5,000 square feet in size, with the largest being 8,000 square
feet, and the smallest being 650 square feet.

Borders.com and Waldenbooks.com

From May 1998 to August 2001, the
Company operated an Internet commerce site, Borders.com. In
August 2001, the Company re-launched Borders.com as a
co-branded Web site powered by Amazon.coms e-commerce
platform. Amazon.com became the seller of record, providing
inventory, fulfillment, site content and

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customer service for the co-branded site.
Waldenbooks has entered into a similar arrangement with an
affiliate of Amazon.com relating to the operation of the
Waldenbooks website. This arrangement is expected to commence
late in 2002.


In the consolidated financial statements, amounts
relating to Borders.com, other than intercompany interest
expense (net of related taxes), have been reclassified from
prior years into the Borders segment. Intercompany interest
charges (net of related taxes) relating to Borders.com have been
included in the Other segment.

Discontinued Operations

In January 2001, the Company adopted a plan
to discontinue operations of All Wound Up, a seasonal retailer
of interactive toys and novelty merchandise the Company had
acquired in March 1999. Accordingly, the operating results
of AWU have been segregated from continuing operations.

Segment Information

The Company is organized based upon the following
operating segments: domestic Borders stores, Waldenbooks stores,
international Borders and Books etc. stores, and other. For
financial information about segments, see
Note 15  Segment Information in the
notes to consolidated financial statements.

Distribution

The Company believes that its centralized
distribution system, consisting of 13 distribution facilities
worldwide, combined with Borders use of its proprietary
expert system to manage inventory, significantly
enhances its ability to manage inventory on a store-by-store
basis. Inventory is shipped from vendors to one of the
Companys distribution centers. Approximately 95% and 70%
of the books carried by Borders and Waldenbooks, respectively,
are processed through the Companys distribution
facilities. Approximately 85% of the inventory that arrives from
publishers is processed within 48 hours for shipment to the
stores. Newly released titles and rush orders are processed
within 24 hours. Borders purchases substantially all of its
music merchandise directly from manufacturers and utilizes the
Companys own distribution center to ship approximately 99%
of its music inventory to its stores.

The Company utilizes distribution centers located
in Harrisburg, Pennsylvania; Indianapolis, Indiana; Columbus,
Ohio; Mira Loma, California and Nashville, Tennessee that
provide exclusive service to Borders stores. The Company
also utilized a distribution center in Columbus that serviced
the All Wound Up seasonal kiosk operations in fiscal 2000. The
distribution center in Columbus closed in 2001 due to the
discontinuance of operations of All Wound Up. In addition, the
Company has distribution facilities in Mira Loma, California and
Nashville, Tennessee that service Waldenbooks and provide
central overstock for Borders stores. Distribution centers
located in the United Kingdom, Australia, Puerto Rico and
Singapore support the Companys growing international
business.

The Company has a 200,000 square-foot fulfillment
center in La Vergne, Tennessee that supported Borders.com prior
to August 2001. Pursuant to the agreement with Amazon.com
as discussed above, Amazon.com assumed the fulfillment of online
orders upon the transition to a co-branded site in
August 2001. This fulfillment center also distributed the
Companys special order merchandise to Borders and
Waldenbooks stores. Pursuant to the March 15, 2001
agreement, Ingram Book Group became the primary provider of book
fulfillment services for Borders Groups special order
sales. The transaction included the sale to Ingram of a large
percentage of the book inventory housed in this fulfillment
center. The Company has converted the La Vergne facility to
support other products and retail store growth.

In general, books can be returned to their
publishers at cost. Borders and Waldenbooks stores return books
to the Companys centralized returns center in Nashville,
Tennessee to be processed for return to the publishers. In
general, Borders can return music and videos to its vendors at
cost plus an additional fee to cover handling and processing
costs.

Competition

The retail book business is highly competitive.
Competition within the retail book industry is fragmented with
Borders facing direct competition from other superstores, such
as Barnes & Noble, Inc., as well as regional chains

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and superstores. In addition, Borders and
Waldenbooks compete with each other, as well as other specialty
retail stores that offer books in a particular area of
specialty, independent single store operators, discount stores,
drug stores, warehouse clubs, mail order clubs and mass
merchandisers. In the future, Borders and Waldenbooks may face
additional competition from other categories of retailers
entering the retail book market.


The music and video businesses are also highly
competitive and Borders faces competition from large established
music chains, such as Tower Records and the Musicland and Media
Play divisions of Musicland Stores Corporation (which also sell
videos), established video chains, such as Blockbuster and
Suncoast Motion Picture Company (a division of Musicland Stores
Corporation), as well as specialty retail stores, video rental
stores, discount stores, warehouse clubs and mass merchandisers.
In addition, consumers receive television and mail order offers
and have access to mail order clubs. The largest mail order
clubs are affiliated with major manufacturers of pre-recorded
music and may have advantageous marketing relationships with
their affiliates.

The Internet has emerged as a significant channel
for retailing in all media categories that the Company carries.
In particular, the retailing of books and music over the
Internet is highly competitive. Competitors on the Internet
include Amazon.com, barnesandnoble.com, and others. In addition,
the Company faces competition from companies engaged in the
business of selling books and music products via electronic
means.

Employees

As of January 27, 2002, the Company had a
total of approximately 15,000 full-time employees and
approximately 17,000 part-time employees. When hiring new
employees, the Company considers a number of factors, including
education and experience, personality and orientation towards
customer service. All new store employees participate in a
training program that provides up to two weeks of in-store
training in all aspects of customer service and selling,
including title searches for in-stock and in-print merchandise,
merchandising, sorting, operation of point of sale terminals and
store policies and procedures. The Company believes that its
relations with its employees are generally excellent. None of
the employees of the Company are represented by unions.

Trademarks and Service Marks

Borders®, Borders Book Shop®, and
Borders Books & Music®, among other marks, are all
registered trademarks and service marks used by Borders.
Brentanos®, Coopersmiths®, Longmeadow
Press®, Waldenbooks®, Waldenbooks Preferred
Reader®, Waldenkids® and Waldensoftware®, among
other marks, are all registered trademarks and service marks
used by Waldenbooks. Books etc.® is a registered trademark
and service mark used by Borders U.K. Limited, Borders.com®
is a registered trademark and service mark used by Borders
Online, Inc. The Borders, Walden, Books etc. and Borders.com
service marks are used as trade names in connection with their
business operations.

Seasonality

The Companys business is highly seasonal,
with sales generally highest in the fourth quarter and lowest in
the first quarter. During 2001, 35.6% of the Companys
sales and 96.1% of the Companys operating income were
generated in the fourth quarter. The Companys results of
operations depend significantly upon the holiday selling season
in the fourth quarter; less than satisfactory net sales for such
period could have a material adverse effect on the
Companys financial condition or results of operations for
the year and may not be sufficient to cover any losses which may
be incurred in the first three quarters of the year. The
Companys expansion program generally is weighted with
store openings in the second half of the fiscal year. In the
future, changes in the number and timing of store openings, or
other factors, may result in different seasonality trends. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations 
Seasonality.

Relationship with Kmart

General.Prior to
its initial public offering in May 1995, the Company was a
subsidiary of Kmart Corporation (Kmart); Kmart currently owns no
shares of common stock of the Company. In January 2002, Kmart
Corporation filed for reorganization under Chapter 11 of
the US Bankruptcy Code. Such filing has not affected the
operations of the Company.

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Kmart and the Company continue to have the
following contractual relationships.

Tax Allocation and Indemnification
Agreement.Prior to the completion of
its initial public offering (IPO), the Company was included in
the consolidated federal income tax returns of Kmart and filed
on a combined basis with Kmart in certain states. Pursuant to a
tax allocation and indemnification agreement between the Company
and Kmart (Tax Allocation Agreement) the Company will remain
obligated to pay to Kmart any income taxes the Company would
have had to pay if it had filed separate tax returns for the tax
period beginning on January 26, 1995, and ending on
June 1, 1995, the date of the consummation of the IPO (to
the extent that it has not previously paid such amounts to
Kmart). In addition, if the tax liability attributable to the
Company for any previous tax period during which the Company was
included in a consolidated federal income tax return filed by
Kmart or a combined state return is adjusted as a result of an
action of a taxing authority or a court, then the Company will
pay to Kmart the amount of any increase in such liability and
Kmart will pay to the Company the amount of any decrease in such
liability (in either case together with interest and penalties).
The Companys tax liability for previous years will not be
affected by any increase or decrease in Kmarts tax
liability if such increase or decrease is not directly
attributable to the Company. After completion of the IPO, the
Company continued to be subject under existing federal
regulations to several liability for the consolidated federal
income taxes for any tax year in which it was a member of any
consolidated group of which Kmart was the common parent.
Pursuant to the Tax Allocation Agreement, however, Kmart agreed
to indemnify the Company for any federal income tax liability of
Kmart or any of its subsidiaries (other than that which is
attributable to the Company) that the Company could be required
to pay and the Company agreed to indemnify Kmart for any of the
Companys separate company taxes.

Lease Guaranty
Agreement.Borders leases for 13
of its retail stores and its distribution center in Harrisburg,
Pennsylvania have been guaranteed by Kmart. Under the terms of a
lease guaranty, indemnification and reimbursement agreement
entered into upon completion of the IPO, as amended, (Lease
Guaranty Agreement), the underlying leases will be transferable
by Borders, subject to a right of first refusal in favor of
Kmart with respect to sites within a three-mile radius of a
Kmart store and, with respect to all other sites, a right of
first offer in favor of Kmart. The Company and Borders are
required to indemnify Kmart with respect to (i) any
liabilities Kmart may incur under the lease guarantees, except
those liabilities arising from the gross negligence or willful
misconduct of Kmart, and (ii) any losses incurred by Kmart
after taking possession of any particular premises, except to
the extent such losses arise solely from the acts or omissions
of Kmart. Under the terms of the Lease Guaranty Agreement, in
the event of (i) the Companys or Borders
failure to provide any required indemnity, (ii) a knowing
and material violation of the limitations on transfers of
guaranteed leases set forth in the agreement, or
(iii) certain events of bankruptcy, Kmart will have the
right to assume any or all of the guaranteed leases and to take
possession of all of the premises underlying such guaranteed
leases; provided, that in the event of a failure or failures to
provide required indemnities, the remedy of taking possession of
all of the premises underlying the guaranteed leases may be
exercised only if such failures relate to aggregate liability of
$10.0 million or more and only if Kmart has provided
100 days prior written notice. In the event of a
failure to provide required indemnities resulting in losses of
more than the equivalent of two months rent under a particular
lease but less than $10.0 million, Kmart may exercise such
remedy of possession as to the premises underlying the
guaranteed lease or leases to which the failure to provide the
indemnity relates and one additional premise for each such
premises to which the failure relates, up to a maximum, in any
event, of five additional premises, and thereafter, with respect
to such additional premises, Kmart remedies and indemnification
rights shall terminate. In the event of a failure to provide
required indemnities resulting in liabilities of less than the
equivalent of two months rent under a particular lease,
Kmart may exercise such remedy of possession only as to the
premises underlying the guaranteed lease or leases to which the
failure to provide the indemnity relates. The Lease Guaranty
Agreement will remain in effect until the expiration of all
lease guarantees, which the Company believes will be in January
2020.

Forward-Looking Statements

This Annual Report on Form 10-K contains
forward-looking statements as defined by the Private Securities
Litigation Reform Act of 1995. Forward-looking statements
reflect managements current expectations and are
inherently uncertain. The Companys actual results may
differ significantly from managements expectations.
Exhibit 99.1, Cautionary Statement Under the Private
Securities Litigation Reform Act of 1995, filed with this

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Annual Report on Form 10-K identifies the
forward-looking statements and describes some, but not all, of
the factors that could cause these differences.







Item 2. Properties


Borders leases all of its stores. Borders
store leases have an average initial term of 15 to 20 years
with multiple three- to five-year renewal options. At
January 27, 2002, the average unexpired term under
Borders existing store leases was 13 years prior to
the exercise of any options.

|                                       |  |           |     | 
|-------------------------------------- |  | --------- | --- | 
|Lease Terms to Expire During 12 Months |  | Number of |    
|Ending on or about January 31          |  | Stores    |    
|                                       |  |           |    
|2002                                   |  |           | 38  | 
|2003                                   |  |           | 8   | 
|2004                                   |  |           | 13  | 
|2005                                   |  |           | 9   | 
|2006                                   |  |           | 4   | 
|2007 and later                         |  |           | 291 | 

Waldenbooks leases all of its stores.
Waldenbooks store leases generally have an initial term of
ten years. At present, the average unexpired term under
Waldenbooks existing store leases is approximately
3.5 years. The expiration of Waldenbooks mall-based
bookstore leases for its bookstores open as of January 27, 2002
expire as follows:

|                                       |  |             |     | 
|-------------------------------------- |  | ----------- | --- | 
|Lease Terms to Expire During 12 Months |  | Number of   |    
|Ending on or about January 31          |  | Mall Stores |    
|                                       |  |             |    
|2002                                   |  |             | 237 | 
|2003                                   |  |             | 128 | 
|2004                                   |  |             | 110 | 
|2005                                   |  |             | 79  | 
|2006                                   |  |             | 64  | 
|2007 and later                         |  |             | 209 | 

Books etc. operated 36 stores in the United
Kingdom as of January 27, 2002. Books etc. generally leases
its stores under operating leases with terms ranging from 5 to
25 years. The average remaining lease term for Books etc.
stores is 11.8 years.

The Company has leased a portion of its corporate
headquarters in Ann Arbor, Michigan and owns the remaining
building and improvements. The Company leases all distribution
centers.






Item 3. Legal Proceedings


In August 1998, The Intimate Bookshop, Inc.
(Intimate) and its owner, Wallace Kuralt, filed a lawsuit in the
United States District Court for the Southern District of New
York against the Company, Barnes & Noble, Inc., and others
alleging violation of the Robinson-Patman Act and other federal
laws, New York statutes governing trade practices and common
law. In response to Defendants Motion to Dismiss the
Complaint, plaintiff Kuralt withdrew his claims and plaintiff
Intimate voluntarily dismissed all but its Robinson-Patman
claims. Intimate has filed a Second Amended Complaint limited to
allegations of violations of the Robinson-Patman Act. The Second
Amended Complaint alleges that Intimate has suffered
$11.3 million or more in damages and requests treble
damages, injunctive and declaratory relief, interest, costs,
attorneys fees and other unspecified relief. The Company
intends to vigorously defend the action.

Two former employees, individually and on behalf
of a purported class consisting of all current and former
employees who worked as assistant managers in Borders stores in
the state of California at any time between April 10, 1996,
and the present, have filed an action against the Company in the
Superior Court of California for the County of San Francisco.
The action alleges that the individual plaintiffs and the
purported class members worked hours for which they were
entitled to receive, but did not receive, overtime compensation
under California law, and

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that they were classified as exempt store
management employees but were forced to work more than 50% of
their time in non-exempt tasks. The Amended Complaint, which
names two additional plaintiffs, alleges violations of the
California Labor Code and the California Business and
Professions Code. The relief sought includes compensatory and
punitive damages, penalties, preliminary and permanent
injunctions requiring Borders to pay overtime compensation as
required under California and Federal law, prejudgment interest,
costs and attorneys fees and such other relief as the
court deems proper. The hearing on the motion to certify the
action as a class action has been rescheduled for May 22,
2002. The Company intends to vigorously defend the action,
including contesting the certification of the action as a class
action.


In addition to the matters described above, the
Company is from time to time involved in or affected by other
litigation incidental to the conduct of its businesses. The
Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial
position or results of operations.






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


Not applicable.

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PART II







Item 5. Market for Registrants
Common Equity and Related Stockholder Matters


The following table sets forth, for the fiscal
quarters indicated, the high and low closing market prices for
the Common Stock on the New York Stock Exchange.

|                    |                |      |   |       |     |  |   |       | 
|------------------- | -------------- | ---- | - | ----- | --- |  | - | ----- | 
|                    |                | High |   |       | Low | 
|                    |                |      |   |       |     | 
|Fiscal Quarter 2000 |                |      |   |       |     |  |   |      
|                    | First Quarter  |      | $ | 17.25 |     |  | $ | 11.19 | 
|                    | Second Quarter |      | $ | 18.50 |     |  | $ | 13.38 | 
|                    | Third Quarter  |      | $ | 14.44 |     |  | $ | 12.56 | 
|                    | Fourth Quarter |      | $ | 13.94 |     |  | $ | 11.38 | 
|Fiscal Quarter 2001 |                |      |   |       |     |  |   |      
|                    | First Quarter  |      | $ | 18.00 |     |  | $ | 12.50 | 
|                    | Second Quarter |      | $ | 23.50 |     |  | $ | 17.40 | 
|                    | Third Quarter  |      | $ | 24.43 |     |  | $ | 16.74 | 
|                    | Fourth Quarter |      | $ | 24.14 |     |  | $ | 14.64 | 

The Common Stock is traded on the New York Stock
Exchange.

As of March 28, 2002, the Common Stock was
held by 3,845 holders of record.

The Company has not declared any cash dividends
and intends to retain its earnings to finance future growth.
Therefore, the Company does not anticipate paying any cash
dividends in the foreseeable future. The declaration and payment
of dividends, if any, is subject to the discretion of the Board
and to certain limitations under the Michigan Business
Corporation Act. In addition, the Companys ability to pay
dividends is restricted by certain agreements to which the
Company is a party. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

10



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Item 6. Selected Financial
Data


SELECTED CONSOLIDATED FINANCIAL AND OPERATING
DATA

The information set forth below should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations and the
Companys consolidated financial statements and the notes
thereto.

|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |         |   |  |   |         |   | 
|--------------------------------------------------------------- | ------------------------------------ | ------------------------------------------- | ------- | - | -------- | - | ------- | -------- |  | - | -------- | --- |  | -------- | ------- | - |  | - | ------- | - | 
|                                                                |                                      |                                            
|                                                                |                                      | Fiscal Year Ended                           |        
|                                                                |                                      | Jan. 27,                                    |         |   | Jan. 28, |   |         | Jan. 23, |  |   | Jan. 24, |     |  | Jan. 25, |        
|                                                                |                                      | 2002                                        |         |   | 2001(1)  |   |         | 2000     |  |   | 1999     |     |  | 1998     |        
|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |        
|                                                                |                                      |                                            
|                                                                |                                      | (dollars in millions except per share data) |        
|Statement of Operations Data                                    |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |         |   |  |   |         |  
|Borders sales                                                   |                                      | $                                           | 2,234.1 |   |          | $ | 2,107.7 |          |  | $ | 1,841.1  |     |  | $        | 1,525.6 |   |  | $ | 1,267.4 |  
|Waldenbooks sales                                               |                                      |                                             | 902.1   |   |          |   | 944.3   |          |  |   | 959.1    |     |  |          | 948.7   |   |  |   | 970.0   |  
|International sales                                             |                                      |                                             | 251.7   |   |          |   | 219.2   |          |  |   | 168.2    |     |  |          | 120.7   |   |  |   | 28.6    |  
|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |        
|Total sales                                                     |                                      | $                                           | 3,387.9 |   |          | $ | 3,271.2 |          |  | $ | 2,968.4  |     |  | $        | 2,595.0 |   |  | $ | 2,266.0 |  
|Operating income before asset impairments and
	other writedowns |                                      | $                                           | 182.4   |   |          | $ | 171.3   |          |  | $ | 171.0    |     |  | $        | 167.3   |   |  | $ | 138.0   |  
|Asset impairments and other writedowns                          |                                      |                                             | 25.4    |   |          |   | 36.2    |          |  |   |         |     |  |          |        |   |  |   |        |  
|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |        
|Operating income from continuing operations                     |                                      | $                                           | 157.0   |   |          | $ | 135.1   |          |  | $ | 171.0    |     |  | $        | 167.3   |   |  | $ | 138.0   |  
|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |        
|Income from continuing operations                               |                                      | $                                           | 87.4    |   |          | $ | 73.8    |          |  | $ | 94.0     |     |  | $        | 92.1    |   |  | $ | 80.2    |  
|Discontinued operations, net of tax                             |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |         |   |  |   |         |  
|                                                                | Loss from operations of All Wound Up |                                             | $       |  |          |   | $       | 10.8     |  |   | $        | 3.7 |  |          | $       |  |  |   | $       |  | 
|                                                                | Loss on disposition of All Wound Up  |                                             | $       |  |          |   | $       | 19.4     |  |   | $        |    |  |          | $       |  |  |   | $       |  | 
|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |        
|Net income                                                      |                                      | $                                           | 87.4    |   |          | $ | 43.6    |          |  | $ | 90.3     |     |  | $        | 92.1    |   |  | $ | 80.2    |  
|                                                                |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |        
|Diluted earnings per common share                               |                                      | $                                           | 1.06    |   |          | $ | 0.54    |          |  | $ | 1.13     |     |  | $        | 1.12    |   |  | $ | 0.98    |  
|Diluted earnings per common share from continuing
	operations   |                                      | $                                           | 1.06    |   |          | $ | 0.92    |          |  | $ | 1.17     |     |  | $        | 1.12    |   |  | $ | 0.98    |  
|Diluted earnings per common share before unusual
	items(2)      |                                      | $                                           | 1.32    |   |          | $ | 1.21    |          |  | $ | 1.17     |     |  | $        | 1.12    |   |  | $ | 0.98    |  
|Balance Sheet Data                                              |                                      |                                             |         |   |          |   |         |          |  |   |          |     |  |          |         |   |  |   |         |  
|Working capital                                                 |                                      | $                                           | 335.4   |   |          | $ | 217.2   |          |  | $ | 170.3    |     |  | $        | 144.5   |   |  | $ | 137.0   |  
|Total assets                                                    |                                      | $                                           | 2,179.3 |   |          | $ | 2,047.1 |          |  | $ | 1,914.8  |     |  | $        | 1,766.6 |   |  | $ | 1,534.9 |  
|Short-term borrowings                                           |                                      | $                                           | 81.6    |   |          | $ | 143.5   |          |  | $ | 133.4    |     |  | $        | 131.9   |   |  | $ | 122.5   |  
|Long-term capital lease obligations, including
	current portion |                                      | $                                           | 51.4    |   |          | $ | 15.8    |          |  | $ | 18.8     |     |  | $        | 8.5     |   |  | $ | 10.0    |  
|Stockholders equity                                            |                                      | $                                           | 949.9   |   |          | $ | 846.5   |          |  | $ | 802.6    |     |  | $        | 715.1   |   |  | $ | 598.1   |  




|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys 2000 fiscal year consisted of
	53 weeks.                                                                                                                                                                                                            
|   
|(2) | Unusual items include discontinued operations,
	fulfillment center and other inventory writedowns, legal
	settlement expense, asset impairments and other writedowns, and
	$3.0 million of pre-tax gains relating to the terrorist
	attacks on September 11, 2001.

