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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


|           |  |                                                                                              |  | 
|---------- |  | -------------------------------------------------------------------------------------------- |  | 
|(MARK ONE) |  |                                                                                              |  | 
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934     |  | 
|          
|           |  | For the fiscal year ended January 23, 2005                                                   |  | 
|          
|           |  | OR                                                                                           |  | 
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 |  | 

For the transition period
from          to                   .


Commission File Number 1-13740





BORDERS GROUP, INC.




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







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















DOCUMENTS INCORPORATED BY REFERENCE












---












BORDERS GROUP, INC. INDEX


|                                                                            |  |                                                                                                                          |  |      |    | 
|--------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                            |  |                                                                                                                          |  | Page |   
|                                                                            |  |                                                                                                                          |  |      |   
|PART I                                                                      |  |                                                                                                                          |  |     
|Item 1.                                                                     |  | Business                                                                                                                 |  |      | 2  | 
|Item 2.                                                                     |  | Properties                                                                                                               |  |      | 11 | 
|Item 3.                                                                     |  | Legal Proceedings                                                                                                        |  |      | 12 | 
|Item 4.                                                                     |  | Submission of Matters to a Vote of Security
    Holders                                                                  |  |      | 13 | 
|PART II                                                                     |  |                                                                                                                          |  |      |    | 
|Item 5.                                                                     |  | Market for the Registrants Common
    Equity, Related Stockholder Matters and Issuer Purchases of
    Equity Securities |  |      | 13 | 
|Item 6.                                                                     |  | Selected Financial Data                                                                                                  |  |      | 15 | 
|Item 7.                                                                     |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                                |  |      | 16 | 
|Item 7A.                                                                    |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                           |  |      | 38 | 
|Item 8.                                                                     |  | Financial Statements and Supplementary
    Data                                                                          |  |      | 40 | 
|Item 9.                                                                     |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                 |  |      | 67 | 
|Item 9A.                                                                    |  | Controls and Procedures                                                                                                  |  |      | 67 | 
|Item 9B.                                                                    |  | Other Information                                                                                                        |  |      | 70 | 
|PART III                                                                    |  |                                                                                                                          |  |      |    | 
|Item 10.                                                                    |  | Directors and Executive Officers of the
    Registrant                                                                   |  |      | 70 | 
|Item 11.                                                                    |  | Executive Compensation                                                                                                   |  |      | 70 | 
|Item 12.                                                                    |  | Security Ownership of Certain Beneficial
    Owners and Management                                                       |  |      | 70 | 
|Item 13.                                                                    |  | Certain Relationships and Related Party
    Transactions                                                                 |  |      | 70 | 
|Item 14.                                                                    |  | Principal Accounting Fees and Services                                                                                   |  |      | 70 | 
|PART IV                                                                     |  |                                                                                                                          |  |      |    | 
|Item 15.                                                                    |  | Exhibits, Financial Statement Schedules                                                                                  |  |      | 71 | 
|                                                                            |  | Signatures                                                                                                               |  |      | 74 | 
|Subsidiaries of Registrant                                                 
|Consent of Ernst & Young LLP                                               
|Section 302 Certification of Chief Executive Officer                       
|Section 302 Certification of Chief Financial Officer                       
|Section 906 Certification of Chief Executive Officer                       
|Section 906 Certification of Chief Financial Officer                       
|Cautionary Statement under Private Securities Litigation Reform Act of 1995





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##### Table of Contents






PART I





Item 1. Business


Forward-Looking Statements




General




Segment Information




Borders Domestic Superstores








2



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|                     |  |           |     | 
|-------------------- |  | --------- | --- | 
|                     |  | Number of |    
|State                |  | Stores    |    
|                     |  |           |    
|Alaska               |  |           | 1   | 
|Arizona              |  |           | 10  | 
|California           |  |           | 74  | 
|Colorado             |  |           | 13  | 
|Connecticut          |  |           | 8   | 
|Delaware             |  |           | 2   | 
|District of Columbia |  |           | 3   | 
|Florida              |  |           | 26  | 
|Georgia              |  |           | 14  | 
|Hawaii               |  |           | 6   | 
|Idaho                |  |           | 2   | 
|Illinois             |  |           | 35  | 
|Indiana              |  |           | 11  | 
|Iowa                 |  |           | 4   | 
|Kansas               |  |           | 7   | 
|Kentucky             |  |           | 4   | 
|Louisiana            |  |           | 1   | 
|Maine                |  |           | 2   | 
|Maryland             |  |           | 12  | 
|Massachusetts        |  |           | 12  | 
|Michigan             |  |           | 17  | 
|Minnesota            |  |           | 8   | 
|Mississippi          |  |           | 1   | 
|Missouri             |  |           | 8   | 
|Montana              |  |           | 3   | 
|Nebraska             |  |           | 2   | 
|Nevada               |  |           | 6   | 
|New Hampshire        |  |           | 4   | 
|New Jersey           |  |           | 17  | 
|New Mexico           |  |           | 4   | 
|New York             |  |           | 25  | 
|North Carolina       |  |           | 8   | 
|Ohio                 |  |           | 17  | 
|Oklahoma             |  |           | 4   | 
|Oregon               |  |           | 7   | 
|Pennsylvania         |  |           | 20  | 
|Rhode Island         |  |           | 2   | 
|South Dakota         |  |           | 1   | 
|Tennessee            |  |           | 6   | 
|Texas                |  |           | 20  | 
|Utah                 |  |           | 4   | 
|Vermont              |  |           | 1   | 
|Virginia             |  |           | 12  | 
|Washington           |  |           | 11  | 
|West Virginia        |  |           | 1   | 
|Wisconsin            |  |           | 6   | 
|                     |  |           |    
|Total                |  |           | 462 | 
|                     |  |           |    



Waldenbooks




3



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|                     |  |           |     | 
|-------------------- |  | --------- | --- | 
|                     |  | Number of |    
|State                |  | Stores    |    
|                     |  |           |    
|Alabama              |  |           | 4   | 
|Alaska               |  |           | 5   | 
|Arizona              |  |           | 8   | 
|Arkansas             |  |           | 6   | 
|California           |  |           | 55  | 
|Colorado             |  |           | 9   | 
|Connecticut          |  |           | 13  | 
|Delaware             |  |           | 3   | 
|District of Columbia |  |           | 2   | 
|Florida              |  |           | 41  | 
|Georgia              |  |           | 19  | 
|Hawaii               |  |           | 11  | 
|Idaho                |  |           | 3   | 
|Illinois             |  |           | 33  | 
|Indiana              |  |           | 15  | 
|Iowa                 |  |           | 9   | 
|Kansas               |  |           | 6   | 
|Kentucky             |  |           | 9   | 
|Louisiana            |  |           | 6   | 
|Maine                |  |           | 2   | 
|Maryland             |  |           | 19  | 
|Massachusetts        |  |           | 23  | 
|Michigan             |  |           | 31  | 
|Minnesota            |  |           | 5   | 
|Mississippi          |  |           | 5   | 
|Missouri             |  |           | 14  | 
|Montana              |  |           | 4   | 
|Nebraska             |  |           | 5   | 
|Nevada               |  |           | 4   | 
|New Hampshire        |  |           | 5   | 
|New Jersey           |  |           | 23  | 
|New Mexico           |  |           | 2   | 
|New York             |  |           | 39  | 
|North Carolina       |  |           | 19  | 
|North Dakota         |  |           | 3   | 
|Ohio                 |  |           | 38  | 
|Oklahoma             |  |           | 10  | 
|Oregon               |  |           | 8   | 
|Pennsylvania         |  |           | 50  | 
|Rhode Island         |  |           | 4   | 
|South Carolina       |  |           | 11  | 
|South Dakota         |  |           | 2   | 
|Tennessee            |  |           | 10  | 
|Texas                |  |           | 41  | 
|Utah                 |  |           | 4   | 
|Vermont              |  |           | 3   | 
|Virginia             |  |           | 28  | 
|Washington           |  |           | 13  | 
|West Virginia        |  |           | 8   | 
|Wisconsin            |  |           | 13  | 
|Wyoming              |  |           | 2   | 
|                     |  |           |    
|Total                |  |           | 705 | 
|                     |  |           |    



International




4



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|               |  |           |    | 
|-------------- |  | --------- | -- | 
|               |  | Number of |   
|Country        |  | Stores    |   
|               |  |           |   
|Australia      |  |           | 11 | 
|New Zealand    |  |           | 1  | 
|Puerto Rico    |  |           | 3  | 
|Singapore      |  |           | 1  | 
|United Kingdom |  |           | 26 | 
|               |  |           |   
|Total          |  |           | 42 | 
|               |  |           |   







Internet






5



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Distribution








|                             |  |        |    |  |                |  |           | 
|---------------------------- |  | ------ | -- |  | -------------- |  | --------- | 
|Locality, Country            |  | Number |    |  | Square Footage | 
|                             |  |        |    |  |                | 
|Auckland, New Zealand        |  |        | 1  |  |                |  | 500       | 
|Bedfordshire, United Kingdom |  |        | 1  |  |                |  | 67,000    | 
|California, United States    |  |        | 1  |  |                |  | 414,000   | 
|Cornwall, United Kingdom     |  |        | 1  |  |                |  | 47,000    | 
|Indiana, United States       |  |        | 1  |  |                |  | 96,000    | 
|Ohio, United States          |  |        | 1  |  |                |  | 172,000   | 
|Pennsylvania, United States  |  |        | 1  |  |                |  | 115,000   | 
|Puerto Rico                  |  |        | 1  |  |                |  | 12,000    | 
|Singapore                    |  |        | 1  |  |                |  | 8,000     | 
|St. Columb, United Kingdom   |  |        | 1  |  |                |  | 50,000    | 
|Tennessee, United States     |  |        | 3  |  |                |  | 926,000   | 
|Victoria, Australia          |  |        | 1  |  |                |  | 50,000    | 
|                             |  |        |    |  |                | 
|Total                        |  |        | 14 |  |                |  | 1,957,500 | 
|                             |  |        |    |  |                | 



Employees




6



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Trademarks and Service Marks




Executive Officers of the Company




|                      |  |     |  |                                                                       
|--------------------- |  | --- |  | ----------------------------------------------------------------------
|Name                  |  | Age |  | Position                                                              
|                      |  |     |  |                                                                       
|Gregory P. Josefowicz |  | 52  |  | Chairman, President and Chief Executive Officer                       
|Vincent E. Altruda    |  | 55  |  | President, Borders Stores Worldwide                                   
|Thomas D. Carney      |  | 58  |  | Senior Vice President, General Counsel and Secretary                  
|Daniel T. Smith       |  | 40  |  | Senior Vice President, Human Resources                                
|Michael G. Spinozzi   |  | 45  |  | Executive Vice President, Chief Marketing Officer                     
|Cedric J. Vanzura     |  | 41  |  | President, Waldenbooks Specialty Retail and Information
    Technology
|Edward W. Wilhelm     |  | 46  |  | Senior Vice President, Chief Financial Officer                        













7



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Risk Factors




Expansion Strategy










8



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Waldenbooks




Seasonality




Competition








Consumer Spending Patterns




Foreign Exchange Risk




9



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Potential for Uninsured Losses and/or Claims




Changes to Information Technology Systems May Disrupt the
Supply Chain




Reliance on Key Personnel




Additional Information


www.bordersgroupinc.com






10



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Item 2. Properties




|                                                                     |  |           |     | 
|-------------------------------------------------------------------- |  | --------- | --- | 
|                                                                     |  | Number of |    
|Lease Terms to Expire During 12 Months Ending on or About January 31 |  | Stores    |    
|                                                                     |  |           |     | 
|2006                                                                 |  |           | 9   | 
|2007                                                                 |  |           | 7   | 
|2008                                                                 |  |           | 8   | 
|2009                                                                 |  |           | 11  | 
|2010                                                                 |  |           | 13  | 
|2011 and later                                                       |  |           | 414 | 
|                                                                     |  |           |    
|Total                                                                |  |           | 462 | 
|                                                                     |  |           |    



|                                                                     |  |           |     | 
|-------------------------------------------------------------------- |  | --------- | --- | 
|                                                                     |  | Number of |    
|Lease Terms to Expire During 12 Months Ending on or About January 31 |  | Stores    |    
|                                                                     |  |           |     | 
|2006                                                                 |  |           | 350 | 
|2007                                                                 |  |           | 83  | 
|2008                                                                 |  |           | 55  | 
|2009                                                                 |  |           | 80  | 
|2010                                                                 |  |           | 78  | 
|2011 and later                                                       |  |           | 59  | 
|                                                                     |  |           |    
|Total                                                                |  |           | 705 | 
|                                                                     |  |           |    



|                                                                     |  |           |    | 
|-------------------------------------------------------------------- |  | --------- | -- | 
|                                                                     |  | Number of |   
|Lease Terms to Expire During 12 Months Ending on or About January 31 |  | Stores    |   
|                                                                     |  |           |    | 
|2006                                                                 |  |           |   | 
|2007                                                                 |  |           | 1  | 
|2008                                                                 |  |           | 1  | 
|2009                                                                 |  |           | 2  | 
|2010                                                                 |  |           | 1  | 
|2011 and later                                                       |  |           | 37 | 
|                                                                     |  |           |   
|Total                                                                |  |           | 42 | 
|                                                                     |  |           |   



11



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Item 3. Legal Proceedings


Proceedings Terminated in the Fourth Quarter






Pending Proceedings






12



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







PART II







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



|                    |                |      |   |       |     |           |   |          |  |  |   |      | 
|------------------- | -------------- | ---- | - | ----- | --- | --------- | - | -------- |  |  | - | ---- | 
|                    |                |      |   |       |     | Dividends |  
|                    |                | High |   |       | Low |           |   | Declared | 
|                    |                |      |   |       |     |           |   |          | 
|Fiscal Quarter 2004 |                |      |   |       |     |           |   |          |  |  |   |     
|                    | First Quarter  |      | $ | 25.21 |     |           | $ | 21.27    |  |  | $ | 0.08 | 
|                    | Second Quarter |      | $ | 24.94 |     |           | $ | 22.09    |  |  | $ | 0.08 | 
|                    | Third Quarter  |      | $ | 25.22 |     |           | $ | 21.42    |  |  | $ | 0.08 | 
|                    | Fourth Quarter |      | $ | 26.30 |     |           | $ | 21.95    |  |  | $ | 0.09 | 
|                   
|Fiscal Quarter 2003 |                |      |   |       |     |           |   |          |  |  |   |     
|                    | First Quarter  |      | $ | 15.84 |     |           | $ | 13.60    |  |  | $ |     | 
|                    | Second Quarter |      | $ | 18.60 |     |           | $ | 15.50    |  |  | $ |     | 
|                    | Third Quarter  |      | $ | 21.76 |     |           | $ | 17.64    |  |  | $ |     | 
|                    | Fourth Quarter |      | $ | 22.98 |     |           | $ | 21.20    |  |  | $ | 0.08 | 







13



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|                                |                                      |                |  |     |                   |  |  |                  |  |  |  |       | 
|------------------------------- | ------------------------------------ | -------------- |  | --- | ----------------- |  |  | ---------------- |  |  |  | ----- | 
|                                |                                      | Number of      |  |     | Weighted-         |  |  | Number of        | 
|                                |                                      | Awards         |  |     | Average           |  |  | Shares Available | 
|Plan Category                   |                                      | Outstanding(2) |  |     | Exercise Price(3) |  |  | for Issuance     | 
|                                |                                      |                |  |     |                   |  |  |                  | 
|Plans approved by stockholders: |                                      |                |  |     |                   |  |  |                  |  |  |  |      
|                                | 2004 Long-Term Incentive
    Plan(1) |                |  | 318 |                   |  |  | 23.53            |  |  |  | 3,213 | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2004 Long-Term Incentive Plan (the 2004 Plan)
    was approved by shareholders in May 2004, and replaced all prior
    equity compensation plans (the Prior Plans). At
    January 23, 2005, there were approximately 9.0 million
    stock options outstanding under the Prior Plans with a
    weighted-average exercise price of $21.48, which, if forfeited
    or cancelled, become available for issuance under the 2004 Plan.
|   
|(2) | Number of awards outstanding as of January 23, 2005
    includes approximately 288,000 restricted share units and
    approximately 29,862 stock options.                                                                                                                                                                                                                                                                                   
|   
|(3) | Reflects the weighted-average exercise price of stock options
    outstanding as of January 23, 2005 only.                                                                                                                                                                                                                                                                                                                                  



|                                            |  |           |           |  |              |                  |       |                     |                 |  |                  |  |  |   |            | 
|------------------------------------------- |  | --------- | --------- |  | ------------ | ---------------- | ----- | ------------------- | --------------- |  | ---------------- |  |  | - | ---------- | 
|                                            |  |           |           |  |              |                  |       | Approximate         |                
|                                            |  |           |           |  |              | Total Number of  |       |                     | Dollar Value of | 
|                                            |  |           |           |  |              | Shares Purchased |       |                     | Shares that May | 
|                                            |  | Total     |           |  | Average      |                  |       | as Part of Publicly |                 |  | Yet Be Purchased | 
|                                            |  | Number of |           |  | Price Paid   |                  |       | Announced Plans     |                 |  | Under the Plans  | 
|Fiscal Period                               |  | Shares    |           |  | per Share(1) |                  |       | or Programs(2)      |                 |  | or Programs      | 
|                                            |  |           |           |  |              |                  |       |                     |                 |  |                  | 
|October 25, 2004 through November 21, 2004  |  |           | 1,168,000 |  |              | $                | 22.83 |                     |                 |  | 1,168,000        |  |  | $ | 60,189,187 | 
|November 22, 2004 through December 26, 2004 |  |           | 1,366,260 |  |              | $                | 23.17 |                     |                 |  | 1,366,260        |  |  | $ | 31,965,755 | 
|December 27, 2004 through January 23, 2005  |  |           | 560,100   |  |              | $                | 25.65 |                     |                 |  | 560,100          |  |  | $ | 26,806,713 | 
|                                            |  |           |           |  |              |                  |       |                     |                 |  |                  | 
|Total                                       |  |           | 3,094,360 |  |              | $                | 23.49 |                     |                 |  | 3,094,360        |  |  | $ | 26,806,713 | 
|                                            |  |           |           |  |              |                  |       |                     |                 |  |                  | 



|    |                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Average price paid per share includes commissions and is rounded
    to the nearest two decimal places.                                                                                                                                                                                                                                 
|   
|(2) | On May 20, 2003, the Company announced that the Board of
    Directors authorized an increase in the amount of share
    repurchases to $150.0 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).