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


General

Borders Group, Inc. (the Company), through its
subsidiaries, is the second largest operator of book and music
superstores and the largest operator of mall-based bookstores in
the world based upon both sales and number of stores. As of
January 27, 2002, the Company operated 385 superstores
primarily under the Borders name, including 12 in the United
Kingdom, six in Australia, two in Puerto Rico, and one each in
Singapore and New Zealand. The Company also operated
827 mall-based and other bookstores primarily under the
Waldenbooks name, and 36 bookstores under the Books etc.
name in the United Kingdom.

The Companys business strategy is to
continue its growth and increase its profitability through
(i) expanding and refining its core superstore business,
(ii) driving international growth by leveraging
infrastructure investments and expanding established markets,
(iii) leveraging strategic alliances and in-store Web-based
commerce technologies which enhance the customer experience, and
(iv) maximizing cash flow at Waldenbooks by containing
costs. Specifically, the Company expects to open an average of
40 domestic Borders stores annually over the next several
years. International store growth over the next several years
will focus on existing markets, primarily in the United Kingdom
and Australia, with approximately eight to
ten international store openings annually. Full year
profitability is expected to be achieved by the International
segment in 2003. The Waldenbooks segment has experienced
decreased comparable sales percentages for the past few years
primarily due to the overall decrease in mall traffic and the
impact of superstore openings. As a result, the Company has
developed a plan for the optimization of its store base in order
to improve net income and free cash flow. This plan could result
in further store closing costs or asset impairments over the
next few years. Overall, the Company expects these initiatives
to support consolidated annual sales growth of 8% to 10% and
consolidated annual earnings growth of 13% to 15%.

In August 2001, the Company entered into an
agreement with Amazon.com, Inc. to re-launch Borders.com as a
co-branded Web site powered by Amazon.coms e-commerce
platform. Amazon.com is the seller of record, providing
inventory, fulfillment, site content, and customer service for
the co-branded site.

The Companys fiscal year ends on the Sunday
immediately preceding the last Wednesday in January.
Fiscal 2001 consisted of 52 weeks and ended
January 27, 2002. Fiscal 2000 consisted of 53 weeks
and ended January 28, 2001. Fiscal 1999 consisted of
52 weeks and ended January 23, 2000. References herein
to years are to the Companys fiscal years.

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Results of Operations

The following table presents the Companys
consolidated statements of operations data, as a percentage of
sales, for the three most recent fiscal years.

|                                                                |  |          |       |   |          |  |       |          |  |  |       |  
|--------------------------------------------------------------- |  | -------- | ----- | - | -------- |  | ----- | -------- |  |  | ----- | -
|                                                                |  | Jan. 27, |       |   | Jan. 28, |  |       | Jan. 23, | 
|                                                                |  | 2002     |       |   | 2001     |  |       | 2000     | 
|                                                                |  |          |       |   |          |  |       |          | 
|Sales                                                           |  |          | 100.0 | % |          |  | 100.0 | %        |  |  | 100.0 | %
|Cost of merchandise sold (includes occupancy)                   |  |          | 72.0  |   |          |  | 72.0  |          |  |  | 71.7  |  
|Fulfillment center and other inventory writedowns               |  |          | 0.3   |   |          |  |      |          |  |  |      |  
|                                                                |  |          |       |   |          |  |       |          | 
|Gross margin                                                    |  |          | 27.7  |   |          |  | 28.0  |          |  |  | 28.3  |  
|Selling, general and administrative expenses                    |  |          | 22.0  |   |          |  | 22.5  |          |  |  | 22.1  |  
|Legal settlement expense                                        |  |          | 0.1   |   |          |  |      |          |  |  |      |  
|Pre-opening expense                                             |  |          | 0.2   |   |          |  | 0.2   |          |  |  | 0.3   |  
|Goodwill amortization                                           |  |          | 0.1   |   |          |  | 0.1   |          |  |  | 0.1   |  
|                                                                |  |          |       |   |          |  |       |          | 
|Operating income before asset impairments and
	other writedowns |  |          | 5.3   |   |          |  | 5.2   |          |  |  | 5.8   |  
|Asset impairments and other writedowns                          |  |          | 0.7   |   |          |  | 1.1   |          |  |  |      |  
|                                                                |  |          |       |   |          |  |       |          | 
|Operating income                                                |  |          | 4.6   |   |          |  | 4.1   |          |  |  | 5.8   |  
|Interest expense                                                |  |          | 0.4   |   |          |  | 0.4   |          |  |  | 0.6   |  
|                                                                |  |          |       |   |          |  |       |          | 
|Income before income tax                                        |  |          | 4.2   |   |          |  | 3.7   |          |  |  | 5.2   |  
|Income tax                                                      |  |          | 1.6   |   |          |  | 1.4   |          |  |  | 2.0   |  
|                                                                |  |          |       |   |          |  |       |          | 
|Income from continuing operations                               |  |          | 2.6   |   |          |  | 2.3   |          |  |  | 3.2   |  
|Discontinued operations, net of tax:                            |  |          |       |   |          |  |       |          |  |  |       |  
|Loss from operations of All Wound Up                            |  |          |      |   |          |  | 0.4   |          |  |  | 0.2   |  
|Loss on disposition of All Wound Up                             |  |          |      |   |          |  | 0.6   |          |  |  |      |  
|                                                                |  |          |       |   |          |  |       |          | 
|Net income                                                      |  |          | 2.6   | % |          |  | 1.3   | %        |  |  | 3.0   | %
|                                                                |  |          |       |   |          |  |       |          | 

Consolidated Results

Sales

Consolidated sales increases in fiscal 2001 and
2000 resulted primarily from the opening of new Borders
superstores and increases in comparable store sales for Borders
superstores of 2.0% and 2.3%, respectively.

Gross margin

Consolidated gross margin decreased as a
percentage of sales in both 2001 and 2000. The decrease in 2001
primarily resulted from an $8.7 million pre-tax charge for
the writedown of inventory affected by the Companys
agreement with Ingram Book Company (Ingram). On March 15,
2001, the Company announced an agreement with Ingram, a
wholesaler of books, spoken audio and magazines, pursuant to
which Ingram provides fulfillment services for the
Companys special order book sales. The agreement included
the sale to Ingram of a large percentage of the book inventory
housed in the Companys fulfillment center in LaVergne,
Tennessee, which handled the function assumed by Ingram. The
decrease in 2000 gross margin was driven by lower gross margin
percentages for both the Borders and Waldenbooks segments. Among
the reasons for the decrease in gross margin percentage of
Borders was a change in sales mix to lower margin items. The
decrease in gross margin percentage of Waldenbooks was due to
its fixed expenses being spread over a smaller store base, as
well as lower sales volume in 2000 compared to 1999.

Selling, general and administrative
expenses

Consolidated selling, general and administrative
expenses as a percentage of sales decreased in 2001 due to a
reduction in Borders.com operating expenses in conjunction with
the agreement with Amazon.com, a decrease in Borders payroll
costs resulting from the restructuring of Borders store
personnel, and strong expense control of Borders advertising
costs, partially offset by continued spending on the
Companys international expansion. The

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increase in 2000 was primarily due to spending on
the Companys strategic initiatives, which primarily
related to international superstores and Web-based convergence.


Legal settlement expense

In March 1998, the American Booksellers
Association (ABA) and 26 independent bookstores filed a
lawsuit in the United States District Court for the Northern
District of California against the Company and Barnes &
Noble, Inc. alleging violations of the Robinson-Patman Act, the
California Unfair Trade Practice Act, and the California Unfair
Competition Act. On April 19, 2001, the Company announced
that a settlement had been reached in this action. The Company
paid $2.4 million under the agreement.

Goodwill amortization

The Company uses the straight-line method for
goodwill amortization, which was flat in fiscal 2001 and 2000.
In the first quarter of fiscal 2002, the Company will adopt
Statement of Financial Accounting Standards No. 142.
Adoption will have the impact of eliminating the Companys
goodwill amortization and increasing net income by approximately
$2.8 million annually. The Company does not expect that
adoption will result in an impairment of goodwill.

Asset impairments and other
writedowns

In fiscal 2001, the Company recorded a
$25.4 million pre-tax charge for asset impairments and
other writedowns. The aforementioned agreement with Ingram in
March 2001 resulted in a first quarter pre-tax charge of
approximately $16.0 million primarily related to the
writedown of assets used by the Company-owned facility to
fulfill special order sales, including warehouse equipment,
hardware, and software. The Company also took a fourth quarter
pre-tax charge of $6.9 million primarily related to the
impairment of the leasehold improvements and furniture and
fixtures of 97 underperforming Waldenbooks stores. In addition,
the Company adopted a plan to close certain underperforming
Waldenbooks stores and recorded a fourth quarter
$2.5 million pre-tax charge for the closing costs of those
stores.

In fiscal 2000, the Company took a pre-tax charge
of $36.2 million related to the impairment of certain
long-lived assets and other writedowns. The charge taken in 2000
primarily consisted of $17.7 million for computer hardware
and software of Borders.com and $12.5 million for leasehold
improvements and furniture and fixtures primarily related to 103
underperforming Waldenbooks stores. The remainder of the charge
related to employee severance, the costs of certain lease
obligations for redundant headquarter buildings, and the
writeoff of certain equity investments.

Interest expense

Despite the decrease in the weighted average
interest rate from 6.8% in 2000 to 4.1% in 2001, interest
expense as a percentage of sales was flat in 2001 primarily due
to the Companys interest rate swaps, which converted a
portion of its variable rates to fixed rates. Interest expense
as a percentage of sales decreased in 2000 as a result of lower
consolidated borrowing levels.

Taxes

The effective tax rate for the years presented
differed from the federal statutory rate primarily as a result
of state income taxes. The Companys effective tax rate was
38.7% in 2001 compared to 39.4% in 2000. The decrease is
primarily due to changes in the mix of income subject to tax in
the various taxing jurisdictions. In 1999, the effective tax
rate was 39.1%.

Discontinued operations

In January 2001, the Company adopted a plan
to discontinue operations of All Wound Up, a seasonal retailer
of interactive toys and novelty merchandise the Company had
acquired in March 1999. The discontinuance and closure of
All Wound Up resulted in an after-tax charge of
$19.4 million in the fourth quarter of fiscal 2000 and is
reflected

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in the consolidated statements of operations as a
discontinued operation. The charge was substantially non-cash
and related primarily to the writeoff of goodwill, inventory and
fixed assets.


Effect of terrorist attacks on
September 11, 2001

As a result of the terrorist attacks on
September 11, 2001, a Borders store that operated in the
World Trade Center in New York City was destroyed. The loss of
that stores sales and net income was not material to the
Companys consolidated fiscal 2001 results.

The Company was insured for the replacement value
of the assets destroyed at the store and up to 24 months of
lost income from business interruption coverage and has
recognized a total recovery of $13.0 million to date. Net
asset values of $8.0 million (net of straight-line rent
reserves of $2.0 million) were written off against the
allocated property insurance proceeds of $11.0 million.
Gains were categorized in the consolidated statements of
operations as follows: $1.0 million in Selling,
general and administrative and $2.0 million in
Cost of merchandise sold. In addition,
$2.0 million of business interruption proceeds were
recorded in Cost of merchandise sold to offset
otherwise lost profits from the store.

The Company expects to recover additional
insurance amounts, which will be recognized when collection of
such additional recoveries is assured.

Segment Results

The Company is organized based upon the following
operating segments: domestic Borders stores, Waldenbooks stores,
international Borders and Books etc. stores, and other
(consisting of interest expense and certain corporate governance
costs). Amounts relating to Borders.com, other than intercompany
interest expense (net of related taxes), have been reclassified
from prior years into the Borders segment. Intercompany interest
charges (net of related taxes) relating to Borders.com have been
included in the other segment. See Note 15 in the notes to
consolidated financial statements for further information
relating to these segments.

|                                      |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|Borders                               |  | 2001 |         |   | 2000 |   |         | 1999 | 
|                                      |  |      |         |   |      |   |         |      | 
|(dollar amounts in millions)          |  |      |         |   |      |   |         |      |  |   |         |  
|Sales                                 |  | $    | 2,234.1 |   |      | $ | 2,107.7 |      |  | $ | 1,841.1 |  
|Net income                            |  | $    | 72.1    |   |      | $ | 56.5    |      |  | $ | 58.4    |  
|Net income as % of sales              |  |      | 3.2     | % |      |   | 2.7     | %    |  |   | 3.2     | %
|Depreciation and amortization expense |  | $    | 65.4    |   |      | $ | 60.7    |      |  | $ | 52.8    |  
|Interest expense                      |  | $    | 9.1     |   |      | $ | 12.8    |      |  | $ | 16.4    |  
|Store openings                        |  |      | 29      |   |      |   | 44      |      |  |   | 46      |  
|Store closings                        |  |      | 1       |   |      |   |        |      |  |   |        |  
|Store count                           |  |      | 363     |   |      |   | 335     |      |  |   | 291     |  

The increases in Borders sales for 2001 and 2000
are primarily the result of new store openings and comparable
store sales increases. Borders opened 29 and 44 new stores in
2001 and 2000, respectively, and experienced comparable store
sales increases of 2.0% and 2.3% in 2001 and 2000, respectively.

Net income for 2001 increased primarily due to
the larger store base, partially offset by $14.7 million of
after-tax asset and inventory writedowns, which resulted from
the March 2001 agreement with Ingram. Net income for 2000
decreased from 1999 primarily as a result of an
$11.3 million after-tax asset impairment charge related to
the computer hardware and software of Borders.com taken in 2000,
partially offset by net income generated by the larger store
base. The increase in net income as a percentage of sales in
2001, exclusive of asset and inventory writedowns in 2001 and
2000, was the result of a reduction in Borders.com operating
expenses in conjunction with the agreement with Amazon.com.
Lower store payroll expenses as a percentage of sales due to the
restructuring of store personnel also contributed to the
improvement. Net income as a percentage of sales was flat in
2000 (exclusive of asset writedowns) despite a decrease in gross
margin percentage and an increase in non-payroll store expenses
as a percentage of sales. The decrease in gross margin as a
percentage of sales was due to a change in sales mix to DVDs and
new-release music, a slight increase in promotional costs, and
less leverage of store occupancy costs resulting from lower
comparable store sales. Non-payroll store expenses as a
percentage of sales

15



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increased due to lower comparable store sales
increases. These items were offset by lower store payroll costs
as a percentage of sales.


Depreciation and amortization expense increased
in 2001 and 2000 as a result of the depreciation expense
recognized on new stores capital expenditures.

Interest expense decreased in 2001 and 2000 due
to lower average borrowing levels at fixed internal interest
rates.

|                             |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|Waldenbooks                  |  | 2001 |       |   | 2000 |   |       | 1999 | 
|                             |  |      |       |   |      |   |       |      | 
|(dollar amounts in millions) |  |      |       |   |      |   |       |      |  |   |       |  
|Sales                        |  | $    | 902.1 |   |      | $ | 944.3 |      |  | $ | 959.1 |  
|Net income                   |  | $    | 39.5  |   |      | $ | 40.2  |      |  | $ | 55.5  |  
|Net income as % of sales     |  |      | 4.4   | % |      |   | 4.3   | %    |  |   | 5.8   | %
|Depreciation expense         |  | $    | 21.4  |   |      | $ | 25.8  |      |  | $ | 23.9  |  
|Interest income              |  | $    | 28.3  |   |      | $ | 26.2  |      |  | $ | 22.3  |  
|Store openings               |  |      | 11    |   |      |   | 11    |      |  |   | 39    |  
|Store closings               |  |      | 53    |   |      |   | 46    |      |  |   | 35    |  
|Store count                  |  |      | 827   |   |      |   | 869   |      |  |   | 904   |  

The decreases in Waldenbooks sales in 2001 and
2000 are primarily the result of the decrease in store count
during each year coupled with comparable store sales decreases
of 1.6% and 2.9%, respectively, due to decreased mall traffic.

In 2001, net income decreased primarily as a
result of a smaller sales and store base, along with a
$4.3 million after-tax asset impairment charge related to
97 underperforming stores and a $2.4 million after-tax
charge for store closing costs. Net income decreased in 2000
primarily as a result of decreased sales and a $7.8 million
after-tax asset impairment charge primarily related to 103
underperforming stores. As a percentage of sales, net income for
2001 was flat, exclusive of asset impairments and the store
closing charge. In 2000, net income as a percentage of sales
decreased primarily due to the asset impairment charge and a
decrease in gross margin percentage. The gross margin decrease
was due to increased promotional costs as a percentage of sales
and higher distribution and store occupancy costs as a
percentage of sales resulting from the smaller store base and
lower sales volume.

Depreciation expense decreased in 2001 as a
result of a lower fixed asset base due to asset impairments,
while it increased in 2000 as a result of the depreciation
expense recognized on new stores and refurbished
stores fixed assets.

Interest income increased in 2001 and 2000 as a
result of Waldenbooks continued positive cash flow at fixed
internal interest rates.

|                                      |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|International                         |  | 2001 |       |   | 2000 |   |       | 1999 | 
|                                      |  |      |       |   |      |   |       |      | 
|(dollar amounts in millions)          |  |      |       |   |      |   |       |      |  |   |       |  
|Sales                                 |  | $    | 251.7 |   |      | $ | 219.2 |      |  | $ | 168.2 |  
|Net loss                              |  | $    | 7.5   |   |      | $ | 10.2  |      |  | $ | 7.9   |  
|Net loss as % of sales                |  |      | 3.0   | % |      |   | 4.7   | %    |  |   | 4.7   | %
|Depreciation and amortization expense |  | $    | 9.4   |   |      | $ | 8.8   |      |  | $ | 6.5   |  
|Interest expense                      |  | $    | 14.3  |   |      | $ | 12.4  |      |  | $ | 8.9   |  
|Superstore store openings             |  |      | 8     |   |      |   | 5     |      |  |   | 4     |  
|Superstore store count                |  |      | 22    |   |      |   | 14    |      |  |   | 9     |  
|Books etc. store openings             |  |      | 5     |   |      |   | 6     |      |  |   | 2     |  
|Books etc. store closings             |  |      |      |   |      |   | 2     |      |  |   | 1     |  
|Books etc. store count                |  |      | 36    |   |      |   | 31    |      |  |   | 27    |  

The increases in International sales for 2001 and
2000 are primarily the result of new superstore openings and
comparable store sales increases. In 2001, the Company opened
three stores in the United Kingdom, four stores in Australia,
and the Companys second store in Puerto Rico. In 2000, the
Company opened three stores in the United Kingdom, one store in
Australia, and the Companys first store in Puerto Rico.

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The net loss in 2001 decreased from 2000 as a
result of higher operating income generated from the maturation
of the store base. Net loss as a percentage of sales for 2001 is
lower than the prior year due to the leveraging of distribution
center and overhead infrastructure, primarily in the United
Kingdom and Australia, over a larger store base. Net loss for
2000 increased as a result of higher depreciation and interest
expense, partially offset by increased operating income
generated from the maturation of the prior years store
base. Net loss as a percentage of sales for 2000 remained flat
from the prior year.

Depreciation and amortization expense increased
in 2001 and 2000 as a result of the depreciation expense
recognized on new stores capital expenditures.

Interest expense increased in 2001 and 2000 due
to higher average borrowing levels necessary to finance
investments in new stores at fixed internal interest rates.

Foreign currency transaction gains
(losses) were $0.3 million, $(0.8) million, and
$0.2 million in 2001, 2000, and 1999, respectively.

|                             |  |      |      |  |      |   |      |      |  |   |      | 
|---------------------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|Other                        |  | 2001 |      |  | 2000 |   |      | 1999 | 
|                             |  |      |      |  |      |   |      |      | 
|                             |  |     
|(dollar amounts in millions) |  |      |     
|Net loss                     |  | $    | 16.7 |  |      | $ | 12.7 |      |  | $ | 12.0 | 
|Interest expense             |  | $    | 19.3 |  |      | $ | 14.1 |      |  | $ | 13.6 | 

Net loss consists of various corporate governance
costs and interest. The net loss in 2001 increased from 2000 as
a result of an increase in the amount of annual incentive
compensation and interest expense. Interest expense represents
corporate-level interest costs not charged to the Companys
operating segments.

Liquidity and Capital Resources

The Companys principal capital requirements
are to fund the opening of new stores, the refurbishment and
expansion of existing stores, continued expansion of in-store
Web-based commerce technologies, and corporate information
technology streamlining.

Net cash provided by continuing operations was
$265.0 million, $152.8 million, and
$181.3 million in 2001, 2000, and 1999, respectively. The
current year activity primarily reflects income before non-cash
charges for depreciation and amortization. Fiscal 2000 and 1999
activity primarily reflected income before non-cash charges for
depreciation and amortization offset by cash used for
inventories as a result of store expansion at Borders. Fiscal
2001 inventory net of accounts payable decreased primarily due
to supply chain improvements and strong inventory management,
while fiscal 2000 and 1999 inventory net of accounts payable
increased primarily due to 49 and 50 new Borders stores,
respectively.

Net cash used by discontinued operations
represents the cash needed for the operations of All Wound Up in
fiscal 2001, 2000, and 1999.

Net cash used for investing in 2001 was
$90.7 million, which primarily funded capital expenditures
for new stores and the refurbishment of existing stores. Capital
expenditures in 2001 reflect the opening of 37 new superstores
and 11 new Waldenbooks stores. Capital expenditures of
$141.1 million in 2000 primarily reflect the opening of 49
new superstores and 11 new Waldenbooks stores. Additional
capital spending in 2001 and 2000 reflected the development and
installation of in-store Web-based technology and spending on
corporate information technology streamlining. Capital
expenditures of $159.2 million in 1999 reflect the opening
of 50 new superstores and 39 new Waldenbooks stores.

Net cash used for financing in 2001 was
$41.1 million, resulting primarily from the paydown of the
Companys Credit Facility of $58.2 million and the
repurchase of common stock of $17.7 million, partially
offset by $34.9 million received from the issuance of
common stock under the Companys employee benefit plans.
Net cash provided by financing in 2000 was $19.5 million,
resulting primarily from net borrowings under the Credit
Facility and the issuance of common stock under the
Companys employee benefit plans. Net cash used for
financing in 1999 was $15.0 million, resulting primarily
from the repurchase of common stock of $25.4 million,
partially offset by the issuance of common stock under the
Companys employee benefit plans.

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The Company expects capital expenditures to
increase to approximately $120.0 million in 2002, resulting
primarily from domestic store openings. In addition, capital
expenditures will result from international store openings,
refurbishment of a number of existing stores, and investment in
information technology streamlining. The Company currently plans
to open approximately 40 domestic Borders superstores and eight
international stores in 2002. Average cash requirements for the
opening of a domestic prototype Borders Books and Music
superstore are $2.4 million, representing capital
expenditures of $1.1 million, inventory requirements (net
of related accounts payable) of $1.1 million, and
$0.2 million of pre-opening costs. Average cash
requirements to open a new or expanded Waldenbooks store range
from $0.4 million to $0.7 million, depending on the
size and format of the store. The Company plans to lease new
store locations predominantly under operating leases.

The Company plans to execute its expansion plans
for Borders superstores and other strategic initiatives
principally with funds generated from operations and financing
through the Lease and Credit Facilities. The Company believes
funds generated from operations, borrowings under the Credit
Facility, and financing through the Lease Facility will be
sufficient to fund its anticipated capital requirements for the
next several years. As discussed below, the Credit and Lease
Facilities expire in October 2002, but the Company expects
to be able to successfully renew the Facilities in the second
quarter of 2002. The Company believes that its borrowing rate
may increase upon renewal of the Facilities if financial market
conditions remain unchanged.

The Company currently has a share repurchase
program in place with remaining authorization to repurchase
approximately $86.5 million. During 2001, 2000, and 1999,
$17.7 million, $9.2 million, and $25.4 million of
common stock was repurchased, respectively. The Company plans to
continue the repurchase of its common stock throughout fiscal
2002, subject to the Companys share price and capital
needs.

The Company has a $472.8 million
multicurrency credit agreement (the Credit Facility) which
expires in October 2002. Borrowings under the Credit
Facility bear interest at a base rate or an increment over LIBOR
at the Companys option. The Credit Facility contains
covenants which limit, among other things, the Companys
ability to incur indebtedness, grant liens, make acquisitions,
merge, declare dividends, dispose of assets, issue or repurchase
its common stock in excess of $100.0 million (plus any
proceeds and tax benefits resulting from stock option exercises
and tax benefits resulting from restricted shares purchased by
employees from the Company), and require the Company to meet
certain financial measures regarding fixed charge coverage,
leverage, and tangible net worth. The Company is prohibited
under the Credit Facility from paying cash dividends on common
shares.

The Company has a $175.0 million lease
financing facility (the Lease Facility) to finance new stores
and other property through operating leases which expires in
October 2002. The Lease Facility provides financing to
lessors through loans from a third-party lender for up to 95% of
a projects cost. It is expected that lessors will make
equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the
third-party lender. The principal amount guaranteed will be
limited to approximately 89% of the original cost of a project,
so long as the Company is not in default under the lease
relating to such project. The Lease Facility contains covenants
and events of default that are similar to those contained in the
Credit Facility described above.

To date, the Company has not been required to
perform under the guarantees described above. In the event that
the Company should be required to perform, borrowings under the
Credit Facility would be sufficient to meet its obligations.

Management believes that the rental payments for
properties financed through the Lease Facility may be lower than
those which the Company could obtain elsewhere due to, among
other factors, (i) the lower borrowing rates available to
the Companys landlords under the facility and
(ii) the fact that rental payments for properties financed
through the facility do not include amortization of the
principal amounts of the landlords indebtedness related to
the properties. Rental payments relating to such properties will
be adjusted when permanent financing is obtained to reflect the
interest rates available at the time of the refinancing and the
amortization of principal.

There were 31 properties financed through the
Lease Facility, with a financed value of $121.8 million, at
January 27, 2002. Of this amount, the Company has recorded
$49.7 million as capital leases on the consolidated balance
sheets. The Company expects that the properties financed under
the Lease Facility will either be transferred to a new facility
currently under negotiation or be permanently financed.

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During 1994, the Company entered into agreements
in which leases with respect to four Borders locations served as
collateral for certain mortgage pass-through certificates. These
mortgage pass-through certificates included a provision
requiring the Company to repurchase the underlying mortgage
notes in certain events. In the fourth quarter of fiscal 2001,
the Company was obligated to purchase the notes for
$33.5 million. As a result, the Company has categorized
this prepaid rent amount as part of Other assets in
the consolidated balance sheets with a corresponding amount in
Accrued payroll and other liabilities, since the
payment did not occur until after the Companys fiscal year
end. The prepaid amount will be amortized over each
propertys remaining lease term.

The following table summarizes the Companys
significant financing and lease obligations:

|                               |  |             |       |  |           |   |       |           |  |   |                     |  |  |       |         |  |  |   |         | 
|------------------------------ |  | ----------- | ----- |  | --------- | - | ----- | --------- |  | - | ------------------- |  |  | ----- | ------- |  |  | - | ------- | 
|                               |  |            
|                               |  | Fiscal Year |      
|                               |  | 2002        |       |  | 2003-2004 |   |       | 2005-2006 |  |   | 2007 and thereafter |  |  | Total |        
|(dollars in millions)          |  |             |       |  |           |   |       |           |  |   |                     |  |  |       |        
|Credit Facility borrowings     |  | $           | 81.6  |  |           | $ |      |           |  | $ |                    |  |  | $     |        |  |  | $ | 81.6    | 
|Capital lease obligations      |  |             | 1.7   |  |           |   |      |           |  |   |                    |  |  |       | 49.7    |  |  |   | 51.4    | 
|Operating lease obligations    |  |             | 257.4 |  |           |   | 471.9 |           |  |   | 420.7               |  |  |       | 1,894.3 |  |  |   | 3,044.3 | 
|Mortgage repurchase obligation |  |             | 33.5  |  |           |   |      |           |  |   |                    |  |  |       |        |  |  |   | 33.5    | 
|                               |  |             |       |  |           |   |       |           |  |   |                     |  |  |       |        
|Total                          |  | $           | 374.2 |  |           | $ | 471.9 |           |  | $ | 420.7               |  |  | $     | 1,944.0 |  |  | $ | 3,210.8 | 
|                               |  |             |       |  |           |   |       |           |  |   |                     |  |  |       |        
|Lease Facility guarantees(1)   |  | $           | 121.8 |  |           | $ |      |           |  | $ |                    |  |  | $     |        |  |  | $ | 121.8   | 




|    |                                                              
|--- | -------------------------------------------------------------
|(1) | Includes $49.7 million treated as capital
	lease obligations.

The Company is subject to risk resulting from
interest rate fluctuations since interest on the Companys
borrowings is principally based on variable rates. The
Companys objective in managing its exposure to interest
rate fluctuations is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall
borrowing costs. The Company primarily utilizes interest rate
swaps to achieve this objective, effectively converting a
portion of its variable rate exposures to fixed interest rates.

LIBOR is the rate upon which the Companys
variable rate debt and its payments under the Lease Facility are
principally based. If LIBOR were to increase 1% for the full
year in 2002 as compared to the end of 2001, the Companys
after-tax earnings, after considering the effects of its
existing interest rate swap agreements, would decrease
$1.2 million based on the Companys expected average
outstanding debt, including its indirect borrowings under the
Lease Facility, as of January 27, 2002.

A portion of the Companys operations takes
place in foreign jurisdictions, primarily the United Kingdom,
Australia, New Zealand and Singapore. As a result, the
Companys financial results could be affected by factors
such as changes in foreign currency exchange rates or weak
economic conditions in the foreign markets in which the Company
operates. The Company has generally not used derivative
instruments to manage this risk.

Seasonality

The Companys business is highly seasonal,
with sales significantly higher and substantially all operating
income realized during the fourth quarter, which includes the
holiday selling season. The information below excludes
discontinued operations, fulfillment center and other inventory
writedowns, legal settlement expense, and asset impairments and
other writedowns.

|                        |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                         |                          
|                        |                         | Fiscal 2001 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                         | $                         | 729.9 |      |      | $ | 739.8 |         |   | $ | 713.7   |      |   | $ | 1,204.5 |     
|Operating income (loss) |                         |                           | 4.9   |      |      |   | 4.1   |         |   |   | (1.4    | )    |   |   | 187.3   |     
|% of full year          |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales                   |                           |       | 21.5 | %    |   |       | 21.8    | % |   |         | 21.1 | % |   |         | 35.6 | %
|                        | Operating income (loss) |                           |       | 2.5  |      |   |       | 2.1     |   |   |         | (0.7 | ) |   |         | 96.1 |  

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|                        |                  |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ---------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                  |                          
|                        |                  | Fiscal 2000 Quarter Ended |      
|                        |                  | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                  |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                  | $                         | 679.7 |      |      | $ | 698.4 |         |   | $ | 701.0   |      |   | $ | 1,192.1 |     
|Operating income (loss) |                  |                           | 3.4   |      |      |   | 3.4   |         |   |   | (0.1    | )    |   |   | 164.6   |     
|% of full year          |                  |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales            |                           |       | 20.8 | %    |   |       | 21.4    | % |   |         | 21.4 | % |   |         | 36.4 | %
|                        | Operating income |                           |       | 2.0  |      |   |       | 2.0     |   |   |         |     |   |   |         | 96.0 |  

|                        |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                         |                          
|                        |                         | Fiscal 1999 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                         | $                         | 617.9 |      |      | $ | 628.6 |         |   | $ | 651.1   |      |   | $ | 1,070.8 |     
|Operating income (loss) |                         |                           | (2.4  | )    |      |   | 1.8   |         |   |   | 5.8     |      |   |   | 165.8   |     
|% of full year          |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales                   |                           |       | 20.8 | %    |   |       | 21.2    | % |   |         | 21.9 | % |   |         | 36.1 | %
|                        | Operating income (loss) |                           |       | (1.4 | )    |   |       | 1.1     |   |   |         | 3.4  |   |   |         | 96.9 |  

Critical Accounting Estimates

In the ordinary course of business, the Company
has made a number of estimates and assumptions relating to the
reporting of results of operations and financial condition in
the preparation of its financial statements in conformity with
accounting principles generally accepted in the United States.
Actual results could differ from those estimates under different
assumptions and conditions. The Company believes that the
following discussion addresses the Companys most critical
accounting estimates.

Asset Impairments

The carrying value of long-lived assets is
evaluated whenever changes in circumstances indicate the
carrying amount of such assets may not be recoverable. In
performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived
assets for each of its stores. If the expected future cash flows
are less than the carrying amount of such assets, the Company
recognizes an impairment loss for the difference between the
carrying amount and its estimated fair value. Fair value is
estimated using expected discounted future cash flows. To the
extent that there is a significant deterioration in the
performance of the Companys stores, significant asset
impairments may result.

Inventory

The Company records reserves for shrinkage and
non-returnable inventory based on actual historical rates. If
future experience differs from these historical rates, the
recorded amounts for inventory and cost of sales will be
impacted.

The Company includes certain distribution and
other expenses in its inventory costs, particularly freight,
distribution payroll, and certain occupancy expenses. In
addition, certain selling, general and administrative expenses
are included in inventory costs. These amounts approximate 2% of
total inventory. The extent to which these costs are included in
inventory is based on certain estimates of space and labor
allocation.

New Accounting Guidance

In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting
Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15,
2001. Under the new rules, goodwill and intangible assets deemed
to have indefinite lives are no longer amortized but are subject
to annual impairment tests in accordance with the Statements.
Other intangible assets continue to be amortized over their
useful lives.

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The Company will apply the new rules on
accounting for goodwill and other intangible assets beginning in
the first quarter of 2002. Adoption of the provisions of the
Statements will have the impact of eliminating the
Companys goodwill amortization and increasing net income
by approximately $2.8 million annually. The Company does
not expect that adoption will result in an impairment of
goodwill.

In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets (FAS 144), which
addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. FAS 144 is effective for
fiscal years beginning after December 15, 2001.

The Company expects to adopt FAS 144 beginning in
the first quarter of fiscal 2002, and it does not expect that
the adoption of the Statement will have a significant impact on
the Companys financial position and results of operations.

Related Party Transactions

The Company has not engaged in any related party
transactions which would have had a material effect on the
Companys financial position, cash flows, or results of
operations.






Item 7A. Quantitative and
Qualitative Disclosures About Market Risk


See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.

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Item 8. Financial Statements and
Supplementary Data


INDEX TO FINANCIAL STATEMENTS

|                                                                                                                                     |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                                     |  | Page |   
|                                                                                                                                     |  |      |   
|Consolidated Statements of Operations for the
	fiscal years ended January 27, 2002, January 28, 2001
	and January 23, 2000           |  |      | 23 | 
|Consolidated Balance Sheets as of
	January 27, 2002 and January 28, 2001                                                             |  |      | 24 | 
|Consolidated Statements of Cash Flows for the
	fiscal years ended January 27, 2002, January 28, 2001
	and January 23, 2000           |  |      | 25 | 
|Consolidated Statements of Stockholders
	Equity for the fiscal years ended January 27, 2002,
	January 28, 2001 and January 23, 2000 |  |      | 26 | 
|Notes to Consolidated Financial Statements                                                                                           |  |      | 27 | 
|Report of Independent Auditors                                                                                                       |  |      | 40 | 
|Report of Independent Accountants                                                                                                    |  |      | 41 | 

22



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##### Table of Contents



CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                     |                                                                                   |                                       |         |   |          |   |         |          |       |   |         |     |       |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------- | ------- | - | -------- | - | ------- | -------- | ----- | - | ------- | --- | ----- | -
|                                                     |                                                                                   |                                      
|                                                     |                                                                                   | Fiscal Year Ended                     |        
|                                                     |                                                                                   | Jan. 27,                              |         |   | Jan. 28, |   |         | Jan. 23, |      
|                                                     |                                                                                   | 2002                                  |         |   | 2001     |   |         | 2000     |      
|(dollars in millions except per share data)          |                                                                                   |                                       |         |   |          |   |         |          |      
|Sales                                                |                                                                                   | $                                     | 3,387.9 |   |          | $ | 3,271.2 |          |       | $ | 2,968.4 |    
|Cost of merchandise sold (includes occupancy)        |                                                                                   |                                       | 2,439.2 |   |          |   | 2,354.5 |          |       |   | 2,127.6 |    
|Fulfillment center and other
	inventory writedowns   |                                                                                   |                                       | 10.1    |   |          |   |        |          |       |   |        |    
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Gross margin                                         |                                                                                   |                                       | 938.6   |   |          |   | 916.7   |          |       |   | 840.8   |    
|Selling, general and administrative expenses         |                                                                                   |                                       | 744.8   |   |          |   | 736.2   |          |       |   | 659.2   |    
|Legal settlement expense                             |                                                                                   |                                       | 2.4     |   |          |   |        |          |       |   |        |    
|Pre-opening expense                                  |                                                                                   |                                       | 6.3     |   |          |   | 6.4     |          |       |   | 7.8     |    
|Asset impairments and other writedowns               |                                                                                   |                                       | 25.4    |   |          |   | 36.2    |          |       |   |        |    
|Goodwill amortization                                |                                                                                   |                                       | 2.7     |   |          |   | 2.8     |          |       |   | 2.8     |    
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Operating income                                     |                                                                                   |                                       | 157.0   |   |          |   | 135.1   |          |       |   | 171.0   |    
|Interest expense                                     |                                                                                   |                                       | 14.4    |   |          |   | 13.1    |          |       |   | 16.6    |    
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Income from continuing operations before
	income tax |                                                                                   |                                       | 142.6   |   |          |   | 122.0   |          |       |   | 154.4   |    
|Income tax provision                                 |                                                                                   |                                       | 55.2    |   |          |   | 48.2    |          |       |   | 60.4    |    
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Income from continuing operations                    |                                                                                   | $                                     | 87.4    |   |          | $ | 73.8    |          |       | $ | 94.0    |    
|Discontinued operations (Note 3)                     |                                                                                   |                                       |         |   |          |   |         |          |       |   |         |    
|                                                     | Loss from operations of All Wound Up, net of
	income tax credits of $7.0 and $2.4 |                                       |         |  |          |   |         | 10.8     |       |   |         | 3.7 |      
|                                                     | Loss on disposition of All Wound Up, net of
	deferred income tax credit of $8.9   |                                       |         |  |          |   |         | 19.4     |       |   |         |    |      
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Net income                                           |                                                                                   | $                                     | 87.4    |   |          | $ | 43.6    |          |       | $ | 90.3    |    
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Earnings (loss) per common share data
	(Note 2)      |                                                                                   |                                       |         |   |          |   |         |          |       |   |         |    
|                                                     | Diluted earnings (loss) per common share                                          |                                       |         |   |          |   |         |          |       |   |         |     |      
|                                                     |                                                                                   | Continuing operations                 |         | $ | 1.06     |   |         | $        | 0.92  |   |         | $   | 1.17  |  
|                                                     |                                                                                   | Discontinued operations               |         |   |         |   |         |          | (0.38 | ) |         |     | (0.04 | )
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|                                                     |                                                                                   | Net diluted earnings per common share |         | $ | 1.06     |   |         | $        | 0.54  |   |         | $   | 1.13  |  
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|Basic earnings (loss) per common share               |                                                                                   |                                       |         |   |          |   |         |          |       |   |         |    
|                                                     |                                                                                   | Continuing operations                 |         | $ | 1.08     |   |         | $        | 0.94  |   |         | $   | 1.21  |  
|                                                     |                                                                                   | Discontinued operations               |         |   |         |   |         |          | (0.38 | ) |         |     | (0.05 | )
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      
|                                                     |                                                                                   | Net basic earnings per common share   |         | $ | 1.08     |   |         | $        | 0.56  |   |         | $   | 1.16  |  
|                                                     |                                                                                   |                                       |         |   |          |   |         |          |      

See accompanying notes to consolidated financial
statements.