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Note: In February 2005, the Board of Directors authorized an
    increase in the amount of share repurchases to
    $250.0 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).

14



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA




|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |         |  |  |   |         |  
|----------------------------------------------------------------------------- |  | ----------------- | ------- | ---------- | -------- | - | ---------- | -------- |  | ---------- | -------- |  | ---------- | -------- | ------- |  |  | - | ------- | -
|                                                                              |  | Fiscal Year Ended |        
|                                                                              |  | Jan. 23,          |         |            | Jan. 25, |   |            | Jan. 26, |  |            | Jan. 27, |  |            | Jan. 28, |        
|                                                                              |  | 2005              |         |            | 2004     |   |            | 2003     |  |            | 2002     |  |            | 2001(1)  |        
|(dollars in millions except per share data)                                   |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|                                                                              |  |                   |         | (restated) |          |   | (restated) |          |  | (restated) |          |  | (restated) |         
|Statement of Operations Data                                                  |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |         |  |  |   |         |  
|Borders sales                                                                 |  | $                 | 2,588.9 |            |          | $ | 2,470.2    |          |  | $          | 2,319.0  |  |            | $        | 2,234.1 |  |  | $ | 2,107.7 |  
|Waldenbooks sales                                                             |  |                   | 779.9   |            |          |   | 820.9      |          |  |            | 852.2    |  |            |          | 902.1   |  |  |   | 944.3   |  
|International sales                                                           |  |                   | 510.7   |            |          |   | 407.5      |          |  |            | 314.9    |  |            |          | 251.7   |  |  |   | 219.2   |  
|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|Total sales                                                                   |  | $                 | 3,879.5 |            |          | $ | 3,698.6    |          |  | $          | 3,486.1  |  |            | $        | 3,387.9 |  |  | $ | 3,271.2 |  
|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|Operating income                                                              |  | $                 | 216.7   |            |          | $ | 198.1      |          |  | $          | 187.6    |  |            | $        | 146.7   |  |  | $ | 123.1   |  
|                                                                             
|Income from continuing operations                                             |  | $                 | 131.9   |            |          | $ | 117.3      |          |  | $          | 107.6    |  |            | $        | 80.9    |  |  | $ | 66.4    |  
|Discontinued operations (net of tax)                                          |  |                   |        |            |          |   |           |          |  |            |         |  |            |          |        |  |  |   | 30.2    |  
|Cumulative effect of accounting change (net of tax)                           |  |                   |        |            |          |   | 2.1        |          |  |            |         |  |            |          |        |  |  |   |        |  
|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|Net income                                                                    |  | $                 | 131.9   |            |          | $ | 115.2      |          |  | $          | 107.6    |  |            | $        | 80.9    |  |  | $ | 36.2    |  
|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|                                                                             
|Per Share Data                                                                |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |         |  |  |   |         |  
|Diluted earnings per common share from continuing operations                  |  | $                 | 1.69    |            |          | $ | 1.48       |          |  | $          | 1.31     |  |            | $        | 0.98    |  |  | $ | 0.83    |  
|Diluted loss per common share from discontinued operations                    |  |                   |        |            |          |   |           |          |  |            |         |  |            |          |        |  |  |   | (0.38   | )
|Diluted loss per common share from cumulative effect of
    accounting change |  |                   |        |            |          |   | (0.02      | )        |  |            |         |  |            |          |        |  |  |   |        |  
|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|Diluted earnings per common share                                             |  | $                 | 1.69    |            |          | $ | 1.46       |          |  | $          | 1.31     |  |            | $        | 0.98    |  |  | $ | 0.45    |  
|                                                                              |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |        
|Cash dividends declared per common share                                      |  | $                 | 0.33    |            |          | $ | 0.08       |          |  | $          |         |  |            | $        |        |  |  | $ |        |  
|                                                                             
|Balance Sheet Data                                                            |  |                   |         |            |          |   |            |          |  |            |          |  |            |          |         |  |  |   |         |  
|Working capital                                                               |  | $                 | 569.4   |            |          | $ | 556.0      |          |  | $          | 463.0    |  |            | $        | 342.8   |  |  | $ | 223.4   |  
|Total assets                                                                  |  | $                 | 2,628.8 |            |          | $ | 2,584.6    |          |  | $          | 2,378.0  |  |            | $        | 2,285.6 |  |  | $ | 2,138.4 |  
|Short-term borrowings                                                         |  | $                 | 141.0   |            |          | $ | 140.7      |          |  | $          | 112.1    |  |            | $        | 81.6    |  |  | $ | 143.5   |  
|Long-term debt, including current portion                                     |  | $                 | 55.9    |            |          | $ | 57.3       |          |  | $          | 50.0     |  |            | $        |        |  |  | $ |        |  
|Long-term capital lease obligations, including current portion                |  | $                 | 0.1     |            |          | $ | 0.4        |          |  | $          | 19.6     |  |            | $        | 51.4    |  |  | $ | 15.8    |  
|Stockholders equity                                                          |  | $                 | 1,088.9 |            |          | $ | 1,100.6    |          |  | $          | 984.0    |  |            | $        | 908.2   |  |  | $ | 811.2   |  



|    |                                                      
|--- | -----------------------------------------------------
|(1) | The Companys 2000 fiscal year consisted of 53 weeks.

15



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

General










16



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Restatement of Prior Year Financial Statements






17



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Results of Operations




|                                                    |                                                      |          |       |       |          |  |       |          |   |  |       |       |  
|--------------------------------------------------- | ---------------------------------------------------- | -------- | ----- | ----- | -------- |  | ----- | -------- | - |  | ----- | ----- | -
|                                                    |                                                      | Jan. 23, |       |       | Jan. 25, |  |       | Jan. 26, |  
|                                                    |                                                      | 2005     |       |       | 2004     |  |       | 2003     |  
|                                                    |                                                      |          |       |       |          |  |       |          |  
|Sales                                               |                                                      |          | 100.0 | %     |          |  | 100.0 | %        |   |  | 100.0 | %    
|Other revenue                                       |                                                      |          | 0.6   |       |          |  | 0.9   |          |   |  | 0.8   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Total revenue                                        |          |       | 100.6 |          |  |       | 100.9    |   |  |       | 100.8 |  
|Cost of merchandise sold (includes occupancy)       |                                                      |          | 72.3  |       |          |  | 72.7  |          |   |  | 72.2  |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Gross margin                                         |          |       | 28.3  |          |  |       | 28.2     |   |  |       | 28.6  |  
|Selling, general and administrative expenses        |                                                      |          | 22.4  |       |          |  | 22.2  |          |   |  | 22.6  |      
|Legal settlement expense                            |                                                      |          |      |       |          |  | 0.1   |          |   |  |      |      
|Pre-opening expense                                 |                                                      |          | 0.1   |       |          |  | 0.2   |          |   |  | 0.2   |      
|Asset impairments and other writedowns              |                                                      |          | 0.2   |       |          |  | 0.3   |          |   |  | 0.4   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Operating income                                     |          |       | 5.6   |          |  |       | 5.4      |   |  |       | 5.4   |  
|Interest expense                                    |                                                      |          | 0.2   |       |          |  | 0.2   |          |   |  | 0.4   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Income before income tax                             |          |       | 5.4   |          |  |       | 5.2      |   |  |       | 5.0   |  
|Income tax                                          |                                                      |          | 2.0   |       |          |  | 2.0   |          |   |  | 1.9   |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Income before cumulative effect of accounting change |          |       | 3.4   |          |  |       | 3.2      |   |  |       | 3.1   |  
|Cumulative effect of accounting change (net of tax) |                                                      |          |      |       |          |  | 0.1   |          |   |  |      |      
|                                                    |                                                      |          |       |       |          |  |       |          |  
|                                                    | Net income                                           |          |       | 3.4   | %        |  |       | 3.1      | % |  |       | 3.1   | %
|                                                    |                                                      |          |       |       |          |  |       |          |  

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Consolidated Results  Comparison of 2004 to
2003


Sales








Other Revenue








Gross Margin






19



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Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Interest Expense




Taxes




Cumulative Effect of Accounting Change




Net Income




20



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Consolidated Results  Comparison of 2003
to 2002


Sales








Other Revenue






Gross Margin






21



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Selling, General and Administrative Expenses






Legal Settlement Expense




Asset Impairments and Other Writedowns






Interest Expense




Taxes




22



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Cumulative Effect of Accounting Change




Net Income




Segment Results






Borders


|                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | 2004 |         |   | 2003 |   |         | 2002 | 
|                             |  |      |         |   |      |   |         |      | 
|(dollar amounts in millions) |  |      |         |   |      |  
|Sales                        |  | $    | 2,588.9 |   |      | $ | 2,470.2 |      |  | $ | 2,319.0 |  
|Net income                   |  | $    | 112.0   |   |      | $ | 97.3    |      |  | $ | 100.2   |  
|Net income as % of sales     |  |      | 4.3     | % |      |   | 3.9     | %    |  |   | 4.3     | %
|Depreciation expense         |  | $    | 80.4    |   |      | $ | 79.5    |      |  | $ | 76.3    |  
|Interest (income) expense    |  | $    | (5.4    | ) |      | $ | (1.9    | )    |  | $ | 2.5     |  
|Store openings               |  |      | 19      |   |      |   | 41      |      |  |   | 41      |  
|Store closings               |  |      | 2       |   |      |   |        |      |  |   |        |  
|Store count                  |  |      | 462     |   |      |   | 445     |      |  |   | 404     |  

Borders  Comparison of 2004 to 2003


Sales




Gross Margin






23



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Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




Interest Income




Cumulative Effect of Accounting Change




Net income




Effect of Terrorist Attacks on September 11,
2001






24



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Borders  Comparison of 2003 to 2002


Sales




Gross Margin






Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




25



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Interest Income




Cumulative Effect of Accounting Change




Net Income




Waldenbooks


|                             |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | 2004 |       |   | 2003 |   |       | 2002 | 
|                             |  |      |       |   |      |   |       |      | 
|(dollar amounts in millions) |  |      |       |   |     
|Sales                        |  | $    | 779.9 |   |      | $ | 820.9 |      |  | $ | 852.2 |  
|Other revenue                |  | $    | 15.3  |   |      | $ | 24.1  |      |  | $ | 25.0  |  
|Net income                   |  | $    | 41.5  |   |      | $ | 48.8  |      |  | $ | 41.1  |  
|Net income as % of sales     |  |      | 5.3   | % |      |   | 5.9   | %    |  |   | 4.8   | %
|Depreciation expense         |  | $    | 16.7  |   |      | $ | 18.5  |      |  | $ | 20.6  |  
|Interest income              |  | $    | 42.2  |   |      | $ | 38.8  |      |  | $ | 33.5  |  
|Store openings               |  |      | 15    |   |      |   | 12    |      |  |   | 7     |  
|Store closings               |  |      | 43    |   |      |   | 74    |      |  |   | 55    |  
|Store count                  |  |      | 705   |   |      |   | 733   |      |  |   | 795   |  

Waldenbooks  Comparison of 2004 to 2003


Sales




Other Revenue




Gross Margin






26



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Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




Interest Income




Net Income




Waldenbooks  Comparison of 2003 to 2002


Sales




Other Revenue




Gross Margin




27



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Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




Interest Income




Net Income




28



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##### Table of Contents



International


|                                |                 |      |       |    |      |   |       |      |  |   |       |    | 
|------------------------------- | --------------- | ---- | ----- | -- | ---- | - | ----- | ---- |  | - | ----- | -- | 
|                                |                 | 2004 |       |    | 2003 |   |       | 2002 | 
|                                |                 |      |       |    |      |   |       |      | 
|(dollar amounts in millions)    |                 |      |       |    |     
|Sales                           |                 | $    | 510.7 |    |      | $ | 407.5 |      |  | $ | 314.9 |   
|Net income (loss)               |                 | $    | 5.6   |    |      | $ | (1.3  | )    |  | $ | (13.8 | ) 
|Net income (loss) as % of sales |                 |      | 1.1   | %  |      |   | (0.3  | )%   |  |   | (4.4  | )%
|Depreciation expense            |                 | $    | 15.8  |    |      | $ | 13.3  |      |  | $ | 10.2  |   
|Interest expense                |                 | $    | 19.1  |    |      | $ | 19.0  |      |  | $ | 17.2  |   
|Superstores:                    |                 |      |       |    |      |   |       |      |  |   |       |   
|                                | Store openings  |      |       | 5  |      |   |       | 7    |  |   |       | 8  | 
|                                | Store count     |      |       | 42 |      |   |       | 37   |  |   |       | 30 | 
|Books etc.:                     |                 |      |       |    |      |   |       |      |  |   |       |   
|                                | Store openings  |      |       | 1  |      |   |       | 1    |  |   |       | 1  | 
|                                | Store closings  |      |       | 2  |      |   |       | 2    |  |   |       |   | 
|                                | Store count     |      |       | 35 |      |   |       | 36   |  |   |       | 37 | 
|Paperchase stand-alone stores:  |                 |      |       |    |      |   |       |      |  |   |       |   
|                                | Stores acquired |      |       | 10 |      |   |       |      |  |   |       |    | 
|                                | Store openings  |      |       | 3  |      |   |       |      |  |   |       |    | 
|                                | Store count     |      |       | 13 |      |   |       |      |  |   |       |    | 

International  Comparison of 2004 to 2003


Sales




Gross Margin






29



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Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




Interest Expense




Net Income






International  Comparison of 2003 to 2002


Sales




Gross Margin




30



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##### Table of Contents







Selling, General and Administrative Expenses






Asset Impairments and Other Writedowns






Depreciation




Interest Expense




Net Income






Corporate


|                             |  |      |      |  |      |   |      |      |  |   |      | 
|---------------------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ---- | 
|                             |  | 2004 |      |  | 2003 |   |      | 2002 | 
|                             |  |      |      |  |      |   |      |      | 
|(dollar amounts in millions) |  |      |      |  |     
|Interest expense             |  | $    | 37.6 |  |      | $ | 30.4 |      |  | $ | 26.4 | 
|Net loss                     |  | $    | 27.2 |  |      | $ | 29.6 |      |  | $ | 19.9 | 



31



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Corporate  Comparison of 2004 to 2003




Corporate  Comparison of 2003 to 2002




Liquidity and Capital Resources
















32



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33



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34



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|                            |  |             |       |          |           |   |       |           |  |   |            |  |  |       |         |  |  |   |         | 
|--------------------------- |  | ----------- | ----- | -------- | --------- | - | ----- | --------- |  | - | ---------- |  |  | ----- | ------- |  |  | - | ------- | 
|                            |  | Fiscal Year |      
|                            |  |             |       | 2010 and |           |   |      
|                            |  | 2005        |       |          | 2006-2007 |   |       | 2008-2009 |  |   | Thereafter |  |  | Total |        
|(dollars in millions)       |  |             |       |          |           |   |       |           |  |   |            |  |  |       |        
|Credit Agreement borrowings |  | $           | 131.7 |          |           | $ |      |           |  | $ |           |  |  | $     |        |  |  | $ | 131.7   | 
|Capital lease obligations   |  |             | 0.1   |          |           |   |      |           |  |   |           |  |  |       |        |  |  |   | 0.1     | 
|Operating lease obligations |  |             | 344.7 |          |           |   | 656.5 |           |  |   | 602.4      |  |  |       | 2,229.5 |  |  |   | 3,833.1 | 
|Senior guaranteed notes     |  |             |      |          |           |   | 50.0  |           |  |   |           |  |  |       |        |  |  |   | 50.0    | 
|Debt of consolidated VIEs   |  |             | 0.1   |          |           |   | 0.4   |           |  |   | 0.4        |  |  |       | 4.8     |  |  |   | 5.7     | 
|Other borrowings            |  |             | 9.3   |          |           |   |      |           |  |   |           |  |  |       |        |  |  |   | 9.3     | 
|                            |  |             |       |          |           |   |       |           |  |   |            |  |  |       |        
|Total                       |  | $           | 485.9 |          |           | $ | 706.9 |           |  | $ | 602.8      |  |  | $     | 2,234.3 |  |  | $ | 4,029.9 | 
|                            |  |             |       |          |           |   |       |           |  |   |            |  |  |       |        