23



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##### Table of Contents



CONSOLIDATED BALANCE SHEETS

|                                                                            |                                                                                                                                                               |                           |                            |         |          |       |         |         |         |       | 
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | -------------------------- | ------- | -------- | ----- | ------- | ------- | ------- | ----- | 
|                                                                            |                                                                                                                                                               |                          
|                                                                            |                                                                                                                                                               | Fiscal Year Ended         |                           
|                                                                            |                                                                                                                                                               | Jan. 27,                  |                            |         | Jan. 28, |      
|                                                                            |                                                                                                                                                               | 2002                      |                            |         | 2001     |      
|(dollars in millions except share amounts)                                  |                                                                                                                                                               |                           |                            |         |          |      
|Assets                                                                      |                                                                                                                                                               |                           |                            |         |          |       |         |        
|Current assets:                                                             |                                                                                                                                                               |                           |                            |         |          |       |         |        
|                                                                            | Cash and cash equivalents                                                                                                                                     |                           | $                          | 190.2   |          |       | $       | 59.1    |        
|                                                                            | Merchandise inventories                                                                                                                                       |                           |                            | 1,178.8 |          |       |         | 1,201.2 |        
|                                                                            | Accounts receivable and other current assets                                                                                                                  |                           |                            | 73.1    |          |       |         | 73.7    |        
|                                                                            | Deferred income taxes                                                                                                                                         |                           |                            |        |          |       |         | 1.1     |        
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|                                                                            |                                                                                                                                                               | Total current assets      |                            |         | 1,442.1  |       |         |         | 1,335.1 |      
|Property and equipment, net                                                 |                                                                                                                                                               |                           | 529.4                      |         |          |       | 562.3   |        
|Other assets                                                                |                                                                                                                                                               |                           | 105.8                      |         |          |       | 34.2    |        
|Deferred income taxes                                                       |                                                                                                                                                               |                           | 13.3                       |         |          |       | 22.3    |        
|Goodwill, net of accumulated amortization of
	$55.8 and $53.1, respectively |                                                                                                                                                               |                           | 88.7                       |         |          |       | 93.2    |        
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|                                                                            |                                                                                                                                                               | Total assets              |                            | $       | 2,179.3  |       |         | $       | 2,047.1 |      
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|Liabilities and Stockholders Equity                                        |                                                                                                                                                               |                           |                            |         |          |       |         |        
|Current liabilities:                                                        |                                                                                                                                                               |                           |                            |         |          |       |         |        
|                                                                            | Short-term borrowings and current portion of
	long-term debt                                                                                                  |                           | $                          | 83.3    |          |       | $       | 144.4   |        
|                                                                            | Trade accounts payable                                                                                                                                        |                           |                            | 638.2   |          |       |         | 623.6   |        
|                                                                            | Accrued payroll and other liabilities                                                                                                                         |                           |                            | 288.9   |          |       |         | 256.6   |        
|                                                                            | Taxes, including income taxes                                                                                                                                 |                           |                            | 93.0    |          |       |         | 93.3    |        
|                                                                            | Deferred income taxes                                                                                                                                         |                           |                            | 3.3     |          |       |         |        |        
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|                                                                            |                                                                                                                                                               | Total current liabilities |                            |         | 1,106.7  |       |         |         | 1,117.9 |      
|Long-term capital lease obligations                                         |                                                                                                                                                               |                           | 49.7                       |         |          |       | 15.0    |        
|Other long-term liabilities                                                 |                                                                                                                                                               |                           | 73.0                       |         |          |       | 67.7    |        
|Commitments and contingencies (Note 9)                                      |                                                                                                                                                               |                           |                           |         |          |       |        |        
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|                                                                            |                                                                                                                                                               | Total liabilities         |                            |         | 1,229.4  |       |         |         | 1,200.6 |      
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|Stockholders equity:                                                       |                                                                                                                                                               |                           |                            |         |          |       |         |        
|                                                                            | Common stock, 200,000,000 shares authorized;
	81,202,967 and 78,649,501 shares issued and outstanding at
	January 27, 2002 and January 28, 2001, respectively |                           |                            | 707.9   |          |       |         | 685.2   |        
|                                                                            | Deferred compensation and officer receivables                                                                                                                 |                           |                            | (0.2    | )        |       |         | (1.0    | )      
|                                                                            | Accumulated other comprehensive loss                                                                                                                          |                           |                            | (15.5   | )        |       |         | (8.0    | )      
|                                                                            | Retained earnings                                                                                                                                             |                           |                            | 257.7   |          |       |         | 170.3   |        
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|                                                                            |                                                                                                                                                               |                           | Total stockholders equity |         |          | 949.9 |         |         |         | 846.5 | 
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      
|                                                                            |                                                                                                                                                               | $                         | 2,179.3                    |         |          | $     | 2,047.1 |        
|                                                                            |                                                                                                                                                               |                           |                            |         |          |      

See accompanying notes to consolidated financial
statements.

24



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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |        |       |      |        |        |       | 
|------------------------------------------------ | ------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------- | ----- | -------- | ----- | ---- | -------- | ------ | ----- | ---- | ------ | ------ | ----- | 
|                                                 |                                                                     |                                                   
|                                                 |                                                                     | Fiscal Year Ended                                  |                                
|                                                 |                                                                     | Jan. 27,                                           |                                 |       | Jan. 28, |       |      | Jan. 23, |       
|                                                 |                                                                     | 2002                                               |                                 |       | 2001     |       |      | 2000     |       
|(dollars in millions)                            |                                                                     |                                                    |                                 |       |          |       |      |          |       
|Cash provided by (used for):                     |                                                                     |                                                    |                                 |       |          |       |      |          |        |       |      |       
|Operations                                       |                                                                     |                                                    |                                 |       |          |       |      |          |        |       |      |       
|                                                 | Income from continuing operations                                   |                                                    | $                               | 87.4  |          |       | $    | 73.8     |        |       | $    | 94.0   |       
|                                                 | Adjustments to reconcile net income to operating
	cash flows        |                                                    |                                 |       |          |       |      |          |        |       |      |        |       
|                                                 |                                                                     | Depreciation and amortization                      |                                 |       | 96.2     |       |      |          | 95.3   |       |      |        | 83.5   |      
|                                                 |                                                                     | (Increase) decrease in deferred income taxes       |                                 |       | 6.3      |       |      |          | (4.6   | )     |      |        | 7.4    |      
|                                                 |                                                                     | Increase in other long-term assets and liabilities |                                 |       | 6.0      |       |      |          | 6.0    |       |      |        | 8.2    |      
|                                                 |                                                                     | Asset impairments and other writedowns             |                                 |       | 16.7     |       |      |          | 23.0   |       |      |        |       |      
|                                                 | Cash provided by (used for) current assets and
	current liabilities |                                                    |                                 |       |          |       |      |          |        |       |      |        |       
|                                                 |                                                                     | (Increase) decrease in inventories                 |                                 |       | 20.4     |       |      |          | (136.5 | )     |      |        | (50.4  | )    
|                                                 |                                                                     | Increase (decrease) in accounts payable            |                                 |       | 18.2     |       |      |          | 45.0   |       |      |        | (29.2  | )    
|                                                 |                                                                     | Increase in taxes payable                          |                                 |       | 15.3     |       |      |          | 35.2   |       |      |        | 60.8   |      
|                                                 |                                                                     | Other  net                                        |                                 |       | (1.5     | )     |      |          | 15.6   |       |      |        | 7.0    |      
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|                                                 |                                                                     | Net cash provided by continuing operations         |                                 |       | 265.0    |       |      |          | 152.8  |       |      |        | 181.3  |      
|                                                 |                                                                     | Net cash used for discontinued operations          |                                 |       | (0.8     | )     |      |          | (14.2  | )     |      |        | (8.3   | )    
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|                                                 |                                                                     |                                                    | Net cash provided by operations |       |          | 264.2 |      |          |        | 138.6 |      |        |        | 173.0 | 
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|Investing                                        |                                                                     |                                                    |                                 |       |          |       |      |          |        |       |      |       
|                                                 | Capital expenditures                                                |                                                    |                                 | (90.7 | )        |       |      | (138.7   | )      |       |      | (143.5 | )     
|                                                 | Net investing activities of discontinued
	operations                |                                                    |                                 |      |          |       |      | (2.4     | )      |       |      | (15.7  | )     
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|                                                 |                                                                     | Net cash used for investing                        |                                 |       | (90.7    | )     |      |          | (141.1 | )     |      |        | (159.2 | )    
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|Financing                                        |                                                                     |                                                    |                                 |       |          |       |      |          |        |       |      |       
|                                                 | Repayment of long-term capital lease obligations                    |                                                    |                                 | (0.1  | )        |       |      | (4.2     | )      |       |      | (1.2   | )     
|                                                 | Repayment of debt assumed in acquisition                            |                                                    |                                 |      |          |       |      |         |        |       |      | (2.0   | )     
|                                                 | Net funding from credit facility                                    |                                                    |                                 | (58.2 | )        |       |      | 21.4     |        |       |      | 1.5    |       
|                                                 | Issuance of common stock                                            |                                                    |                                 | 34.9  |          |       |      | 11.5     |        |       |      | 11.6   |       
|                                                 | Repurchase of common stock                                          |                                                    |                                 | (17.7 | )        |       |      | (9.2     | )      |       |      | (25.4  | )     
|                                                 | Other                                                               |                                                    |                                 |      |          |       |      |         |        |       |      | 0.5    |       
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|                                                 |                                                                     | Net cash provided by (used for) financing          |                                 |       | (41.1    | )     |      |          | 19.5   |       |      |        | (15.0  | )    
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|Effect of exchange rates on cash and equivalents |                                                                     |                                                    | (1.3                            | )     |          |       | 0.5  |          |        |       |     |       
|Net increase (decrease) in cash and
	equivalents |                                                                     |                                                    | 131.1                           |       |          |       | 17.5 |          |        |       | (1.2 | )     
|Cash and equivalents at beginning of year        |                                                                     |                                                    | 59.1                            |       |          |       | 41.6 |          |        |       | 42.8 |       
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|Cash and equivalents at end of year              |                                                                     | $                                                  | 190.2                           |       |          | $     | 59.1 |          |        | $     | 41.6 |       
|                                                 |                                                                     |                                                    |                                 |       |          |       |      |          |       
|Supplemental cash flow disclosures               |                                                                     |                                                    |                                 |       |          |       |      |          |        |       |      |       
|                                                 | Interest paid                                                       |                                                    | $                               | 14.6  |          |       | $    | 15.8     |        |       | $    | 18.0   |       
|                                                 | Income taxes paid                                                   |                                                    | $                               | 33.9  |          |       | $    | 38.6     |        |       | $    | 6.4    |       
|                                                 | Debt and liabilities assumed in business
	acquisition               |                                                    | $                               |      |          |       | $    |         |        |       | $    | 6.5    |       

See accompanying notes to consolidated financial
statements.

25



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##### Table of Contents



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |   |       |  |  |   |       |  
|---------------------------------------------------------------- |  | ------------ | ---------- | ------------ | ----------- | -------- | ----- | ------------- | ----------- | -------- | ------------- | -------- |  | -------- | ----- | - | ----- | - | ----- |  |  | - | ----- | -
|                                                                 |  |              |            |              |             | Deferred |       |               | Accumulated |          |               | Retained |  |          |      
|                                                                 |  |              |            | Compensation |             |          | Other |               |             | Earnings |               |          | 
|                                                                 |  | Common Stock |            |              | and Officer |          |       | Comprehensive |             |          | (Accumulated  |          |  |         
|                                                                 |  | Shares       |            |              | Amount      |          |       | Receivables   |             |          | Income (Loss) |          |  | Deficit) |       |   | Total |  
|(dollars in millions except share amounts)                       |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Balance at January 24, 1999                                      |  |              | 77,695,124 |              |             | $        | 687.3 |               |             | $        | (7.7          | )        |  | $        | (0.9  | ) |       | $ | 36.4  |  |  | $ | 715.1 |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Net income                                                       |  |              |           |              |             |          |      |               |             |          |              |          |  |          |      |   |       |   | 90.3  |  |  |   | 90.3  |  
|Foreign currency translation adjustments                         |  |              |           |              |             |          |      |               |             |          |              |          |  |          | 1.1   |   |       |   |      |  |  |   | 1.1   |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Comprehensive income                                             |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |   |       |  |  |   | 91.4  |  
|Issuance of common stock                                         |  |              | 2,444,055  |              |             |          | 11.5  |               |             |          |              |          |  |          |      |   |       |   |      |  |  |   | 11.5  |  
|Repurchase and retirement of common stock                        |  |              | (2,451,350 | )            |             |          | (25.4 | )             |             |          |              |          |  |          |      |   |       |   |      |  |  |   | (25.4 | )
|Tax benefit of equity compensation                               |  |              |           |              |             |          | 6.2   |               |             |          |              |          |  |          |      |   |       |   |      |  |  |   | 6.2   |  
|Change in receivables and deferred compensation                  |  |              |           |              |             |          |      |               |             |          | 3.8           |          |  |          |      |   |       |   |      |  |  |   | 3.8   |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Balance at January 23, 2000                                      |  |              | 77,687,829 |              |             | $        | 679.6 |               |             | $        | (3.9          | )        |  | $        | 0.2   |   |       | $ | 126.7 |  |  | $ | 802.6 |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Net income                                                       |  |              |           |              |             |          |      |               |             |          |              |          |  |          |      |   |       |   | 43.6  |  |  |   | 43.6  |  
|Foreign currency translation adjustments                         |  |              |           |              |             |          |      |               |             |          |              |          |  |          | (8.2  | ) |       |   |      |  |  |   | (8.2  | )
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Comprehensive income                                             |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |   |       |  |  |   | 35.4  |  
|Issuance of common stock                                         |  |              | 1,596,475  |              |             |          | 11.5  |               |             |          |              |          |  |          |      |   |       |   |      |  |  |   | 11.5  |  
|Repurchase and retirement of common stock                        |  |              | (634,803   | )            |             |          | (9.2  | )             |             |          |              |          |  |          |      |   |       |   |      |  |  |   | (9.2  | )
|Tax benefit of equity compensation                               |  |              |           |              |             |          | 3.3   |               |             |          |              |          |  |          |      |   |       |   |      |  |  |   | 3.3   |  
|Change in receivables and deferred compensation                  |  |              |           |              |             |          |      |               |             |          | 2.9           |          |  |          |      |   |       |   |      |  |  |   | 2.9   |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Balance at January 28, 2001                                      |  |              | 78,649,501 |              |             | $        | 685.2 |               |             | $        | (1.0          | )        |  | $        | (8.0  | ) |       | $ | 170.3 |  |  | $ | 846.5 |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Net income                                                       |  |              |           |              |             |          |      |               |             |          |              |          |  |          |      |   |       |   | 87.4  |  |  |   | 87.4  |  
|Foreign currency translation adjustments                         |  |              |           |              |             |          |      |               |             |          |              |          |  |          | (4.4  | ) |       |   |      |  |  |   | (4.4  | )
|Cumulative effect of change in accounting
	principle, net of tax |  |              |           |              |             |          |      |               |             |          |              |          |  |          | (1.6  | ) |       |   |      |  |  |   | (1.6  | )
|Change in fair value of derivatives, net of tax                  |  |              |           |              |             |          |      |               |             |          |              |          |  |          | (1.5  | ) |       |   |      |  |  |   | (1.5  | )
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Comprehensive income                                             |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |   |       |  |  |   | 79.9  |  
|Issuance of common stock                                         |  |              | 3,729,906  |              |             |          | 34.9  |               |             |          |              |          |  |          |      |   |       |   |      |  |  |   | 34.9  |  
|Repurchase and retirement of common stock                        |  |              | (1,176,440 | )            |             |          | (17.7 | )             |             |          |              |          |  |          |      |   |       |   |      |  |  |   | (17.7 | )
|Tax benefit of equity compensation                               |  |              |           |              |             |          | 5.5   |               |             |          |              |          |  |          |      |   |       |   |      |  |  |   | 5.5   |  
|Change in receivables and deferred compensation                  |  |              |           |              |             |          |      |               |             |          | 0.8           |          |  |          |      |   |       |   |      |  |  |   | 0.8   |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  
|Balance at January 27, 2002                                      |  |              | 81,202,967 |              |             | $        | 707.9 |               |             | $        | (0.2          | )        |  | $        | (15.5 | ) |       | $ | 257.7 |  |  | $ | 949.9 |  
|                                                                 |  |              |            |              |             |          |       |               |             |          |               |          |  |          |       |   |       |  

See accompanying notes to consolidated financial
statements.

26



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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. (the Company), through its subsidiaries,
operates book and music superstores, mall-based bookstores and
other bookstores in the United States, United Kingdom,
Australia, Singapore, New Zealand, and Puerto Rico. The Company
also operated the Internet commerce site Borders.com through
July 31, 2001. Effective August 1, 2001, the Company
re-launched Borders.com as a co-branded Web site powered by
Amazon.coms e-commerce platform. Amazon.com is the seller
of record, providing inventory, fulfillment, site content, and
customer service for the co-branded site. The Companys
subsidiaries include, among others, Borders, Inc. (Borders) and
Walden Book Company, Inc. (Waldenbooks).

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 and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.

Fiscal Year:The
Companys fiscal year ends on the Sunday immediately
preceding the last Wednesday in January. Fiscal 2001 consisted
of 52 weeks and ended January 27, 2002. Fiscal 2000
consisted of 53 weeks and ended January 28, 2001.
Fiscal 1999 consisted of 52 weeks and ended
January 23, 2000. References herein to years are to the
Companys fiscal years.