Seasonality




|                        |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                         | Fiscal 2004 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                         | $                         | 830.3 |      |      | $ | 847.1 |         |   | $ | 833.3   |      |   | $ | 1,368.3 |     
|Operating income (loss) |                         |                           | 5.6   |      |      |   | 15.0  |         |   |   | 0.4     |      |   |   | 195.7   |     
|% of full year:         |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales                   |                           |       | 21.4 | %    |   |       | 21.8    | % |   |         | 21.5 | % |   |         | 35.3 | %
|                        | Operating income (loss) |                           |       | 2.6  |      |   |       | 6.9     |   |   |         | 0.2  |   |   |         | 90.3 |  

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

|                        |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |      |  
|----------------------- | ----------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                        |                         | Fiscal 2002 Quarter Ended |      
|                        |                         | April                     |       |      | July |   |       | October |   |   | January |     
|(dollars in millions)   |                         |                           |       |      |      |   |       |         |   |   |         |     
|Sales                   |                         | $                         | 751.7 |      |      | $ | 763.6 |         |   | $ | 749.8   |      |   | $ | 1,221.0 |     
|Operating income (loss) |                         |                           | 8.5   |      |      |   | 5.8   |         |   |   | (1.1    | )    |   |   | 174.4   |     
|% of full year:         |                         |                           |       |      |      |   |       |         |   |   |         |      |   |   |         |     
|                        | Sales                   |                           |       | 21.6 | %    |   |       | 21.9    | % |   |         | 21.5 | % |   |         | 35.0 | %
|                        | Operating income (loss) |                           |       | 4.5  |      |   |       | 3.1     |   |   |         | (0.6 | ) |   |         | 93.0 |  

35



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Critical Accounting Policies and Estimates




Asset Impairments




Goodwill Impairment




Inventory






36



---



##### Table of Contents



Leases




Gift Certificates




Advertising and Vendor Incentive Programs








Income Taxes






New Accounting Guidance




37



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Related Party Transactions









|         |                                                           
|-------- | ----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk



Interest Rate Risk








38



---



##### Table of Contents



Foreign Currency Exchange Risk




39



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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 23, 2005, January 25,
    2004, and January 26, 2003               |  |      | 41 | 
|Consolidated Balance Sheets as of
    January 23, 2005 and January 25, 2004                                                                     |  |      | 42 | 
|Consolidated Statements of Cash Flows for
    the fiscal years ended January 23, 2005, January 25,
    2004, and January 26, 2003               |  |      | 43 | 
|Consolidated Statements of
    Stockholders Equity for the fiscal years ended
    January 23, 2005, January 25, 2004, and
    January 26, 2003 |  |      | 44 | 
|Notes to Consolidated Financial
    Statements                                                                                                  |  |      | 45 | 
|Report of Independent Registered Public
    Accounting Firm                                                                                     |  |      | 66 | 

40



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##### Table of Contents






CONSOLIDATED STATEMENTS OF OPERATIONS


(dollars in millions except per share data)


|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |       |      |         |         |      |      |      | 
|--------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------- | ---------- | ------------------------------------------ | -------- | ---- | ---------- | -------- | ----- | ---- | ------- | ------- | ---- | ---- | ---- | 
|                                                    |                                                      | Fiscal Year Ended                                    |           
|                                                    |                                                      | Jan. 23,                                             |            |                                            | Jan. 25, |      |            | Jan. 26, |      
|                                                    |                                                      | 2005                                                 |            |                                            | 2004     |      |            | 2003     |      
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    |                                                      |                                                      |            | (restated)                                 |          |      | (restated) |         
|Sales                                               |                                                      | $                                                    | 3,879.5    |                                            |          | $    | 3,698.6    |          |       | $    | 3,486.1 |        
|Other revenue                                       |                                                      |                                                      | 23.5       |                                            |          |      | 32.4       |          |       |      | 28.6    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    | Total revenue                                        |                                                      | $          | 3,903.0                                    |          |      | $          | 3,731.0  |       |      | $       | 3,514.7 |     
|Cost of merchandise sold (includes occupancy)       |                                                      |                                                      | 2,803.6    |                                            |          |      | 2,689.0    |          |       |      | 2,518.6 |        
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    | Gross margin                                         |                                                      |            | 1,099.4                                    |          |      |            | 1,042.0  |       |      |         | 996.1   |     
|Selling, general and administrative expenses        |                                                      |                                                      | 870.7      |                                            |          |      | 821.4      |          |       |      | 786.3   |        
|Legal settlement expense                            |                                                      |                                                      |           |                                            |          |      | 3.5        |          |       |      |        |        
|Pre-opening expense                                 |                                                      |                                                      | 4.8        |                                            |          |      | 7.0        |          |       |      | 6.9     |        
|Asset impairments and other writedowns              |                                                      |                                                      | 7.2        |                                            |          |      | 12.0       |          |       |      | 15.3    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    | Operating income                                     |                                                      |            | 216.7                                      |          |      |            | 198.1    |       |      |         | 187.6   |     
|Interest expense                                    |                                                      |                                                      | 9.1        |                                            |          |      | 8.7        |          |       |      | 12.6    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    | Income before income tax                             |                                                      |            | 207.6                                      |          |      |            | 189.4    |       |      |         | 175.0   |     
|Income tax provision                                |                                                      |                                                      | 75.7       |                                            |          |      | 72.1       |          |       |      | 67.4    |        
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    | Income before cumulative effect of accounting change |                                                      |            | 131.9                                      |          |      |            | 117.3    |       |      |         | 107.6   |     
|Cumulative effect of accounting change (net of tax) |                                                      |                                                      |           |                                            |          |      | 2.1        |          |       |      |        |        
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    | Net income                                           |                                                      | $          | 131.9                                      |          |      | $          | 115.2    |       |      | $       | 107.6   |     
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|Earnings (loss) per common share data (Note 3)      |                                                      |                                                      |            |                                            |          |      |            |          |       |      |         |        
|                                                    | Diluted:                                             |                                                      |            |                                            |          |      |            |          |       |      |         |         |     
|                                                    |                                                      | Income before cumulative effect of accounting change |            | $                                          | 1.69     |      |            | $        | 1.48  |      |         | $       | 1.31 |     
|                                                    |                                                      | Cumulative effect of accounting change (net of tax)  |            |                                            |         |      |            |          | (0.02 | )    |         |         |     |     
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    |                                                      |                                                      | Net income |                                            | $        | 1.69 |            |          | $     | 1.46 |         |         | $    | 1.31 |     
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    |                                                      |                                                      |            | Weighted-average common shares outstanding |          |      | 77.9       |          |       |      | 79.1    |         |      |      | 82.0 | 
|                                                    | Basic:                                               |                                                      |            |                                            |          |      |            |          |       |      |         |         |     
|                                                    |                                                      | Income before cumulative effect of accounting change |            | $                                          | 1.72     |      |            | $        | 1.51  |      |         | $       | 1.34 |     
|                                                    |                                                      | Cumulative effect of accounting change (net of tax)  |            |                                            |         |      |            |          | (0.03 | )    |         |         |     |     
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    |                                                      |                                                      | Net income |                                            | $        | 1.72 |            |          | $     | 1.48 |         |         | $    | 1.34 |     
|                                                    |                                                      |                                                      |            |                                            |          |      |            |          |      
|                                                    |                                                      |                                                      |            | Weighted-average common shares outstanding |          |      | 76.6       |          |       |      | 77.9    |         |      |      | 80.3 | 



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CONSOLIDATED BALANCE SHEETS


(dollars in millions except share amounts)


|                                                            |                                                                                                                                                                     |                                                                   |       |            |          |  |       |         |         | 
|----------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ----- | ---------- | -------- |  | ----- | ------- | ------- | 
|                                                            |                                                                                                                                                                     | Fiscal Year Ended                                                 |      
|                                                            |                                                                                                                                                                     | Jan. 23,                                                          |       |            | Jan. 25, | 
|                                                            |                                                                                                                                                                     | 2005                                                              |       |            | 2004     | 
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     |                                                                   |       | (restated) |         
|Assets                                                     
|Current assets:                                             |                                                                                                                                                                     |                                                                   |       |            |          |  |       |        
|                                                            | Cash and cash equivalents                                                                                                                                           |                                                                   | $     | 244.8      |          |  | $     | 260.8   |        
|                                                            | Investments                                                                                                                                                         |                                                                   |       | 95.4       |          |  |       | 118.0   |        
|                                                            | Merchandise inventories                                                                                                                                             |                                                                   |       | 1,306.9    |          |  |       | 1,235.6 |        
|                                                            | Accounts receivable and other current assets                                                                                                                        |                                                                   |       | 118.3      |          |  |       | 98.3    |        
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total current assets                                              |       |            | 1,765.4  |  |       |         | 1,712.7 | 
|Property and equipment, net                                 |                                                                                                                                                                     |                                                                   | 635.6 |            |          |  | 671.8 |        
|Other assets                                                |                                                                                                                                                                     |                                                                   | 84.8  |            |          |  | 70.2  |        
|Deferred income taxes                                       |                                                                                                                                                                     |                                                                   | 14.4  |            |          |  | 25.6  |        
|Goodwill                                                    |                                                                                                                                                                     |                                                                   | 128.6 |            |          |  | 104.3 |        
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total assets                                                      |       | $          | 2,628.8  |  |       | $       | 2,584.6 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|Liabilities, Minority Interest and Stockholders
    Equity
|Current liabilities:                                        |                                                                                                                                                                     |                                                                   |       |            |          |  |       |        
|                                                            | Short-term borrowings and current portion of long-term debt                                                                                                         |                                                                   | $     | 141.2      |          |  | $     | 141.2   |        
|                                                            | Trade accounts payable                                                                                                                                              |                                                                   |       | 615.1      |          |  |       | 595.9   |        
|                                                            | Accrued payroll and other liabilities                                                                                                                               |                                                                   |       | 306.4      |          |  |       | 281.8   |        
|                                                            | Taxes, including income taxes                                                                                                                                       |                                                                   |       | 118.3      |          |  |       | 125.7   |        
|                                                            | Deferred income taxes                                                                                                                                               |                                                                   |       | 15.0       |          |  |       | 12.1    |        
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total current liabilities                                         |       |            | 1,196.0  |  |       |         | 1,156.7 | 
|Long-term debt                                              |                                                                                                                                                                     |                                                                   | 55.8  |            |          |  | 57.2  |        
|Other long-term liabilities                                 |                                                                                                                                                                     |                                                                   | 286.7 |            |          |  | 268.4 |        
|Commitments and contingencies (Note 12)                     |                                                                                                                                                                     |                                                                   |      |            |          |  |      |        
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total liabilities                                                 |       |            | 1,538.5  |  |       |         | 1,482.3 | 
|Minority interest                                           |                                                                                                                                                                     |                                                                   | 1.4   |            |          |  | 1.7   |        
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total liabilities and minority interest                           |       |            | 1,539.9  |  |       |         | 1,484.0 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|Stockholders equity:                                       |                                                                                                                                                                     |                                                                   |       |            |          |  |       |        
|                                                            | Common stock, 200,000,000 shares authorized; 73,875,627 and
    78,273,341 shares issued and outstanding at
    January 23, 2005 and January 25, 2004, respectively |                                                                   |       | 525.1      |          |  |       | 646.3   |        
|                                                            | Deferred compensation                                                                                                                                               |                                                                   |       | (0.5       | )        |  |       | (0.6    | )      
|                                                            | Accumulated other comprehensive income                                                                                                                              |                                                                   |       | 25.3       |          |  |       | 22.7    |        
|                                                            | Retained earnings                                                                                                                                                   |                                                                   |       | 539.0      |          |  |       | 432.2   |        
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total stockholders equity                                        |       |            | 1,088.9  |  |       |         | 1,100.6 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 
|                                                            |                                                                                                                                                                     | Total liabilities, minority interest and stockholders
    equity |       | $          | 2,628.8  |  |       | $       | 2,584.6 | 
|                                                            |                                                                                                                                                                     |                                                                   |       |            |          | 



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CONSOLIDATED STATEMENTS OF CASH FLOWS


(dollars in millions)


|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |        |       |       |        |        |       | 
|------------------------------------------------ | ----------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------- | ---------- | -------- | ----- | ---------- | -------- | ------ | ----- | ----- | ------ | ------ | ----- | 
|                                                 |                                                                         | Fiscal Year Ended                                            |                                
|                                                 |                                                                         | Jan. 23,                                                     |                                 |            | Jan. 25, |       |            | Jan. 26, |       
|                                                 |                                                                         | 2005                                                         |                                 |            | 2004     |       |            | 2003     |       
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|                                                 |                                                                         |                                                              |                                 | (restated) |          |       | (restated) |         
|Cash provided by (used for):                     |                                                                         |                                                              |                                 |            |          |       |            |          |        |       |       |       
|Operations                                       |                                                                         |                                                              |                                 |            |          |       |            |          |        |       |       |       
|                                                 | Net income                                                              |                                                              | $                               | 131.9      |          |       | $          | 115.2    |        |       | $     | 107.6  |       
|                                                 | Adjustments to reconcile net income to operating cash flows:            |                                                              |                                 |            |          |       |            |          |        |       |       |        |       
|                                                 |                                                                         | Depreciation                                                 |                                 |            | 112.9    |       |            |          | 111.3  |       |       |        | 107.1  |      
|                                                 |                                                                         | Gain on deconsolidation of variable interest entities        |                                 |            | (2.9     | )     |            |          |       |       |       |        |       |      
|                                                 |                                                                         | Decrease in deferred income taxes                            |                                 |            | 12.6     |       |            |          | 0.8    |       |       |        | 13.4   |      
|                                                 |                                                                         | (Increase) decrease in other long-term assets                |                                 |            | (6.7     | )     |            |          | (14.0  | )     |       |        | 7.7    |      
|                                                 |                                                                         | Increase in other long-term liabilities                      |                                 |            | 13.3     |       |            |          | 17.8   |       |       |        | 15.1   |      
|                                                 |                                                                         | Asset impairments and other writedowns                       |                                 |            | 6.2      |       |            |          | 11.3   |       |       |        | 13.8   |      
|                                                 | Cash provided by (used for) current assets and current
    liabilities: |                                                              |                                 |            |          |       |            |          |        |       |       |        |       
|                                                 |                                                                         | (Increase) decrease in inventories                           |                                 |            | (63.8    | )     |            |          | (37.9  | )     |       |        | 6.2    |      
|                                                 |                                                                         | Increase in accounts receivable                              |                                 |            | (5.7     | )     |            |          | (3.1   | )     |       |        | (9.3   | )    
|                                                 |                                                                         | Increase in prepaid expenses                                 |                                 |            | (9.9     | )     |            |          | (3.3   | )     |       |        | (4.6   | )    
|                                                 |                                                                         | Increase (decrease) in accounts payable                      |                                 |            | 13.8     |       |            |          | 25.2   |       |       |        | (77.3  | )    
|                                                 |                                                                         | Increase in taxes payable                                    |                                 |            | 3.4      |       |            |          | 20.2   |       |       |        | 28.9   |      
|                                                 |                                                                         | Increase (decrease) in accrued payroll and other liabilities |                                 |            | 19.3     |       |            |          | (5.2   | )     |       |        | (7.2   | )    
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|                                                 |                                                                         |                                                              | Net cash provided by operations |            |          | 224.4 |            |          |        | 238.3 |       |        |        | 201.4 | 
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|Investing                                        |                                                                         |                                                              |                                 |            |          |       |            |          |        |       |       |       
|                                                 | Capital expenditures                                                    |                                                              |                                 | (115.5     | )        |       |            | (110.9   | )      |       |       | (134.0 | )     
|                                                 | Loss on disposal of assets                                              |                                                              |                                 | 2.4        |          |       |            |         |        |       |       |       |       
|                                                 | Proceeds from sale of investments                                       |                                                              |                                 | 118.0      |          |       |            |         |        |       |       |       |       
|                                                 | Purchase of investments                                                 |                                                              |                                 | (95.4      | )        |       |            | (118.0   | )      |       |       |       |       
|                                                 | Proceeds from sale-leaseback of assets                                  |                                                              |                                 | 32.3       |          |       |            |         |        |       |       |       |       
|                                                 | Acquisition                                                             |                                                              |                                 | (31.2      | )        |       |            | (2.9     | )      |       |       |       |       
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|                                                 |                                                                         | Net cash used for investing                                  |                                 |            | (89.4    | )     |            |          | (231.8 | )     |       |        | (134.0 | )    
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|Financing                                        |                                                                         |                                                              |                                 |            |          |       |            |          |        |       |       |       
|                                                 | Net funding from long-term debt                                         |                                                              |                                 |           |          |       |            |         |        |       |       | 50.0   |       
|                                                 | Net repayment of long-term capital lease obligations                    |                                                              |                                 | (0.4       | )        |       |            | (0.3     | )      |       |       | (1.0   | )     
|                                                 | Net funding from credit facility                                        |                                                              |                                 | 7.2        |          |       |            | 1.1      |        |       |       | 15.4   |       
|                                                 | Cash dividends paid                                                     |                                                              |                                 | (25.1      | )        |       |            |         |        |       |       |       |       
|                                                 | Issuance of common stock                                                |                                                              |                                 | 44.8       |          |       |            | 27.4     |        |       |       | 18.8   |       
|                                                 | Repurchase of common stock                                              |                                                              |                                 | (177.3     | )        |       |            | (44.0    | )      |       |       | (74.8  | )     
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|                                                 |                                                                         | Net cash provided by (used for) financing                    |                                 |            | (150.8   | )     |            |          | (15.8  | )     |       |        | 8.4    |      
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|Effect of exchange rates on cash and equivalents |                                                                         |                                                              | (0.2                            | )          |          |       | 1.0        |          |        |       | 3.1   |       
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|Net increase (decrease) in cash and equivalents  |                                                                         |                                                              | (16.0                           | )          |          |       | (8.3       | )        |        |       | 78.9  |       
|Cash and equivalents at beginning of year        |                                                                         |                                                              | 260.8                           |            |          |       | 269.1      |          |        |       | 190.2 |       
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|Cash and equivalents at end of year              |                                                                         | $                                                            | 244.8                           |            |          | $     | 260.8      |          |        | $     | 269.1 |       
|                                                 |                                                                         |                                                              |                                 |            |          |       |            |          |       
|Supplemental cash flow disclosures:              |                                                                         |                                                              |                                 |            |          |       |            |          |        |       |       |       
|                                                 | Interest paid                                                           |                                                              | $                               | 8.5        |          |       | $          | 9.2      |        |       | $     | 11.0   |       
|                                                 | Income taxes paid                                                       |                                                              | $                               | 64.6       |          |       | $          | 56.3     |        |       | $     | 26.9   |       