Foreign Currency and Translation of Foreign
Subsidiaries: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 other comprehensive income. The
functional currencies of the Companys foreign operations
are the respective local currencies. Foreign currency
translation gains/(losses) were $0.3, $(0.8), and $0.2 in 2001,
2000, and 1999, 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
$85.1 and $87.7 as of January 27, 2002, and
January 28, 2001, 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. Most store properties are
leased and improvements are amortized over the term of the
lease, generally over 3 to 20 years. Other annual
rates used in computing depreciation for financial statement
purposes are 2% to 3% for buildings and 10% to 33% for other
fixtures and equipment. Amortization of assets under capital
leases is included in depreciation expense.

During fiscal 1999, the Company shortened the
estimated depreciable lives of certain categories of personal
computer equipment to three years and extended the estimated
depreciable lives of certain store fixtures up to ten years. The
Company believed that these changes better reflected the useful
lives of these assets. The Company accounted for this as a
change in estimate. Accordingly, the Company utilized the new
depreciable lives prospectively. These changes did not have a
material impact on the Companys financial position or
results of operations during fiscal 2001, 2000, or 1999.

The carrying value of long-lived assets and
certain identifiable intangible assets are evaluated whenever
changes in circumstances indicate the carrying amount of such
assets may not be recoverable.

27



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


Goodwill:Goodwill
is amortized over 20 to 40 years on a straight-line
basis. The Company evaluates the recoverability of goodwill
using a fair value methodology whenever events or changes in
circumstances indicate that the carrying amount of goodwill may
not be recoverable. This methodology is applied separately to
each of the businesses for which the Company has recorded
goodwill. In determining the fair value, the median
price/earnings (P/E) multiple for similar growth retail
companies, or the median earnings before depreciation and
amortization, interest and taxes (EBITDA) multiple for
mature companies, is calculated based upon actual quoted market
prices per share and analysts consensus earnings estimates
for these companies. The applicable multiple is applied to
earnings or EBITDA to arrive at an overall fair value of the
respective companies. The Company evaluates any indicated
impairment as temporary or permanent and records appropriate
charges (if any) to operations for permanent impairments.

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

In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting
For Derivative Instruments and Hedging Activities
(FAS 133), as amended by Statement Nos. 137 and 138,
which the Company adopted effective January 29, 2001.
Pursuant to this guidance, the Company recognizes the fair value
of its derivatives on the consolidated balance sheets. Changes
in derivative fair values are either recognized in earnings as
offsets to the changes in fair value of related hedged assets,
liabilities and firm commitments, or, for forecasted
transactions, deferred and recorded as a component of other
stockholders equity until the hedged transactions occur
and are recognized in earnings. The ineffective portion of a
hedging derivatives change in fair value is immediately
recognized in earnings.

Prior to the adoption of FAS 133, the net cash
amounts paid or received by the Company resulting from interest
rate swap agreements were recognized as adjustments to interest
expense in the period to which they related. The Company was not
required to recognize the fair value of the derivatives on the
consolidated balance sheets.

Revenue:Revenue is
recognized, net of estimated returns, at the point of sale for
all of the Companys segments.

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

When the decision to close a store is made, the
Company provides for expenses directly related to discontinuance
of operations of the store.

Preferred Reader
Program:Waldenbooks sells memberships
in its Preferred Reader Program, which offers members discounts
on purchases and other benefits. Membership fees are deferred
and recognized over the 12-month membership period.

Equity-Based
Compensation:The Company accounts for
equity-based compensation under the guidance of APB No. 25.
See Note 13 for discussion of the pro forma net income
calculated under FAS 123.

New Accounting
Guidance:In June 2001, the
Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business
Combinations, and No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and
intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests in
accordance with the Statements. Other intangible assets continue
to be amortized over their useful lives.

The Company will apply the new rules on
accounting for goodwill and other intangible assets beginning in
the first quarter of 2002. Adoption of the provisions of the
Statements will have the impact of eliminating the
Companys goodwill amortization and increasing net income
by approximately $2.8 annually. The Company does not expect that
adoption will result in an impairment of goodwill.

28



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets (FAS 144), which addresses
financial accounting and reporting for the impairment or
disposal of long-lived assets. FAS 144 is effective for
fiscal years beginning after December 15, 2001.

The Company expects to adopt FAS 144
beginning in the first quarter of fiscal 2002, and it does not
expect that the adoption of the Statement will have a
significant impact on the Companys financial position or
results of operations.

Reclassifications:Certain prior year amounts have been reclassified to conform to
fiscal 2001 presentation.

NOTE 2  WEIGHTED-AVERAGE
SHARES OUTSTANDING

Weighted-average shares outstanding are
calculated as follows (thousands):

|                                                                         |  |      |        |  |      |  |        |      |  |  |        | 
|------------------------------------------------------------------------ |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                                         |  | 2001 |        |  | 2000 |  |        | 1999 | 
|                                                                         |  |      |        |  |      |  |        |      | 
|Weighted-average common shares
	outstanding  basic                      |  |      | 80,559 |  |      |  | 78,374 |      |  |  | 77,577 | 
|Dilutive effect of employee stock options                                |  |      | 2,165  |  |      |  | 1,914  |      |  |  | 2,641  | 
|                                                                         |  |      |        |  |      |  |        |      | 
|Weighted-average common shares
	outstanding  diluted earnings per share |  |      | 82,724 |  |      |  | 80,288 |      |  |  | 80,218 | 
|                                                                         |  |      |        |  |      |  |        |      | 

Unexercised employee stock options to purchase
4.6 million, 14.3 million, and 10.2 million
common shares as of January 27, 2002, January 28,
2001, and January 23, 2000, respectively, were not included
in the weighted-average shares outstanding calculation because
to do so would have been antidilutive.

NOTE 3  DISCONTINUED
OPERATIONS

In March 1999, the Company purchased All
Wound Up, a seasonal retailer of interactive toys and novelty
merchandise for a purchase price of $19.7 (excluding debt
repayment), allocated primarily to fixed assets, inventory, and
goodwill. The acquisition was accounted for as a purchase.

In January 2001, the Company adopted a plan
to discontinue operations of All Wound Up. Accordingly, the
operating results of All Wound Up, including a writeoff of
leasehold improvements, equipment, and deferred charges of
approximately $19.4, were segregated from continuing operations
and reported as a separate line item on the consolidated
statements of operations. The Company restated its prior
consolidated financial statements to present the operating
results of All Wound Up as a discontinued operation. Operations
of All Wound Up were substantially discontinued in
February 2001.

Operating results (exclusive of the
aforementioned provisions) from discontinued operations are as
follows:

|                         |                                              |      |   |      |  |   |       |      |  |   |      |      | 
|------------------------ | -------------------------------------------- | ---- | - | ---- |  | - | ----- | ---- |  | - | ---- | ---- | 
|                         |                                              | 2001 |   | 2000 |  |   | 1999  |     
|                         |                                              |      |   |      |  |   |       |     
|Net sales                |                                              | $    |  |      |  | $ | 23.2  |      |  | $ | 30.8 |     
|Costs and expenses       |                                              |      |   |      |  |   |       |      |  |   |      |     
|                         | Cost of sales                                |      |   |     |  |   |       | 25.4 |  |   |      | 20.5 | 
|                         | Selling, general and administrative expenses |      |   |     |  |   |       | 12.0 |  |   |      | 14.4 | 
|                         | Goodwill amortization                        |      |   |     |  |   |       | 0.9  |  |   |      | 0.7  | 
|                         |                                              |      |   |      |  |   |       |      | 
|Operating loss           |                                              |      |  |      |  |   | (15.1 | )    |  |   | (4.8 | )   
|Other deductions         |                                              |      |  |      |  |   | 2.7   |      |  |   | 1.3  |     
|                         |                                              |      |   |      |  |   |       |      | 
|Loss before income tax   |                                              |      |  |      |  |   | (17.8 | )    |  |   | (6.1 | )   
|Income tax credit        |                                              |      |  |      |  |   | (7.0  | )    |  |   | (2.4 | )   
|                         |                                              |      |   |      |  |   |       |      | 
|Net loss from operations |                                              | $    |  |      |  | $ | (10.8 | )    |  | $ | (3.7 | )   
|                         |                                              |      |   |      |  |   |       |      | 

29



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


The components of net assets of discontinued
operations included in the Companys consolidated balance
sheets at January 27, 2002, and January 28, 2001, are
as follows:

|                |  |      |   |      |  |   |      | 
|--------------- |  | ---- | - | ---- |  | - | ---- | 
|                |  | 2001 |   | 2000 | 
|                |  |      |   |      | 
|Net assets      |  | $    |  |      |  | $ | 14.6 | 
|Net liabilities |  |      |  |      |  |   | 2.7  | 
|                |  |      |   |      |  |  
|                |  | $    |  |      |  | $ | 11.9 | 
|                |  |      |   |      |  |  

NOTE 4  ASSET IMPAIRMENTS AND
OTHER WRITEDOWNS

On March 15, 2001, the Company announced an
agreement with Ingram Book Group (Ingram), a wholesaler of
books, spoken audio and magazines, pursuant to which Ingram
provides fulfillment services for the Companys special
order book sales. This agreement with Ingram resulted in a first
quarter pre-tax charge of approximately $16.0 primarily related
to the writedown of assets used by the Company-owned facility to
fulfill special order sales, including warehouse equipment,
hardware, and software, and is included in Asset
impairments and other writedowns on the consolidated
statements of operations. This agreement also resulted in a
first quarter pre-tax charge of $12.7 for the writedown of
fulfillment center inventory. In the fourth quarter of 2001, the
Company reversed approximately $4.0 (pre-tax) of this charge as
a result of favorable experience in the disposition of the
inventory. The net charge of $8.7 is categorized as
Fulfillment center and other inventory writedowns on
the consolidated statements of operations.

In the fourth quarter of fiscal 2001, the Company
took a pre-tax charge of $6.9 primarily related to the
impairment of certain long-lived assets. The carrying value of
long-lived assets is evaluated whenever changes in circumstances
indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the
Company compares the expected cash flows to the carrying value
of long-lived assets. If the expected future cash flows are less
than the carrying amount of such assets, the Company recognizes
an impairment loss for the difference between the carrying
amount and its estimated fair value. Fair value is estimated
using expected discounted future cash flows. The charge taken
for such impairments in 2001 was related to leasehold
improvements and furniture and fixtures of underperforming
Waldenbooks stores and is categorized as Asset impairments
and other writedowns on the consolidated statements of
operations.

Also in the fourth quarter of 2001, the Company
adopted a plan to close certain underperforming Waldenbooks
stores. As a result of this plan, the Company recorded a $2.5
pre-tax charge for the closing costs of the stores. This charge
is categorized as Asset impairments and other
writedowns on the consolidated statements of operations.
The Company also recorded a $1.4 pre-tax charge for inventory
markdowns of the stores to be closed. This charge is categorized
as Fulfillment center and other inventory writedowns
on the consolidated statements of operations.

NOTE 5  EFFECT OF TERRORIST ATTACKS
ON SEPTEMBER 11, 2001

As a result of the terrorist attacks on
September 11, 2001, a Borders store that operated in the
World Trade Center in New York City was destroyed. The loss of
that stores sales and net income was not material to the
consolidated fiscal 2001 results as a whole.

The Company was insured for the replacement value
of the assets destroyed at the store and up to 24 months of
lost income from business interruption coverage and has
recognized a total recovery of $13.0 to date. Net asset values
of $8.0 (net of straight-line rent reserves of $2.0) were
written off against the allocated property insurance proceeds of
$11.0. Gains were categorized in the consolidated statements of
operations as follows: $1.0 in Selling, general and
administrative and $2.0 in Cost of merchandise
sold. In addition, $2.0 of business interruption proceeds
were recorded in Cost of merchandise sold to offset
otherwise lost profits from the store.

The Company expects to recover additional
insurance amounts, which will be recognized when collection of
such additional recoveries is assured.

30



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


NOTE 6  LEGAL SETTLEMENT

In March 1998, the American Booksellers
Association (ABA) and 26 independent bookstores filed a
lawsuit in the United States District Court for the Northern
District of California against the Company and Barnes &
Noble, Inc. alleging violations of the Robinson-Patman Act, the
California Unfair Trade Practice Act, and the California Unfair
Competition Act. On April 19, 2001, the Company announced
that a settlement had been reached in this action. The Company
paid $2.4 under the agreement and has categorized this charge as
Legal settlement expense in the consolidated
statements of operations.

NOTE 7  PROPERTY AND
EQUIPMENT

Property and equipment consists of the following:

|                                                  |                          |      |         |       |      |   |         |       | 
|------------------------------------------------- | ------------------------ | ---- | ------- | ----- | ---- | - | ------- | ----- | 
|                                                  |                          | 2001 |         |       | 2000 |  
|                                                  |                          |      |         |       |      |  
|Property and equipment                            |                          |      |         |       |      |   |         |      
|                                                  | Land                     |      | $       | 10.2  |      |   | $       | 10.2  | 
|                                                  | Buildings                |      |         | 3.1   |      |   |         | 3.5   | 
|                                                  | Leasehold improvements   |      |         | 351.0 |      |   |         | 339.6 | 
|                                                  | Furniture and fixtures   |      |         | 745.7 |      |   |         | 712.1 | 
|                                                  | Construction in progress |      |         | 15.6  |      |   |         | 12.8  | 
|                                                  |                          |      |         |       |      |  
|                                                  |                          |      | 1,125.6 |       |      |   | 1,078.2 |      
|Less  accumulated depreciation and
	amortization |                          |      | (596.2  | )     |      |   | (515.9  | )    
|                                                  |                          |      |         |       |      |  
|Property and equipment, net                       |                          | $    | 529.4   |       |      | $ | 562.3   |      
|                                                  |                          |      |         |       |      |  

NOTE 8  INCOME TAXES

The income tax provision from continuing
operations consists of the following:

|                           |                 |      |      |      |      |   |      |      |   |   |      |      |  
|-------------------------- | --------------- | ---- | ---- | ---- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                           |                 | 2001 |      |      | 2000 |   |      | 1999 |  
|                           |                 |      |      |      |      |   |      |      |  
|Current                    |                 |      |      |      |      |   |      |      |   |   |      |     
|                           | Federal         |      | $    | 36.1 |      |   | $    | 46.0 |   |   | $    | 45.4 |  
|                           | State and local |      |      | 5.5  |      |   |      | 5.3  |   |   |      | 7.4  |  
|                           | Foreign         |      |      | 0.2  |      |   |      | 0.3  |   |   |      | 0.2  |  
|Deferred                   |                 |      |      |      |      |   |      |      |   |   |      |     
|                           | Federal         |      |      | 14.4 |      |   |      | (0.6 | ) |   |      | 10.2 |  
|                           | State and local |      |      | 0.4  |      |   |      | 1.0  |   |   |      | 0.7  |  
|                           | Foreign         |      |      | (1.4 | )    |   |      | (3.8 | ) |   |      | (3.5 | )
|                           |                 |      |      |      |      |   |      |      |  
|Total income tax provision |                 | $    | 55.2 |      |      | $ | 48.2 |      |   | $ | 60.4 |     
|                           |                 |      |      |      |      |   |      |      |  

A reconciliation of the federal statutory rate to
the Companys effective tax rate follows:

|                                                  |  |      |      |  |      |   |      |      |  |   |      | 
|------------------------------------------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|                                                  |  | 2001 |      |  | 2000 |   |      | 1999 | 
|                                                  |  |      |      |  |      |   |      |      | 
|Federal statutory rate                            |  | $    | 49.9 |  |      | $ | 42.8 |      |  | $ | 54.0 | 
|State and local taxes, net of federal tax benefit |  |      | 3.8  |  |      |   | 4.1  |      |  |   | 5.3  | 
|Other                                             |  |      | 1.5  |  |      |   | 1.3  |      |  |   | 1.1  | 
|                                                  |  |      |      |  |      |   |      |      | 
|Total income tax provision                        |  | $    | 55.2 |  |      | $ | 48.2 |      |  | $ | 60.4 | 
|                                                  |  |      |      |  |      |   |      |      | 

31



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


Deferred tax assets and liabilities resulted from
the following:

|                         |                                        |      |      |      |      |   |      |      | 
|------------------------ | -------------------------------------- | ---- | ---- | ---- | ---- | - | ---- | ---- | 
|                         |                                        | 2001 |      |      | 2000 |  
|                         |                                        |      |      |      |      |  
|Deferred tax assets      |                                        |      |      |      |      |   |      |     
|                         | Net state deferred tax asset           |      | $    |     |      |   | $    | 1.7  | 
|                         | Accruals and other current liabilities |      |      | 6.9  |      |   |      | 3.9  | 
|                         | Deferred revenue                       |      |      | 6.1  |      |   |      | 6.1  | 
|                         | Other long-term liabilities            |      |      | 1.6  |      |   |      | 3.1  | 
|                         | Deferred compensation                  |      |      | 1.7  |      |   |      | 7.2  | 
|                         | Deferred rent                          |      |      | 22.8 |      |   |      | 21.2 | 
|                         | Net operating losses                   |      |      | 9.3  |      |   |      | 8.2  | 
|                         | Asset impairments and other writedowns |      |      | 27.2 |      |   |      | 25.2 | 
|                         |                                        |      |      |      |      |  
|                         | Total deferred tax assets              |      |      | 75.6 |      |   |      | 76.6 | 
|                         |                                        |      |      |      |      |  
|Deferred tax liabilities |                                        |      |      |      |      |   |      |     
|                         | Inventory                              |      |      | 17.1 |      |   |      | 12.2 | 
|                         | Property and equipment                 |      |      | 45.6 |      |   |      | 37.9 | 
|                         | Net state deferred tax liability       |      |      | 0.9  |      |   |      |     | 
|                         | Other                                  |      |      | 2.0  |      |   |      | 3.1  | 
|                         |                                        |      |      |      |      |  
|                         | Total deferred tax liabilities         |      |      | 65.6 |      |   |      | 53.2 | 
|                         |                                        |      |      |      |      |  
|Net deferred tax assets  |                                        | $    | 10.0 |      |      | $ | 23.4 |     
|                         |                                        |      |      |      |      |  

The Company has tax net operating loss
carryforwards in foreign jurisdictions totaling $33.1 as of
January 27, 2002, $28.4 as of January 28, 2001, and
$16.3 as of January 23, 2000. These losses have an
indefinite carryforward period.

For tax purposes, consolidated domestic
income/(loss) before taxes was $149.0 in 2001, $135.0 in 2000,
and $166.6 in 1999. The corresponding amounts for foreign
operations was $(6.4) in 2001, $(13.0) in 2000, and $(12.2) in
1999.

NOTE 9  COMMITMENTS AND
CONTINGENCIES

In August 1998, The Intimate Bookshop, Inc.
(Intimate) and its owner, Wallace Kuralt, filed a lawsuit in the
United States District Court for the Southern District of
New York against the Company, Barnes & Noble, Inc., and
others alleging violation of the Robinson-Patman Act and other
federal laws, New York statutes governing trade practices
and common law. In response to Defendants Motion to
Dismiss the Complaint, plaintiff Kuralt withdrew his claims and
plaintiff Intimate voluntarily dismissed all but its
Robinson-Patman claims. Intimate has filed a Second Amended
Complaint limited to allegations of violations of the
Robinson-Patman Act. The Second Amended Complaint alleges that
Intimate has suffered $11.3 or more in damages and requests
treble damages, injunctive and declaratory relief, interest,
costs, attorneys fees and other unspecified relief. The
Company intends to vigorously defend the action.

Two former employees, individually and on behalf
of a purported class consisting of all current and former
employees who worked as assistant managers in Borders stores in
the state of California at any time between April 10, 1996,
and the present, have filed an action against the Company in the
Superior Court of California for the County of San Francisco.
The action alleges that the individual plaintiffs and the
purported class members worked hours for which they were
entitled to receive, but did not receive, overtime compensation
under California law, and that they were classified as exempt
store management employees but were forced to work more than 50%
of their time in non-exempt tasks. The Amended Complaint, which
names two additional plaintiffs, alleges violations of the
California Labor Code and the California Business and
Professions Code. The relief sought includes compensatory and
punitive damages, penalties, preliminary and permanent
injunctions requiring Borders to pay overtime compensation

32



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


as required under California and Federal law,
prejudgment interest, costs, and attorneys fees and such
other relief as the court deems proper. The hearing on the
motion to certify the action as a class action has been
rescheduled for May 22, 2002. The Company intends to
vigorously defend the action, including contesting the
certification of the action as a class action.