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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(dollars in millions except share amounts)


|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |   |       |   |  |   |         |  
|----------------------------------------------------------------- |  | ------------ | ---------- | - | -------- | ----- | ------ | ------------- |  | - | ------------- | - |  | -------- | ----- | - | ----- | - | ----- | - |  | - | ------- | -
|                                                                  |  |              |            |   |          |       |        | Accumulated   |  |   |               |   | 
|                                                                  |  |              |            |   |          | Other |        |               |  |   |              
|                                                                  |  | Common Stock |            |   | Deferred |       |        | Comprehensive |  |   | Retained      |   |  |         
|                                                                  |  | Shares       |            |   | Amount   |       |        | Compensation  |  |   | Income (Loss) |   |  | Earnings |       |   | Total |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Balance at January 27, 2002 (restated)                            |  |              | 81,202,967 |   |          | $     | 707.9  |               |  | $ | (0.2          | ) |  | $        | (15.1 | ) |       | $ | 215.6 |   |  | $ | 908.2   |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Net income                                                        |  |              |           |   |          |       |       |               |  |   |              |   |  |          |      |   |       |   | 107.6 |   |  |   | 107.6   |  
|Foreign currency translation adjustments                          |  |              |           |   |          |       |       |               |  |   |              |   |  |          | 16.9  |   |       |   |      |   |  |   | 16.9    |  
|Change in fair value of derivatives, net of tax provision of $1.4 |  |              |           |   |          |       |       |               |  |   |              |   |  |          | 2.2   |   |       |   |      |   |  |   | 2.2     |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Comprehensive income                                              |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |   |       |   |  |   | 126.7   |  
|Issuance of common stock                                          |  |              | 1,515,955  |   |          |       | 18.8   |               |  |   |              |   |  |          |      |   |       |   |      |   |  |   | 18.8    |  
|Repurchase and retirement of common stock                         |  |              | (3,987,000 | ) |          |       | (74.8  | )             |  |   |              |   |  |          |      |   |       |   |      |   |  |   | (74.8   | )
|Tax benefit of equity compensation                                |  |              |           |   |          |       | 5.1    |               |  |   |              |   |  |          |      |   |       |   |      |   |  |   | 5.1     |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Balance at January 26, 2003 (restated)                            |  |              | 78,731,922 |   |          | $     | 657.0  |               |  | $ | (0.2          | ) |  | $        | 4.0   |   |       | $ | 323.2 |   |  | $ | 984.0   |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Net income                                                        |  |              |           |   |          |       |       |               |  |   |              |   |  |          |      |   |       |   | 115.2 |   |  |   | 115.2   |  
|Foreign currency translation adjustments                          |  |              |           |   |          |       |       |               |  |   |              |   |  |          | 18.0  |   |       |   |      |   |  |   | 18.0    |  
|Change in fair value of derivatives, net of tax provision of $0.4 |  |              |           |   |          |       |       |               |  |   |              |   |  |          | 0.7   |   |       |   |      |   |  |   | 0.7     |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Comprehensive income                                              |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |   |       |   |  |   | 133.9   |  
|Cash dividends declared ($0.08 per common share)                  |  |              |           |   |          |       |       |               |  |   |              |   |  |          |      |   |       |   | (6.2  | ) |  |   | (6.2    | )
|Issuance of common stock                                          |  |              | 2,094,005  |   |          |       | 27.4   |               |  |   |              |   |  |          |      |   |       |   |      |   |  |   | 27.4    |  
|Repurchase and retirement of common stock                         |  |              | (2,552,586 | ) |          |       | (44.0  | )             |  |   |              |   |  |          |      |   |       |   |      |   |  |   | (44.0   | )
|Tax benefit of equity compensation                                |  |              |           |   |          |       | 5.9    |               |  |   |              |   |  |          |      |   |       |   |      |   |  |   | 5.9     |  
|Change in deferred compensation                                   |  |              |           |   |          |       |       |               |  |   | (0.4          | ) |  |          |      |   |       |   |      |   |  |   | (0.4    | )
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Balance at January 25, 2004 (restated)                            |  |              | 78,273,341 |   |          | $     | 646.3  |               |  | $ | (0.6          | ) |  | $        | 22.7  |   |       | $ | 432.2 |   |  | $ | 1,100.6 |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Net income                                                        |  |              |           |   |          |       |       |               |  |   |              |   |  |          |      |   |       |   | 131.9 |   |  |   | 131.9   |  
|Foreign currency translation adjustments                          |  |              |           |   |          |       |       |               |  |   |              |   |  |          | 2.3   |   |       |   |      |   |  |   | 2.3     |  
|Change in fair value of derivatives, net of tax provision of $0.2 |  |              |           |   |          |       |       |               |  |   |              |   |  |          | 0.3   |   |       |   |      |   |  |   | 0.3     |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Comprehensive income                                              |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |   |       |   |  |   | 134.5   |  
|Cash dividends declared ($0.08 and $0.09 per common share)        |  |              |           |   |          |       |       |               |  |   |              |   |  |          |      |   |       |   | (25.1 | ) |  |   | (25.1   | )
|Issuance of common stock                                          |  |              | 3,222,058  |   |          |       | 44.8   |               |  |   |              |   |  |          |      |   |       |   |      |   |  |   | 44.8    |  
|Repurchase and retirement of common stock                         |  |              | (7,619,772 | ) |          |       | (177.3 | )             |  |   |              |   |  |          |      |   |       |   |      |   |  |   | (177.3  | )
|Tax benefit of equity compensation                                |  |              |           |   |          |       | 11.3   |               |  |   |              |   |  |          |      |   |       |   |      |   |  |   | 11.3    |  
|Change in deferred compensation                                   |  |              |           |   |          |       |       |               |  |   | 0.1           |   |  |          |      |   |       |   |      |   |  |   | 0.1     |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  
|Balance at January 23, 2005                                       |  |              | 73,875,627 |   |          | $     | 525.1  |               |  | $ | (0.5          | ) |  | $        | 25.3  |   |       | $ | 539.0 |   |  | $ | 1,088.9 |  
|                                                                  |  |              |            |   |          |       |        |               |  |   |               |   |  |          |       |   |       |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(dollars in millions except per share data)




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

Nature of Business: Borders
Group, Inc., through its subsidiaries, Borders, Inc.
(Borders), Walden Book Company, Inc.
(Waldenbooks), Borders (UK) Limited,
Borders Australia Pty Limited and others (individually and
collectively, the Company), is the second largest
operator of book, music and movie superstores and the largest
operator of mall-based bookstores in the world based upon both
sales and number of stores. At January 23, 2005, the
Company operated 504 superstores under the Borders name,
including 462 in the United States, 26 in the United
Kingdom, 11 in Australia, three in Puerto Rico, and one
each in Singapore and New Zealand. The Company also operated
705 mall-based and other bookstores primarily under the
Waldenbooks name in the United States and 35 bookstores
under the Books etc. name in the United Kingdom. In addition,
the Company owns and operates United Kingdom-based Paperchase
Products Limited (Paperchase), a designer and
retailer of stationery, cards and gifts, with 72 locations,
including 28 located inside Borders International
superstores.


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


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


Fiscal Year: The
Companys fiscal years have ended on the Sunday immediately
preceding the last Wednesday in January. Fiscal 2004 consisted
of 52 weeks and ended January 23, 2005. Fiscal 2003
consisted of 52 weeks and ended January 25, 2004.
Fiscal 2002 consisted of 52 weeks and ended
January 26, 2003. References herein to years are to the
Companys fiscal years.




Foreign Currency and Translation of Foreign
Subsidiaries: The functional
currencies of the Companys foreign operations are the
respective local currencies. All assets and liabilities of the
Companys foreign operations are translated into
U.S. dollars at fiscal period-end exchange rates. Income
and expense items are translated at average exchange rates
prevailing during the year. The resulting translation
adjustments are recorded as a component of stockholders
equity and other comprehensive income. Foreign currency
transaction gains/ (losses) were $(0.2), $(0.4), and $0.1 in
2004, 2003, and 2002, respectively.