In addition to the matters described above, the
Company is, from time to time, involved in or affected by other
litigation incidental to the conduct of its businesses.

The Company has not included any liability in its
consolidated financial statements in connection with the
lawsuits described above and has expensed as incurred all legal
costs to date. The Company does not believe that any such
litigation will have a material adverse effect on its liquidity
or financial position.

NOTE 10  DEBT

The Company has a $472.8 multicurrency credit
agreement (the Credit Facility) which expires in
October 2002. Borrowings under the Credit Facility bear
interest at a base rate or an increment over LIBOR at the
Companys option. The Credit Facility contains covenants
which limit, among other things, the Companys ability to
incur indebtedness, grant liens, make acquisitions, merge,
declare dividends, dispose of assets, issue or repurchase its
common stock in excess of $100.0 (plus any proceeds and tax
benefits resulting from stock option exercises and tax benefits
resulting from restricted shares purchased by employees from the
Company), and require the Company to meet certain financial
measures regarding fixed charge coverage, leverage, and tangible
net worth. The Company is prohibited under the Credit Facility
from paying cash dividends on common shares. The Company had
borrowings outstanding under the Credit Facility of $81.6 at
January 27, 2002, and $143.5 at January 28, 2001. The
weighted average interest rate in 2001 and 2000 was
approximately 4.1% and 6.8%, respectively.

NOTE 11  LEASES

Operating Leases:The Company conducts operations primarily in leased facilities.
Store leases are generally for terms of 3 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 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
January 27, 2002, total $257.4 in 2002, $243.7 in 2003,
$228.2 in 2004, $213.9 in 2005, $206.8 in 2006, $1,894.3 in all
later years, and in the aggregate, total $3,044.3.

Rental Expenses:A
summary of operating lease rental expense and short-term rentals
follows:

|                |                    |       |   |       |       |  |   |       |       |  |   |       |       | 
|--------------- | ------------------ | ----- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                |                    | 2001  |   |       | 2000  |  |   | 1999  |      
|                |                    |       |   |       |       |  |   |       |      
|Rental expenses |                    |       |   |       |       |  |   |       |       |  |   |      
|                | Minimum rentals    |       | $ | 303.1 |       |  | $ | 277.7 |       |  | $ | 252.6 |      
|                | Percentage rentals |       |   | 1.8   |       |  |   | 2.0   |       |  |   | 2.0   |      
|                |                    |       |   |       |       |  |   |       |      
|                |                    | Total |   | $     | 304.9 |  |   | $     | 279.7 |  |   | $     | 254.6 | 
|                |                    |       |   |       |       |  |   |       |      

Capitalized Leases:The Company accounts for 16 stores and certain computer
equipment under capital leases. At January 27, 2002, the
Companys commitments under leases accounted for as capital
leases aggregated $51.4. Scheduled principal payments of
capitalized lease obligations as of January 27, 2002 are as
follows: 2002  $1.7; 2003  $0.0;
2004  $0.0; 2005  $0.0; 2006 
$0.0; 2007 and thereafter  $49.7. Certain obligations
related to properties included in the Companys Lease
Facility (described below) have been classified as due after
2007.

33



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


Lease Financing
Facility:The Company has a $175.0
lease financing facility (the Lease Facility) to finance new
stores and other property through operating leases, which
expires in October 2002. The Lease Facility provides
financing to lessors through loans from a third-party lender for
up to 95% of a projects cost. It is expected that lessors
will make equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the
third-party lender. The principal amount guaranteed is limited
to approximately 89% of the original cost of a project so long
as the Company is not in default under the lease relating to
such project. The Lease Facility contains covenants and events
of default that are similar to those contained in the Credit
Facility described above. There was $121.8 and $163.1
outstanding under the Lease Facility at January 27, 2002,
and January 28, 2001, respectively. The Company has
recorded $49.7 and $10.0 of the amounts under the Lease Facility
as capitalized leases at January 27, 2002, and
January 28, 2001, respectively. These amounts have been
treated as non-cash items on the consolidated statements of cash
flows. The Company expects to be able to successfully renew the
Lease Facility in the second quarter of 2002.

During 1994, the Company entered into agreements
in which leases with respect to four Borders locations served as
collateral for certain mortgage pass-through certificates. These
mortgage pass-through certificates included a provision
requiring the Company to repurchase the underlying mortgage
notes in certain events. In the fourth quarter of fiscal 2001,
the Company was obligated to purchase the notes for $33.5. As a
result, the Company has categorized this prepaid rent amount as
part of Other assets in the consolidated balance
sheets with a corresponding amount in Accrued payroll and
other liabilities, since the payment did not occur until
after the Companys fiscal year end. The prepaid amount
will be amortized over each propertys remaining lease term.

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 $3.2, $3.2, and
$2.9 for 2001, 2000, and 1999, respectively.

NOTE 13  STOCK-BASED BENEFIT
PLANS

Stock Option Plans:The Company has various stock option plans pursuant to which the
Company may grant options to purchase its common stock. The
exercise price of options granted under these plans will
generally not be less than the fair value per share of the
Companys common stock at the date of grant with vesting
periods up to six years from grant date and maximum option terms
up to ten years from grant date. Options have been granted under
the plans to all full-time employees of the Company and its
subsidiaries with 30 days or more of service. At
January 27, 2002, the Company has 34.5 million shares
authorized for the grant of stock options under these plans.

Stock Purchase
Plans:The Company has a management
stock purchase plan (the Management Plan) and an employee stock
purchase plan (the Employee Plan). Under the Management Plan,
the Companys senior management personnel are required to
use 20%, and may use up to 100%, of their annual incentive
bonuses to purchase restricted shares of the Companys
common stock, at a 20% discount from the fair value of the same
number of unrestricted shares of common stock. Restricted shares
of common stock purchased under the Management Plan will
generally be restricted from sale or transfer for three years
from date of purchase. The Employee Plan allows the
Companys associates not covered under the Management Plan
to purchase shares of the Companys common stock at a 15%
discount from their fair market value.

The Company recognizes compensation expense for
the discount on restricted shares of common stock purchased
under the Management Plan. Such discounts are recognized as
expense on a straight-line basis over the three-year period
during which the shares are restricted from sale or transfer.
The Company is not required to record compensation expense with
respect to shares purchased under the Employee Plan.

34



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


A summary of the information relative to the
Companys stock option plans follows:

|                                |                  |           |        |          |                |  |       |       | 
|------------------------------- | ---------------- | --------- | ------ | -------- | -------------- |  | ----- | ----- | 
|                                |                  |           |        | Weighted |               
|                                |                  | Number    |        |          | Average        | 
|                                |                  | of Shares |        |          | Exercise Price | 
|(number of shares in thousands) |                  |           |        |          |                | 
|Outstanding at January 24, 1999 |                  |           | 19,186 |          |                |  | 19.36 |      
|                                | Granted          |           |        | 5,468    |                |  |       | 14.49 | 
|                                | Exercised        |           |        | 2,181    |                |  |       | 7.53  | 
|                                | Forfeited        |           |        | 3,909    |                |  |       | 21.24 | 
|Outstanding at January 23, 2000 |                  |           | 18,564 |          |                |  | 18.89 |      
|                                | Granted          |           |        | 4,811    |                |  |       | 13.25 | 
|                                | Exercised        |           |        | 1,397    |                |  |       | 7.52  | 
|                                | Forfeited        |           |        | 4,324    |                |  |       | 20.80 | 
|Outstanding at January 28, 2001 |                  |           | 17,654 |          |                |  | 17.82 |      
|                                | Granted          |           |        | 3,326    |                |  |       | 16.51 | 
|                                | Exercised        |           |        | 2,659    |                |  |       | 12.25 | 
|                                | Forfeited        |           |        | 2,906    |                |  |       | 19.34 | 
|Outstanding at January 27, 2002 |                  |           | 15,415 |          |                |  | 18.11 |      
|Balance exercisable at          |                  |           |        |          |                |  |       |      
|                                | January 23, 2000 |           |        | 4,639    |                |  |       | 14.26 | 
|                                | January 28, 2001 |           |        | 6,803    |                |  |       | 16.80 | 
|                                | January 27, 2002 |           |        | 7,619    |                |  |       | 18.22 | 

The weighted-average fair values of options at
their grant date where the exercise price equals the market
price on the grant date were $6.09, $5.17, and $5.84 in 2001,
2000, and 1999, respectively.

As permitted, the Company has adopted the
disclosure-only option of Financial Accounting Standards Board
Statement No. 123, Accounting for Stock Based
Compensation (FAS 123). The pro forma net income had
the Company adopted the fair-value accounting provisions of
FAS 123 would have been $80.9, $31.6, and $68.3 in 2001,
2000, and 1999, respectively. Pro forma diluted and basic
earnings per share would have been $0.98, $0.39, and $0.85 and
$1.00, $0.40, and $0.88 in 2001, 2000, and 1999, respectively.

The Black-Scholes option valuation model was used
to calculate the fair market value of the options at the grant
date for the purpose of disclosures required by FAS 123.
The following assumptions were used in the calculation:

|                        |  |      |            |  |      |  |              |      |  |  |            | 
|----------------------- |  | ---- | ---------- |  | ---- |  | ------------ | ---- |  |  | ---------- | 
|                        |  | 2001 |            |  | 2000 |  |              | 1999 | 
|                        |  |      |            |  |      |  |              |      | 
|Risk-free interest rate |  |      | 3.1-5.4%   |  |      |  | 4.8-6.8%     |      |  |  | 4.9-6.7%   | 
|Expected life           |  |      | 3-10 years |  |      |  | 2.5-10 years |      |  |  | 3-10 years | 
|Expected volatility     |  |      | 33.3-47.5% |  |      |  | 33.3-40.9%   |      |  |  | 33.3-40.3% | 
|Expected dividends      |  |      | 0%         |  |      |  | 0%           |      |  |  | 0%         | 

35



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


The following table summarizes the information
regarding stock options outstanding at January 27, 2002
(number of shares in thousands):

|                |              |             |           |  |             |                  |  |  |                  |  |  |           |       |  |                  |  |       |  |  |   |       | 
|--------------- | ------------ | ----------- | --------- |  | ----------- | ---------------- |  |  | ---------------- |  |  | --------- | ----- |  | ---------------- |  | ----- |  |  | - | ----- | 
|                |              |             |           | 
|                |              | Outstanding |           |  | Exercisable |                 
|Range of        |              |             | Number of |  |             | Weighted Average |  |  | Weighted Average |  |  | Number of |       |  | Weighted Average | 
|Exercise Prices |              |             | Shares    |  |             | Remaining Life   |  |  | Exercise Price   |  |  | Shares    |       |  | Exercise Price   | 
|                |              |             |           |  |             |                  |  |  |                  |  |  |           |       |  |                  | 
|$               | 6.81-$10.22  |             |           |  | 1,762       |                  |  |  | 3.4              |  |  | $         | 8.69  |  |                  |  | 1,762 |  |  | $ | 8.69  | 
|$               | 10.23-$13.63 |             |           |  | 3,368       |                  |  |  | 4.4              |  |  |           | 12.80 |  |                  |  | 1,207 |  |  |   | 12.73 | 
|$               | 13.64-$17.03 |             |           |  | 4,351       |                  |  |  | 5.7              |  |  |           | 14.70 |  |                  |  | 1,413 |  |  |   | 14.43 | 
|$               | 17.04-$20.44 |             |           |  | 1,361       |                  |  |  | 4.9              |  |  |           | 18.16 |  |                  |  | 442   |  |  |   | 17.84 | 
|$               | 20.45-$27.25 |             |           |  | 979         |                  |  |  | 4.6              |  |  |           | 24.04 |  |                  |  | 752   |  |  |   | 24.20 | 
|$               | 27.26-$30.66 |             |           |  | 2,786       |                  |  |  | 5.6              |  |  |           | 29.79 |  |                  |  | 1,571 |  |  |   | 29.77 | 
|$               | 30.67-$34.06 |             |           |  | 808         |                  |  |  | 5.9              |  |  |           | 31.61 |  |                  |  | 472   |  |  |   | 31.49 | 

A summary of the information relative to the
Companys stock purchase plans follows:

|                                        |      |           |  |     |                  |  |  |                   |  |  |  |       | 
|--------------------------------------- | ---- | --------- |  | --- | ---------------- |  |  | ----------------- |  |  |  | ----- | 
|                                        |      | Number of |  |     | Weighted Average |  |  | Weighted Average  | 
|                                        |      | Shares    |  |     | Purchase Price   |  |  | at Grant Date FMV | 
|                                        |      |           |  |     |                  |  |  |                   | 
|(number of shares in thousands)         |      |          
|Stock issued under stock purchase plans |      |           |  |     |                  |  |  |                   |  |  |  |      
|Management plan                         |      |           |  |     |                  |  |  |                   |  |  |  |      
|                                        | 1999 |           |  | 106 |                  |  |  | 10.91             |  |  |  | 13.64 | 
|                                        | 2000 |           |  | 13  |                  |  |  | 10.56             |  |  |  | 13.21 | 
|                                        | 2001 |           |  | 24  |                  |  |  | 13.26             |  |  |  | 16.57 | 
|Employee plan                           |      |           |  |     |                  |  |  |                   |  |  |  |      
|                                        | 1999 |           |  | 118 |                  |  |  | 12.79             |  |  |  | 15.05 | 
|                                        | 2000 |           |  | 65  |                  |  |  | 12.38             |  |  |  | 14.56 | 
|                                        | 2001 |           |  | 35  |                  |  |  | 16.52             |  |  |  | 19.43 | 

NOTE 14  FINANCIAL
INSTRUMENTS

Effective January 29, 2001, the Company
adopted Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (FAS 133), as amended.
FAS 133 requires the transition adjustment resulting from
adoption to be reported in net income or other comprehensive
income, as appropriate, as the cumulative effect of a change in
accounting principle. Accordingly, the Company recorded a
cumulative transition adjustment to decrease other comprehensive
income by $1.6 (net of tax) to recognize the fair value of its
derivative financial instruments as of the date of adoption.

The Company is subject to risk resulting from
interest rate fluctuations, as interest on the Companys
borrowings is principally based on variable rates. The
Companys objective in managing its exposure to interest
rate fluctuations is to limit the impact of interest rate
changes on earnings and cash flows and to lower its overall
borrowing costs. The Company primarily utilizes interest rate
swaps to achieve this objective, effectively converting a
portion of its variable rate exposures to fixed interest rates.
In accordance with the provisions of FAS 133, the Company
has designated all of its interest rate swap agreements as cash
flow hedges.

The Company recognizes the fair value of its
derivatives on the consolidated balance sheets. Changes in the
fair value of a derivative that is designated as, and meets all
the required criteria for, a cash flow hedge are recorded in
accumulated other comprehensive income and reclassified into
earnings as the underlying hedged item affects earnings. Amounts
reclassified into earnings related to interest swap agreements
are included in interest expense. For the year ended
January 27, 2002, unrealized after-tax net losses of $3.1
related to interest rate swaps were recorded in other
comprehensive income, including the $1.6 cumulative transition
adjustment. As of January 27, 2002, $3.1 of net unrealized
losses related to interest rate swaps was included in
accumulated other comprehensive

36



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


income, approximately $2.6 of which is expected
to be reclassified into earnings during the next 12 months.
The hedge ineffectiveness for the year ending January 27,
2002 was not material.

As of January 27, 2002, and January 28,
2001, the Company had the following interest rate instruments in
effect:

|                    |  |                  |       |      |        |  |      |        |  |        |             |  |  |   |      |  
|------------------- |  | ---------------- | ----- | ---- | ------ |  | ---- | ------ |  | ------ | ----------- |  |  | - | ---- | -
|                    |  |                 
|                    |  | January 27, 2002 |      
|                    |  |                  |       | Fair |       
|                    |  | Notional         |       |      | Strike |  |      |        |  | Market |            
|                    |  | Amount           |       |      | Rate   |  |      | Period |  |        | Value       | 
|                    |  |                  |       |      |        |  |      |        |  |        |             | 
|Interest rate swaps |  | $                | 100.0 |      |        |  | 5.2% |        |  |        | 1/01-1/02   |  |  | $ | (0.3 | )
|                    |  | $                | 75.0  |      |        |  | 5.7% |        |  |        | 1/00-1/03   |  |  | $ | (2.7 | )
|                    |  | $                | 50.0  |      |        |  | 5.1% |        |  |        | 1/01-1/02   |  |  | $ | (0.1 | )
|                    |  | $                | 33.0  | (a)  |        |  | 6.6% |        |  |        | 10/98-10/03 |  |  | $ | (0.8 | )
|                    |  | $                | 33.0  | (a)  |        |  | 6.9% |        |  |        | 9/98-9/03   |  |  | $ | (1.2 | )

| | 
| | 
| | 

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

|                    |  |                  |      |      |        |  |      |        |  |        |             |  |  |   |      |  
|------------------- |  | ---------------- | ---- | ---- | ------ |  | ---- | ------ |  | ------ | ----------- |  |  | - | ---- | -
|                    |  |                 
|                    |  | January 28, 2001 |     
|                    |  |                  |      | Fair |       
|                    |  | Notional         |      |      | Strike |  |      |        |  | Market |            
|                    |  | Amount           |      |      | Rate   |  |      | Period |  |        | Value       | 
|                    |  |                  |      |      |        |  |      |        |  |        |             | 
|Interest rate swaps |  | $                | 50.0 |      |        |  | 6.0% |        |  |        | 1/00-1/01   |  |  | $ | 0.0  |  
|                    |  | $                | 75.0 |      |        |  | 5.7% |        |  |        | 1/00-1/03   |  |  | $ | (0.7 | )
|                    |  | $                | 33.0 | (a)  |        |  | 6.6% |        |  |        | 10/98-10/03 |  |  | $ | (0.7 | )
|                    |  | $                | 33.0 | (a)  |        |  | 6.9% |        |  |        | 9/98-9/03   |  |  | $ | (1.3 | )

| | 
| | 
| | 

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

NOTE 15  SEGMENT
INFORMATION

The Company is organized based upon the following
operating segments: domestic Borders stores, Waldenbooks stores,
international Borders and Books etc. stores, and other
(consisting of interest expense and certain corporate governance
costs).

The accounting policies of the segments are the
same as those described in the Summary of Significant
Accounting Policies. Segment data includes charges
allocating all corporate headquarters costs to each segment.
Transactions between segments, consisting principally of
inventory transfers, are recorded primarily at cost. The Company
evaluates the performance of its segments and allocates
resources to them based on anticipated future contribution.
Amounts relating to Borders.com, other than intercompany
interest expense (net of related taxes), have been reclassified
from prior years into the Borders segment. Intercompany interest
charges (net of related taxes) relating to Borders.com have been
included in the other segment.

37



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


|                                      |                         |      |         |         |      |   |         |         |   |   |         |         |  
|------------------------------------- | ----------------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                                      |                         | 2001 |         |         | 2000 |   |         | 1999    |  
|                                      |                         |      |         |         |      |   |         |         |  
|Sales                                 |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 2,234.1 |      |   | $       | 2,107.7 |   |   | $       | 1,841.1 |  
|                                      | Waldenbooks             |      |         | 902.1   |      |   |         | 944.3   |   |   |         | 959.1   |  
|                                      | International           |      |         | 251.7   |      |   |         | 219.2   |   |   |         | 168.2   |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         | $    | 3,387.9 |         |      | $ | 3,271.2 |         |   | $ | 2,968.4 |        
|                                      |                         |      |         |         |      |   |         |         |  
|Interest expense (income)             |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 9.1     |      |   | $       | 12.8    |   |   | $       | 16.4    |  
|                                      | Waldenbooks             |      |         | (28.3   | )    |   |         | (26.2   | ) |   |         | (22.3   | )
|                                      | International           |      |         | 14.3    |      |   |         | 12.4    |   |   |         | 8.9     |  
|                                      | Other                   |      |         | 19.3    |      |   |         | 14.1    |   |   |         | 13.6    |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         | $    | 14.4    |         |      | $ | 13.1    |         |   | $ | 16.6    |        
|                                      |                         |      |         |         |      |   |         |         |  
|Income tax expense (benefit)          |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 48.8    |      |   | $       | 38.2    |   |   | $       | 39.9    |  
|                                      | Waldenbooks             |      |         | 23.7    |      |   |         | 24.2    |   |   |         | 34.7    |  
|                                      | International           |      |         | (6.4    | )    |   |         | (6.8    | ) |   |         | (5.8    | )
|                                      | Other                   |      |         | (10.9   | )    |   |         | (7.4    | ) |   |         | (8.4    | )
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         | $    | 55.2    |         |      | $ | 48.2    |         |   | $ | 60.4    |        
|                                      |                         |      |         |         |      |   |         |         |  
|Depreciation and amortization expense |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 65.4    |      |   | $       | 60.7    |   |   | $       | 52.8    |  
|                                      | Waldenbooks             |      |         | 21.4    |      |   |         | 25.8    |   |   |         | 23.9    |  
|                                      | International           |      |         | 9.4     |      |   |         | 8.8     |   |   |         | 6.5     |  
|                                      | Other                   |      |         |        |      |   |         |        |   |   |         | 0.3     |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         | $    | 96.2    |         |      | $ | 95.3    |         |   | $ | 83.5    |        
|                                      |                         |      |         |         |      |   |         |         |  
|Net income (loss)                     |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 72.1    |      |   | $       | 56.5    |   |   | $       | 58.4    |  
|                                      | Waldenbooks             |      |         | 39.5    |      |   |         | 40.2    |   |   |         | 55.5    |  
|                                      | International           |      |         | (7.5    | )    |   |         | (10.2   | ) |   |         | (7.9    | )
|                                      | Other                   |      |         | (16.7   | )    |   |         | (12.7   | ) |   |         | (12.0   | )
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         |      | 87.4    |         |      |   | 73.8    |         |   |   | 94.0    |        
|                                      | Discontinued operations |      |         |        |      |   |         | (30.2   | ) |   |         | (3.7    | )
|                                      |                         |      |         |         |      |   |         |         |  
|Total net income                      |                         | $    | 87.4    |         |      | $ | 43.6    |         |   | $ | 90.3    |        
|                                      |                         |      |         |         |      |   |         |         |  
|Total assets                          |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 1,339.3 |      |   | $       | 1,309.0 |   |   |         |         |  
|                                      | Waldenbooks             |      |         | 380.0   |      |   |         | 432.0   |   |   |         |         |  
|                                      | International           |      |         | 257.7   |      |   |         | 216.1   |   |   |         |         |  
|                                      | Other                   |      |         | 202.3   |      |   |         | 75.4    |   |   |         |         |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         |      | 2,179.3 |         |      |   | 2,032.5 |         |   |   |         |        
|                                      | Discontinued operations |      |         |        |      |   |         | 14.6    |   |   |         |         |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total assets                          |                         | $    | 2,179.3 |         |      | $ | 2,047.1 |         |   |   |         |        
|                                      |                         |      |         |         |      |   |         |         |  
|Capital expenditures                  |                         |      |         |         |      |   |         |         |   |   |         |        
|                                      | Borders                 |      | $       | 40.5    |      |   | $       | 87.6    |   |   |         |         |  
|                                      | Waldenbooks             |      |         | 7.5     |      |   |         | 19.3    |   |   |         |         |  
|                                      | International           |      |         | 24.6    |      |   |         | 16.0    |   |   |         |         |  
|                                      | Other                   |      |         | 18.1    |      |   |         | 15.8    |   |   |         |         |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total continuing operations           |                         |      | 90.7    |         |      |   | 138.7   |         |   |   |         |        
|                                      | Discontinued operations |      |         |        |      |   |         | 2.4     |   |   |         |         |  
|                                      |                         |      |         |         |      |   |         |         |  
|Total capital expenditures            |                         | $    | 90.7    |         |      | $ | 141.1   |         |   |   |         |        
|                                      |                         |      |         |         |      |   |         |         |  

38



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(dollars in millions except per common share
data) (Continued)


Total assets for the other operating segment
include certain corporate headquarters asset balances which have
not been allocated to the other segments; however, depreciation
expense associated with such assets has been allocated to the
other segments.

Long-lived assets by geographic area are as
follows:

|                        |               |      |       |       |      |   |       |       |  |   |       |       | 
|----------------------- | ------------- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                        |               | 2001 |       |       | 2000 |   |       | 1999  | 
|                        |               |      |       |       |      |   |       |       | 
|Long-lived assets       |               |      |       |       |      |   |       |       |  |   |       |      
|                        | Domestic      |      | $     | 580.3 |      |   | $     | 566.8 |  |   | $     | 567.9 | 
|                        | International |      |       | 156.9 |      |   |       | 145.2 |  |   |       | 148.7 | 
|                        |               |      |       |       |      |   |       |       | 
|Total long-lived assets |               | $    | 737.2 |       |      | $ | 712.0 |       |  | $ | 716.6 |      
|                        |               |      |       |       |      |   |       |       | 

NOTE 16  UNAUDITED QUARTERLY
FINANCIAL DATA

|                                                                     |  |                           |       |   |      |   |       |         |  |   |         |   |  |   |         | 
|-------------------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | ------- |  | - | ------- | - |  | - | ------- | 
|                                                                     |  |                          
|                                                                     |  | Fiscal 2001 Quarter Ended |      
|                                                                     |  |                          
|                                                                     |  | April                     |       |   | July |   |       | October |  |   | January |  
|                                                                     |  |                           |       |   |      |   |       |         |  |   |         |  
|Sales                                                                |  | $                         | 729.9 |   |      | $ | 739.8 |         |  | $ | 713.7   |   |  | $ | 1,204.5 | 
|Cost of merchandise sold (includes occupancy)                        |  |                           | 545.1 |   |      |   | 553.7 |         |  |   | 534.0   |   |  |   | 806.4   | 
|Operating income (loss)                                              |  |                           | (26.0 | ) |      |   | 4.1   |         |  |   | (1.4    | ) |  |   | 180.3   | 
|Income (loss) from continuing operations                             |  |                           | (18.9 | ) |      |   | 0.1   |         |  |   | (3.1    | ) |  |   | 109.3   | 
|Net income (loss)                                                    |  |                           | (18.9 | ) |      |   | 0.1   |         |  |   | (3.1    | ) |  |   | 109.3   | 
|Diluted earnings (loss) per common share
	from continuing operations |  |                           | (0.24 | ) |      |   |      |         |  |   | (0.04   | ) |  |   | 1.32    | 
|Basic earnings (loss) per common share from
	continuing operations   |  |                           | (0.24 | ) |      |   |      |         |  |   | (0.04   | ) |  |   | 1.35    | 

|                                                                     |  |                           |       |   |      |   |       |         |  |   |         |   |  |   |         | 
|-------------------------------------------------------------------- |  | ------------------------- | ----- | - | ---- | - | ----- | ------- |  | - | ------- | - |  | - | ------- | 
|                                                                     |  |                          
|                                                                     |  | Fiscal 2000 Quarter Ended |      
|                                                                     |  | April                     |       |   | July |   |       | October |  |   | January |  
|                                                                     |  |                           |       |   |      |   |       |         |  |   |         |  
|Sales                                                                |  | $                         | 679.7 |   |      | $ | 698.4 |         |  | $ | 701.0   |   |  | $ | 1,192.1 | 
|Cost of merchandise sold (includes occupancy)                        |  |                           | 503.9 |   |      |   | 518.0 |         |  |   | 523.7   |   |  |   | 808.9   | 
|Operating income (loss)                                              |  |                           | 3.5   |   |      |   | 3.4   |         |  |   | (0.1    | ) |  |   | 128.3   | 
|Income (loss) from continuing operations                             |  |                           | 0.7   |   |      |   |      |         |  |   | (2.6    | ) |  |   | 75.7    | 
|Net income (loss)                                                    |  |                           | (0.9  | ) |      |   | (1.6  | )       |  |   | (5.0    | ) |  |   | 51.1    | 
|Diluted earnings (loss) per common share
	from continuing operations |  |                           | 0.01  |   |      |   |      |         |  |   | (0.03   | ) |  |   | 0.95    | 
|Basic earnings (loss) per common share from
	continuing operations   |  |                           | 0.01  |   |      |   |      |         |  |   | (0.03   | ) |  |   | 0.96    | 

Earnings per share amounts for each quarter are
required to be computed independently and may not equal the
amount computed for the total year.

39



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

To The Board of Directors and Stockholders

of Borders Group, Inc.


We have audited the accompanying consolidated
balance sheets of Borders Group, Inc. as of January 27,
2002 and January 28, 2001, and the related consolidated
statements of operations, stockholders equity, and cash
flows for the years then ended. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Borders Group, Inc. at
January 27, 2002 and January 28, 2001, and the
consolidated results of its operations and its cash flows for
the years then ended in conformity with accounting principles
generally accepted in the United States.

-s- Ernst & Young LLP

Detroit, Michigan

March 12, 2002


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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors

of Borders Group, Inc.


In our opinion, the accompanying consolidated
statements of operations, of cash flows and of
stockholders equity for the year ended January 23,
2000, present fairly, in all material respects, the results of
operations and cash flows of Borders Group, Inc. and its
subsidiaries for the year ended January 23, 2000, in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. We have not
audited the consolidated financial statements of Borders Group,
Inc. for any period subsequent to January 23, 2000.

/s/  PRICEWATERHOUSECOOPERS LLP

Bloomfield Hills, Michigan

March 6, 2000


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

Not applicable.






PART III







Item 10. Directors and Executive
Officers of the Registrant


Set forth below is certain information regarding
the directors and executive officers of the Company:

|                        |  |     |    |  |          |                                                                
|----------------------- |  | --- | -- |  | -------- | ---------------------------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|Gregory P. Josefowicz   |  |     | 49 |  |          | Chairman, Chief Executive Officer, President and
	Director     
|Vincent E. Altruda      |  |     | 52 |  |          | President, International                                       
|Thomas D. Carney        |  |     | 55 |  |          | Vice President, General Counsel and Secretary                  
|Tamara L. Heim          |  |     | 44 |  |          | President, Borders Stores and Borders Online, Inc.             
|Daniel T. Smith         |  |     | 37 |  |          | Vice President, Human Resources                                
|Michael G. Spinozzi     |  |     | 42 |  |          | Chief Marketing Officer                                        
|Ronald S. Staffieri     |  |     | 52 |  |          | President, Waldenbooks Stores                                  
|Edward W. Wilhelm       |  |     | 43 |  |          | Senior Vice President and Chief Financial Officer              
|Mark A. Winterhalter    |  |     | 47 |  |          | Vice President, Information Technology                         
|Joel J. Cohen           |  |     | 64 |  |          | Director, member of the Nominating and
	Compensation Committees
|Robert F. DiRomualdo    |  |     | 57 |  |          | Director                                                       
|Peter R. Formanek       |  |     | 58 |  |          | Director, member of the Nominating and Audit
	Committees       
|Amy B. Lane             |  |     | 49 |  |          | Director, member of the Nominating and Audit
	Committees       
|Victor L. Lund          |  |     | 54 |  |          | Director, member of the Nominating and Audit
	Committees       
|Dr. Edna Greene Medford |  |     | 50 |  |          | Director, member of the Nominating and
	Compensation Committees
|George R. Mrkonic       |  |     | 49 |  |          | Director                                                       
|Lawrence I. Pollock     |  |     | 54 |  |          | Director, member of the Nominating and
	Compensation Committees
|Beth M. Pritchard       |  |     | 54 |  |          | Director, member of the Nominating and
	Compensation Committees

The Companys Bylaws provide, among other
things, that Directors will be elected annually for one year
terms. Directors hold office until their successors are elected
and qualified.

Gregory P. Josefowicz has served as
President, Chief Executive Officer and Director of the Company
since November 1999, and as Chairman of the Board since
January 2002. For more than five years prior to joining the
Company, he served in a variety of executive positions with
Jewel-Osco, a food and drug retailer that is currently a
division of Albertsons, Inc., most recently as President.
Mr. Josefowicz also serves as a director of Ryerson Tull,
Inc., a distributor and processor of metals and Spartan Stores,
Inc., a food retailer.

Vincent E. Altruda has served as President
of the Companys international operations since
December 1997. From February 1997 through
December 1997, Mr. Altruda served as Senior Vice
President of Borders Store Development. From February 1995
through February 1997, Mr. Altruda served as Senior Vice
President of Borders Store Operations. From December 1992
through February 1995, Mr. Altruda served as Vice
President of Borders Store Operations.

Thomas D. Carney has been Vice President,
General Counsel and Secretary of the Company since
December 1994. For more than five years prior to joining
the Company, Mr. Carney was a Partner at the law firm of
Dickinson, Wright, Moon, Van Dusen & Freeman in
Detroit, Michigan.

Tamara L. Heim has served as President of
Borders Stores and Borders Online, Inc. since January 2000.
From February 1999 to January 2000, Ms. Heim
served as Senior Vice President of Sales and Marketing for
Borders.

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##### Table of Contents



Ms. Heim served as a Territorial Vice
President of Borders from December 1996 to
February 1999. From 1980 to 1996, Ms. Heim held
several key positions of increasing responsibility for Federated
Department Stores, and served as Regional Vice President and
Director of Stores for Richs Lazarus Goldsmith, a division
of Federated Department Stores, prior to joining the Company.


Daniel T. Smith has served as Vice President
of Human Resources of the Company since March 2000. From
April 1998 to March 2000, Mr. Smith served as
Vice President of Human Resources of Waldenbooks. Mr. Smith
served as Director of Human Resources for Waldenbooks from
April 1996 to April 1998. He also served as Director
of Compensation and Benefits of the Company from July 1995
to April 1996.

Michael G. Spinozzi has served as Executive Vice
President and Chief Marketing Officer of the Company since
January 2002. He also served as Sr. Vice President of Sales
and Marketing of Borders Stores from March 2001 to
January 2002. Prior to joining the company, he spent
19 years with Jewel-Osco stores, a food and drug retailer
that is currently a division of Albertsons, Inc., and was
most recently Senior Vice President of Marketing and
Merchandising.

Ronald S. Staffieri has served as President of
Waldenbooks Stores since April 1999. Mr. Staffieri
served as Chief Administrative Officer of the Company from
January 1998 to April 1999. From July 1997 to
January 1998, Mr. Staffieri served as President of
Borders Outlet. Prior to joining the Company Mr. Staffieri
was President and Chief Executive Officer of Lil Things, a
chain of childrens superstores, from 1994 until January of
1997.

In June of 1997, Lil Things filed a
voluntary petition for reorganization under Chapter 11 of
the United States Bankruptcy Code and the business was
liquidated in December of 1997.

Edward W. Wilhelm has served as Senior Vice
President and Chief Financial Officer of the Company since
August 2000. From 1997 through August 2000,
Mr. Wilhelm served as Vice President of Planning, Reporting
and Treasury for the Company. From 1994 through 1997,
Mr. Wilhelm served as Vice President of Finance.

Mark A. Winterhalter has served as Vice President
of Information Technology of the Company since
October 1999. He also served as Vice President of
Applications Development from May 1998 to
October 1999. Prior to joining the company,
Mr. Winterhalter served as Vice President and Chief
Information Officer for Arbor Drugs, Inc., a drug retailer, from
October 1989 until May 1998.

Joel J. Cohen became a director of the
Company on March 30, 2001. Mr. Cohen was Managing
Director and co-head of Mergers and Acquisitions at Donaldson,
Lufkin & Jenrette Securities Corporation (DLJ),
a leading investment and merchant bank that was acquired by
Credit Suisse First Boston, until his retirement in
November 2000. He had been associated with DLJ since
October 1989. He had previously served as General Counsel
to the Presidential Task Force on Market Mechanisms and as a
partner of Davis Polk and Wardwell, attorneys. Mr. Cohen also
serves as a director of the Chubb Corporation, a major property
and casualty insurance company, and Maersk, Inc., an owner and
operator of container ships involved in worldwide trade.

Robert F. DiRomualdo served as a director of
the Company since its formation in August 1994.
Mr. DiRomualdo also served as Chairman of the Company from
August 1994 until January 2002, Chief Executive Officer of the
Company from August 1994 until November 1998, and as
President and Chief Executive Officer from April 1999 until
November 1999.

Peter R. Formanek has served as a director of the
Company since August 1995. Mr. Formanek was co-founder
of AutoZone Inc., a retailer of aftermarket automotive parts,
and served as President and Chief Operating Officer of AutoZone,
Inc. from 1986 until his retirement in May 1994. He
currently is a director of The Perrigo Company, a manufacturer
of over-the-counter pharmaceutical and nutritional products for
the store brand market, and Gart Sports, Inc., a retailer of
sporting goods.

Amy B. Lane served as a director of the
Company from August 1995 until March 1999, and was most recently
elected a director on October 30, 2001. Ms. Lane was
Managing Director, Investment Banking Group, of Merrill Lynch
from 1997 until her retirement in February 2002. From 1989
through 1996, she served as a Managing Director, Corporate
Finance, of Solomon Brothers in New York.

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##### Table of Contents



Victor L. Lund has served as a director of
the Company since July 1997. Mr. Lund has served as
Vice Chairman of Albertsons, Inc., a food and drug
retailer, since June 1999. He served as Chairman of the
Board of American Stores Company from June 1995 until its
acquisition by Albertsons in June 1999, and as Chief
Executive Officer of American Stores Company from
August 1992 until June 1999. He was President of
American Stores Company from August 1992 until
June 1995. Mr. Lund also serves as a director of
Service Corporation International, a provider of death care
services.

Dr. Edna Greene Medford became a director of
the Company in September 1998. Dr. Greene Medford is
an Associate Professor of History and a former Director of the
Undergraduate Program in History at Howard University.
Dr. Medford is a member of the Board of Trustees and is
Chairperson of the Program Committee for National History Day,
Inc., and is also a member of the Board of Advisors for The
Lincoln Forum; both are non-profit organizations.

George R. Mrkonic has served as a director
of the Company since August 1994. Mr. Mrkonic also
served as the Vice Chairman of the Company from
December 1994 until January 2002, and as President of
the Company from December 1994 until January 1997. He
is also a director of (i) Champion Enterprises, Inc., a
manufacturer and seller of manufactured homes and mid-sized
buses, (ii) Syntel, Inc., a computer software and
development company, (iii) Galyans Trading Company,
Inc., a specialty retailer that offers a broad range of products
that appeal to consumers with active lifestyles, and
(iv) Nashua Corporation, a manufacturer of specialty
imaging products and services to industrial and commercial
customers to meet various print application needs.

Lawrence I. Pollock has served as a director of
the Company since August 1995. Mr. Pollock has served
as President and Chief Operating Officer of Cole National
Corporation, which operates retail vision and gift stores, since
January 2000. He is also a partner of Independent Group
L.P., a privately-held radio broadcasting company based in
Cleveland, Ohio. From September 1998 until June 1999,
Mr. Pollock served as President and Chief Executive Officer
of HomePlace, Inc., a chain of home furnishings and housewares
superstores, which he joined in January 1997 as Executive
Vice President and Chief Operating Officer. From 1994 until
1996, he served as the President, Chief Operating Officer and a
director of Zale Corporation, a jewelry retailer.

In January of 1998, HomePlace, Inc. filed a
voluntary petition in the United States Bankruptcy Court for the
District of Delaware for reorganization under Chapter 11 of
the Bankruptcy Code.

Beth M. Pritchard has served as a director of the
Company since March 2000. Ms. Pritchard has served as
President and Chief Executive Officer of Bath & Body Works,
and Chief Executive Officer of The White Barn and Candle
Company, divisions of Intimate Brands, Inc. since 1993. She also
serves as a director of Intimate Brands, Inc., a specialty
retailer of lingerie and personal care products.

Officers of the Company are elected on an annual
basis and serve at the discretion of the Board of Directors.

Section 16(a) Beneficial Ownership
Reporting Compliance

The information required by this section is
incorporated herein by reference to the information under the
caption Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement dated April 19,
2002 for the Companys May 23, 2002 Annual Meeting of
Stockholders.






Item 11. Executive
Compensation


The information required by this Item 11 is
incorporated herein by reference to the information under the
captions Executive Compensation and
Compensation of Directors in the Proxy Statement
dated April 19, 2002 for the Companys May 23,
2002 Annual Meeting of Stockholders.

44



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##### Table of Contents








Item 12. Security Ownership of
Certain Beneficial Owners and Management


The information required by this Item 12 is
incorporated herein by reference to the information under the
heading Beneficial Ownership of Common Stock in the
Proxy Statement dated April 19, 2002 for the Companys
May 23, 2002 Annual Meeting of Stockholders.






Item 13. Certain Relationships and
Related Party Transactions


Not applicable.

45



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##### Table of Contents



PART IV






Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K


(a) The following exhibits are filed
herewith unless otherwise indicated:

|        |           |  |             |                                                                                                                                               
|------- | --------- |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |            
|Number  |           |  | Description
|        |           |  |            
|        | 2.1(4)    |  |             | Agreement and plan of Merger dated as of April 8,
	1997 between Michigan Borders Group, Inc. and Borders Group, Inc.                          
|        | 3.1(9)    |  |             | Restated Articles of Incorporation of Borders
	Group, Inc.                                                                                    
|        | 3.2(14)   |  |             | Restated bylaws of Borders Group, Inc.                                                                                                        
|        | 10.1(14)  |  |             | Form of Severance Agreement                                                                                                                   
|        | 10.2(4)   |  |             | Borders Group, Inc. Stock Option Plan                                                                                                         
|        | 10.3(14)  |  |             | Amendment to the Borders Group, Inc. Stock Option
	Plan                                                                                       
|        | 10.4(2)   |  |             | Tax Allocation Agreement dated May 24, 1995
	between Borders                                                                                  
|        |           |  |             | Group, Inc. and Kmart Corporation                                                                                                             
|        | 10.5(2)   |  |             | Lease Guaranty Agreement dated May 24, 1995
	between Borders Group, Inc. and Kmart Corporation                                                
|        | 10.6(15)  |  |             | First Amendment to Lease Guaranty Agreement
	between Borders Group, Inc. and Kmart Corporation                                                
|        | 10.7(1)   |  |             | Borders Group, Inc. Management Stock Purchase
	Plan.                                                                                          
|        | 10.8(6)   |  |             | First Amendment to the Borders Group, Inc.
	Management Stock Purchase Plan                                                                    
|        | 10.9(7)   |  |             | Second Amendment to the Borders Group, Inc.
	Management Stock Purchase Plan                                                                   
|        | 10.10(9)  |  |             | Third Amendment to the Borders Group, Inc.
	Management Stock Purchase Plan                                                                    
|        | 10.11(14) |  |             | Fourth Amendment to the Borders Group, Inc.
	Management Stock Purchase Plan                                                                   
|        | 10.12     |  |             | Fifth Amendment to the Borders Group, Inc.
	Management Stock Purchase Plan                                                                    
|        | 10.13     |  |             | Sixth Amendment to the Borders Group, Inc.
	Management Stock Purchase Plan                                                                    
|        | 10.14(1)  |  |             | Borders Group, Inc. Employee Stock Purchase Plan                                                                                              
|        | 10.15(3)  |  |             | First Amendment to the Borders Group, Inc.
	Employee Stock Purchase Plan                                                                      
|        | 10.16(9)  |  |             | Second Amendment to the Borders Group, Inc.
	Employee Stock Purchase Plan                                                                     
|        | 10.17(9)  |  |             | Third Amendment to the Borders Group, Inc.
	Employee Stock Purchase Plan                                                                      
|        | 10.18(13) |  |             | Borders Group, Inc. Annual Incentive Bonus Plan                                                                                               
|        | 10.19(1)  |  |             | Borders Group, Inc. Director Stock Plan                                                                                                       
|        | 10.20(7)  |  |             | First Amendment to the Borders Group, Inc.
	Director Stock Plan                                                                               
|        | 10.21(7)  |  |             | Second Amendment to the Borders Group, Inc.
	Director Stock Plan                                                                              
|        | 10.22(14) |  |             | Third Amendment to Borders Group, Inc. Director
	Stock Plan                                                                                   
|        | 10.23(14) |  |             | Fourth Amendment to Borders Group, Inc. Director
	Stock Plan                                                                                  
|        | 10.24(5)  |  |             | Amended and Restated Multicurrency Credit
	Agreement among Borders Group, Inc., its subsidiaries and
	Parties thereto                         
|        | 10.25(5)  |  |             | Amended and Restated Participation Agreement
	among Borders Group, Inc., its subsidiaries and Parties thereto                                 
|        | 10.26(5)  |  |             | Appendix A to Participation Agreement among
	Borders Group, Inc., its subsidiaries and Parties thereto                                        
|        | 10.27(5)  |  |             | Amended and Restated Credit Agreement among
	Borders Group, Inc., its subsidiaries and Parties thereto                                        
|        | 10.28(5)  |  |             | Amended and Restated Guarantee Credit Agreement
	among Borders Group, Inc., its subsidiaries and Parties thereto                              
|        | 10.29(10) |  |             | Omnibus Amendment No. 1 to Amended and Restated
	Guarantee Credit Agreement among Borders Group, Inc., its
	subsidiaries and Parties thereto  
|        | 10.30(8)  |  |             | Borders Group, Inc. Stock Option Plan for
	International Employees                                                                            
|        | 10.31(9)  |  |             | 1998 Borders Group, Inc. Stock Option Plan                                                                                                    
|        | 10.32(12) |  |             | Agreement dated November 15, 1999, between
	Borders Group, Inc. and Gregory P. Josefowicz                                                     
|        | 10.33(9)  |  |             | Participation Agreement dated as of December 1,
	1998 by and among Borders Group, Inc., Borders, Inc. and Parties
	thereto                    
|        | 10.34(10) |  |             | Multicurrency Revolving Credit Facility Credit
	Agreement dated July 9, 1999 among Borders Group, Inc., its
	subsidiaries, and Parties thereto

46



---



##### Table of Contents



|        |           |  |             |                                                                                                                                                      
|------- | --------- |  | ----------- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |            
|Number  |           |  | Description
|        |           |  |            
|        | 10.35(11) |  |             | Amendment No. 1 to 1998 Borders Group, Inc. Stock
	Option Plan                                                                                       
|        | 10.36(12) |  |             | Amended Schedule 1.01(B) to the Amended and
	Restated Multicurrency Credit Agreement among Borders Group,
	Inc., its Subsidiaries and Parties thereto
|        | 10.37(12) |  |             | Amended Schedule II to the Amended and Restated
	Credit Agreement among Borders Group, Inc., its subsidiaries and
	Parties thereto                   
|        | 10.38(14) |  |             | Participation Agreement dated as of January 22,
	2001 by and among Borders Group, Inc., Borders, Inc. and Parties
	thereto                           
|        | 10.39(14) |  |             | Form of Lease Guaranty Related to Lease Facility
	Agreement                                                                                          
|        | 10.40(14) |  |             | Form of Environmental Indemnity Related to Lease
	Facility Agreement                                                                                 
|        | 18.1(3)   |  |             | Letter of PricewaterhouseCoopers LLP dated July
	17, 1995                                                                                            
|        | 21.1      |  |             | Subsidiaries of Registrant                                                                                                                           
|        | 23.1      |  |             | Consent of Ernst & Young LLP                                                                                                                         
|        | 23.2      |  |             | Consent of PricewaterhouseCoopers LLP                                                                                                                
|        | 99.1      |  |             | Cautionary Statement under the Private Securities
	Litigation Reform Act of 1995  Safe
	Harbor for Forward-Looking Statements                     




| |     |                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------
| | (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
	Quarterly Report on Form 10-Q for the quarter ended April
	23, 1995 (File No. 1-13740).  
|
| | (3) | Incorporated by reference from the Companys
	Registration Statement on Form S-1 (File
	No. 333-80643).                                
|
| | (4) | Incorporated by reference from the Companys
	Proxy Statement dated April 9, 1997 of Borders Group, Inc.
	(File No. 1-13740).          
|
| | (5) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	October 26, 1997 (File No. 1-13740).
|
| | (6) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	October 22, 1995 (File No. 1-13740).
|
| | (7) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	January 25, 1998 (File No. 1-13740).      
|
| | (8) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	July 26, 1998 (File No. 1-13740).   
|
| | (9) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	January 24, 1999 (File No. 1-13740).      



|     |                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	July 25, 1999 (File No. 1-13740).   
|    
|(11) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	October 24, 1999 (File No. 1-13740).
|    
|(12) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	January 23, 2000 (File No. 1-13740).      
|    
|(13) | Incorporated by reference from the Companys
	Proxy Statement dated May 24, 2000 (File No. 1-13740).                                   
|    
|(14) | Incorporated by reference from the Companys
	Annual Report on Form 10-K for the year ended
	January 28, 2001 (File No. 1-13740).      
|    
|(15) | Incorporated by reference from the Companys
	Quarterly Report on Form 10-Q for the quarter ended April
	29, 2001 (File No. 1-13740).  

(b) Financial Statement Schedules:

All financial statement schedules are omitted as
they are not applicable or the required information is included
in the consolidated financial statements of the Registrant.

(c) Reports on Form 8-K:

During fiscal 2001, there was one report filed on
Form 8-K under Item 7  Financial Statements and
Exhibits. This report was dated and filed on April 13, 2001
(File No. 1-13740).

47



---



##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

BORDERS GROUP, INC.

(Registrant)




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

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

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                   |  |                                                                                                 |  |               
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | --------------
|Name                                               |  | Title                                                                                           |  | Date          
|                                                   |  |                                                                                                 |  |               
|/s/ GREGORY P. JOSEFOWICZGregory P. Josefowicz     |  | Chairman, Chief Executive Officer, and President                                                |  | April 25, 2002
|/s/ EDWARD W. WILHELMEdward W. Wilhelm             |  | Senior Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer) |  | April 25, 2002
|/s/ JOEL J. COHENJoel J. Cohen                     |  | Director                                                                                        |  | April 25, 2002
|/s/ ROBERT F. DIROMUALDORobert F. DiRomualdo       |  | Director                                                                                        |  | April 25, 2002
|/s/ PETER R. FORMANEKPeter R. Formanek             |  | Director                                                                                        |  | April 25, 2002
|/s/ AMY B. LANEAmy B. Lane                         |  | Director                                                                                        |  | April 25, 2002
|/s/ VICTOR L. LUNDVictor L. Lund                   |  | Director                                                                                        |  | April 25, 2002
|/s/ DR. EDNA GREENE MEDFORDDr. Edna Greene Medford |  | Director                                                                                        |  | April 25, 2002
|/s/ GEORGE R. MRKONICGeorge R. Mrkonic             |  | Director                                                                                        |  | April 25, 2002
|/s/ LAWRENCE I. POLLOCKLawrence I. Pollock         |  | Director                                                                                        |  | April 25, 2002
|/s/ BETH M. PRITCHARDBeth M. Pritchard             |  | Director                                                                                        |  | April 25, 2002

48



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##### Table of Contents



EXHIBIT INDEX

|        |           |  |             |                                                                                                                                                                    
|------- | --------- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |            
|Number  |           |  | Description
|        |           |  |            
|        | 2.1(4)    |  |             | Agreement and plan of Merger dated as of April 8,
        1997 between Michigan Borders Group, Inc. and Borders Group, Inc.                                        
|        | 3.1(9)    |  |             | Restated Articles of Incorporation of Borders
        Group, Inc.                                                                                                  
|        | 3.2(14)   |  |             | Restated bylaws of Borders Group, Inc.                                                                                                                             
|        | 10.1(14)  |  |             | Form of Severance Agreement                                                                                                                                        
|        | 10.2(4)   |  |             | Borders Group, Inc. Stock Option Plan                                                                                                                              
|        | 10.3(14)  |  |             | Amendment to the Borders Group, Inc. Stock Option
        Plan                                                                                                     
|        | 10.4(2)   |  |             | Tax Allocation Agreement dated May 24, 1995
        between Borders                                                                                                
|        |           |  |             | Group, Inc. and Kmart Corporation                                                                                                                                  
|        | 10.5(2)   |  |             | Lease Guaranty Agreement dated May 24, 1995
        between Borders Group, Inc. and Kmart Corporation                                                              
|        | 10.6(15)  |  |             | First Amendment to Lease Guaranty Agreement
        between Borders Group, Inc. and Kmart Corporation                                                              
|        | 10.7(1)   |  |             | Borders Group, Inc. Management Stock Purchase
        Plan.                                                                                                        
|        | 10.8(6)   |  |             | First Amendment to the Borders Group, Inc.
        Management Stock Purchase Plan                                                                                  
|        | 10.9(7)   |  |             | Second Amendment to the Borders Group, Inc.
        Management Stock Purchase Plan                                                                                 
|        | 10.10(9)  |  |             | Third Amendment to the Borders Group, Inc.
        Management Stock Purchase Plan                                                                                  
|        | 10.11(14) |  |             | Fourth Amendment to the Borders Group, Inc.
        Management Stock Purchase Plan                                                                                 
|        | 10.12     |  |             | Fifth Amendment to the Borders Group, Inc.
        Management Stock Purchase Plan                                                                                  
|        | 10.13     |  |             | Sixth Amendment to the Borders Group, Inc.
        Management Stock Purchase Plan                                                                                  
|        | 10.14(1)  |  |             | Borders Group, Inc. Employee Stock Purchase Plan                                                                                                                   
|        | 10.15(3)  |  |             | First Amendment to the Borders Group, Inc.
        Employee Stock Purchase Plan                                                                                    
|        | 10.16(9)  |  |             | Second Amendment to the Borders Group, Inc.
        Employee Stock Purchase Plan                                                                                   
|        | 10.17(9)  |  |             | Third Amendment to the Borders Group, Inc.
        Employee Stock Purchase Plan                                                                                    
|        | 10.18(13) |  |             | Borders Group, Inc. Annual Incentive Bonus Plan                                                                                                                    
|        | 10.19(1)  |  |             | Borders Group, Inc. Director Stock Plan                                                                                                                            
|        | 10.20(7)  |  |             | First Amendment to the Borders Group, Inc.
        Director Stock Plan                                                                                             
|        | 10.21(7)  |  |             | Second Amendment to the Borders Group, Inc.
        Director Stock Plan                                                                                            
|        | 10.22(14) |  |             | Third Amendment to Borders Group, Inc. Director
        Stock Plan                                                                                                 
|        | 10.23(14) |  |             | Fourth Amendment to Borders Group, Inc. Director
        Stock Plan                                                                                                
|        | 10.24(5)  |  |             | Amended and Restated Multicurrency Credit
        Agreement among Borders Group, Inc., its subsidiaries and
        Parties thereto                                
|        | 10.25(5)  |  |             | Amended and Restated Participation Agreement
        among Borders Group, Inc., its subsidiaries and Parties thereto                                               
|        | 10.26(5)  |  |             | Appendix A to Participation Agreement among
        Borders Group, Inc., its subsidiaries and Parties thereto                                                      
|        | 10.27(5)  |  |             | Amended and Restated Credit Agreement among
        Borders Group, Inc., its subsidiaries and Parties thereto                                                      
|        | 10.28(5)  |  |             | Amended and Restated Guarantee Credit Agreement
        among Borders Group, Inc., its subsidiaries and Parties thereto                                            
|        | 10.29(10) |  |             | Omnibus Amendment No. 1 to Amended and Restated
        Guarantee Credit Agreement among Borders Group, Inc., its
        subsidiaries and Parties thereto         
|        | 10.30(8)  |  |             | Borders Group, Inc. Stock Option Plan for
        International Employees                                                                                          
|        | 10.31(9)  |  |             | 1998 Borders Group, Inc. Stock Option Plan                                                                                                                         
|        | 10.32(12) |  |             | Agreement dated November 15, 1999, between
        Borders Group, Inc. and Gregory P. Josefowicz                                                                   
|        | 10.33(9)  |  |             | Participation Agreement dated as of December 1,
        1998 by and among Borders Group, Inc., Borders, Inc. and Parties
        thereto                           
|        | 10.34(10) |  |             | Multicurrency Revolving Credit Facility Credit
        Agreement dated July 9, 1999 among Borders Group, Inc., its
        subsidiaries, and Parties thereto       
|        | 10.35(11) |  |             | Amendment No. 1 to 1998 Borders Group, Inc. Stock
        Option Plan                                                                                              
|        | 10.36(12) |  |             | Amended Schedule 1.01(B) to the Amended and
        Restated Multicurrency Credit Agreement among Borders Group,
        Inc., its Subsidiaries and Parties thereto

49



---



##### Table of Contents



|        |           |  |             |                                                                                                                                                 
|------- | --------- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |            
|Number  |           |  | Description
|        |           |  |            
|        | 10.37(12) |  |             | Amended Schedule II to the Amended and Restated
        Credit Agreement among Borders Group, Inc., its subsidiaries and
        Parties thereto
|        | 10.38(14) |  |             | Participation Agreement dated as of January 22,
        2001 by and among Borders Group, Inc., Borders, Inc. and Parties
        thereto        
|        | 10.39(14) |  |             | Form of Lease Guaranty Related to Lease Facility
        Agreement                                                                              
|        | 10.40(14) |  |             | Form of Environmental Indemnity Related to Lease
        Facility Agreement                                                                     
|        | 18.1(3)   |  |             | Letter of PricewaterhouseCoopers LLP dated July
        17, 1995                                                                                
|        | 21.1      |  |             | Subsidiaries of Registrant                                                                                                                      
|        | 23.1      |  |             | Consent of Ernst & Young LLP                                                                                                                    
|        | 23.2      |  |             | Consent of PricewaterhouseCoopers LLP                                                                                                           
|        | 99.1      |  |             | Cautionary Statement under the Private Securities
        Litigation Reform Act of 1995  Safe
        Harbor for Forward-Looking Statements  




| |     |                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | (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
        Quarterly Report on Form 10-Q for the quarter ended April
        23, 1995 (File No. 1-13740).  
|
| | (3) | Incorporated by reference from the Companys
        Registration Statement on Form S-1 (File
        No. 333-80643).                                
|
| | (4) | Incorporated by reference from the Companys
        Proxy Statement dated April 9, 1997 of Borders Group, Inc.
        (File No. 1-13740).          
|
| | (5) | Incorporated by reference from the Companys
        Quarterly Report on Form 10-Q for the quarter ended
        October 26, 1997 (File No. 1-13740).
|
| | (6) | Incorporated by reference from the Companys
        Quarterly Report on Form 10-Q for the quarter ended
        October 22, 1995 (File No. 1-13740).
|
| | (7) | Incorporated by reference from the Companys
        Annual Report on Form 10-K for the year ended
        January 25, 1998 (File No. 1-13740).      
|
| | (8) | Incorporated by reference from the Companys
        Quarterly Report on Form 10-Q for the quarter ended
        July 26, 1998 (File No. 1-13740).   
|
| | (9) | Incorporated by reference from the Companys
        Annual Report on Form 10-K for the year ended
        January 24, 1999 (File No. 1-13740).      



|     |                                                                                                                                                      
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference from the Companys
        Quarterly Report on Form 10-Q for the quarter ended
        July 25, 1999 (File No. 1-13740).   
|    
|(11) | Incorporated by reference from the Companys
        Quarterly Report on Form 10-Q for the quarter ended
        October 24, 1999 (File No. 1-13740).
|    
|(12) | Incorporated by reference from the Companys
        Annual Report on Form 10-K for the year ended
        January 23, 2000 (File No. 1-13740).      
|    
|(13) | Incorporated by reference from the Companys
        Proxy Statement dated May 24, 2000 (File No. 1-13740).                                          
|    
|(14) | Incorporated by reference from the Companys
        Annual Report on Form 10-K for the year ended
        January 28, 2001 (File No. 1-13740).      
|    
|(15) | Incorporated by reference from the Companys
        Quarterly Report on Form 10-Q for the quarter ended April
        29, 2001 (File No. 1-13740).  

50