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


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




Inventories: Merchandise
inventories are valued on a first-in, first-out
(FIFO) basis at the lower of cost or market using
the retail inventory method. The Company includes certain
distribution and other expenses in its inventory costs, totaling
$91.4 and $86.9 as of January 23, 2005, and
January 25, 2004, respectively.


45



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


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 shorter of their estimated useful lives or the initial
term of the related lease, generally over three to
20 years. Other annual rates used in computing depreciation
for financial statement purposes approximate 3% for buildings
and 10% to 33% for other fixtures and equipment. Amortization of
assets under capital leases is included in depreciation expense.




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


Leases: All leases are
reviewed for capital or operating classification at their
inception under the guidance of Statement of Financial
Accounting Standards No. 13, Accounting for
Leases (FAS 13), as amended. The Company
uses its incremental borrowing rate in the assessment of lease
classification, and defines initial lease term to include the
construction build-out period, but to exclude lease extension
period(s). The Company conducts operations primarily under
operating leases. For leases that contain rent escalations, the
Company records the total rent payable during the lease term, as
defined above, on a straight-line basis over the term of the
lease and records the difference between the rents paid and the
straight-line rent as a deferred rent liability, under
Other long-term liabilities on the Companys
consolidated balance sheets, totaling $144.9 and $134.3 as of
January 23, 2005 and January 25, 2004, respectively.


Landlord Allowances: The
Company classifies landlord allowances as deferred rent
liabilities, under Other long-term liabilities on
the Companys consolidated balance sheets, totaling $116.3
and $113.1 as of January 23, 2005 and January 25,
2004, respectively, in accordance with the provisions of FASB
Technical Bulletin No. 88-1, Issues Relating to
Accounting for Leases (FTB 88-1), and as an
operating activity on the Companys consolidated statements
of cash flows. Also in accordance with the provisions of
FTB 88-1, the Company classifies the amortization of
landlord allowances as a reduction of occupancy expense,
included as a component of Cost of merchandise sold
(includes occupancy) in the Companys consolidated
statements of operations.


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




46



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


Accumulated Other Comprehensive Income
(Loss): Accumulated other
comprehensive income (loss) for the Company includes fair value
changes of derivatives (net of tax) and exchange rate
fluctuations. Disclosure of comprehensive income (loss) is
incorporated into the consolidated statements of
stockholders equity for all years presented. Accumulated
other comprehensive income (loss) includes $0.1 and $(0.2) for
derivatives and $25.2 and $22.9 for exchange rate fluctuations
as of January 23, 2005 and January 25, 2004,
respectively.


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






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


Closing Costs: Pursuant to
the provisions of Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities (FAS 146), which the
Company adopted effective January 1, 2003, the Company
expenses when incurred all amounts related to the discontinuance
of operations of stores identified for closure subsequent to
December 31, 2002.




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


Gift Certificates: The
Company sells gift certificates to its customers and records a
liability for the face value of all certificates issued and
unredeemed within the last 12 months. For certificates
older than 12 months, the Company records a liability for a
portion of the certificates face value based upon
historical redemption trends. The Company has included the
liability for gift certificates as a component of Accrued
payroll and other liabilities on its consolidated balance
sheets, totaling $140.5 and $129.3 as of January 23, 2005
and January 25, 2004, respectively.


Advertising Costs: The
Company expenses advertising costs as incurred, and recorded
approximately $44.7, $35.9 and $36.1 of gross advertising
expenses in 2004, 2003 and 2002, respectively.


47



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)










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




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


|                                                                                                                          |                       |      |       |            |      |   |            |      |  |   |       |      | 
|------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ----- | ---------- | ---- | - | ---------- | ---- |  | - | ----- | ---- | 
|                                                                                                                          |                       | 2004 |       |            | 2003 |   |            | 2002 | 
|                                                                                                                          |                       |      |       |            |      |   |            |      | 
|                                                                                                                          |                       |      |       | (restated) |      |   | (restated) |     
|Net income, as reported                                                                                                   |                       | $    | 131.9 |            |      | $ | 115.2      |      |  | $ | 107.6 |     
|Add: Stock-based employee expense included in reported net
    income, net of related tax effects                         |                       |      | 0.7   |            |      |   | 0.1        |      |  |   | 0.1   |     
|Deduct: Total stock-based employee compensation expense
    determined under fair value method for all awards, net of tax |                       |      | 4.1   |            |      |   | 7.4        |      |  |   | 11.5  |     
|                                                                                                                          |                       |      |       |            |      |   |            |      | 
|Pro forma net income                                                                                                      |                       | $    | 128.5 |            |      | $ | 107.9      |      |  | $ | 96.2  |     
|                                                                                                                          |                       |      |       |            |      |   |            |      | 
|Earnings per share:                                                                                                       |                       |      |       |            |      |   |            |      |  |   |       |     
|                                                                                                                          | Diluted  as reported |      | $     | 1.69       |      |   | $          | 1.46 |  |   | $     | 1.31 | 
|                                                                                                                          | Diluted  pro forma   |      | $     | 1.65       |      |   | $          | 1.36 |  |   | $     | 1.17 | 
|                                                                                                                          | Basic  as reported   |      | $     | 1.72       |      |   | $          | 1.48 |  |   | $     | 1.34 | 
|                                                                                                                          | Basic  pro forma     |      | $     | 1.68       |      |   | $          | 1.39 |  |   | $     | 1.20 | 



48



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


New Accounting Guidance: In
December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment (FAS 123(R)), which is a revision
of FAS 123. FAS 123(R) supersedes APB No. 25, and
amends FAS No. 95, Statement of Cash
Flows. Generally, the approach in FAS 123(R) is
similar to the approach described in FAS 123. However,
FAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the income statement based on their fair values. The Company
expects to adopt FAS 123(R) in the third quarter of 2005
using the modified-prospective method in which compensation cost
is recognized beginning with the adoption date based on
(a) the requirements of FAS 123(R) for all share-based
payments granted after the effective date and (b) based on
the requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date. As of
January 23, 2005, there were 2.0 million stock option
awards granted to employees that remain unvested.






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




|         |                                               
|-------- | ----------------------------------------------
|NOTE 2  | RESTATEMENT OF PRIOR YEAR FINANCIAL STATEMENTS







49



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)






|                                     |                                               |                                                                   |                                                      |         |             |      |   |             |       |       |   |         |         |      | 
|------------------------------------ | --------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------------------- | ------- | ----------- | ---- | - | ----------- | ----- | ----- | - | ------- | ------- | ---- | 
|                                     |                                               | Jan. 25, 2004                                                     |                                                     
|                                     |                                               | As Previously                                                     |                                                      |         |            
|                                     |                                               | Reported                                                          |                                                      |         | Adjustments |      |   | As Restated |      
|                                     |                                               |                                                                   |                                                      |         |             |      |   |             |      
|Consolidated Statement of Operations |                                               |                                                                   |                                                      |         |             |      |   |             |       |       |   |        
|                                     | Cost of merchandise sold (includes occupancy) |                                                                   | $                                                    | 2,683.4 |             |      | $ | 5.6         |       |       | $ | 2,689.0 |        
|                                     |                                               | Gross margin                                                      |                                                      |         | 1,047.6     |      |   |             | (5.6  | )     |   |         | 1,042.0 |     
|                                     | Selling, general and administrative expenses  |                                                                   |                                                      | 820.0   |             |      |   | 1.4         |       |       |   | 821.4   |        
|                                     | Asset impairments and other writedowns        |                                                                   |                                                      | 11.5    |             |      |   | 0.5         |       |       |   | 12.0    |        
|                                     |                                               | Operating income                                                  |                                                      |         | 205.6       |      |   |             | (7.5  | )     |   |         | 198.1   |     
|                                     |                                               | Income before income tax                                          |                                                      |         | 196.9       |      |   |             | (7.5  | )     |   |         | 189.4   |     
|                                     | Income tax provision                          |                                                                   |                                                      | 74.8    |             |      |   | (2.7        | )     |       |   | 72.1    |        
|                                     |                                               | Income before cumulative effect of accounting change              |                                                      |         | 122.1       |      |   |             | (4.8  | )     |   |         | 117.3   |     
|                                     |                                               | Net income                                                        |                                                      | $       | 120.0       |      |   | $           | (4.8  | )     |   | $       | 115.2   |     
|                                     | Earnings (loss) per common share data:        |                                                                   |                                                      |         |             |      |   |             |       |       |   |         |        
|                                     |                                               | Diluted:                                                          |                                                      |         |             |      |   |             |       |       |   |         |         |     
|                                     |                                               |                                                                   | Income before cumulative effect of accounting change |         | $           | 1.54 |   |             | $     | (0.06 | ) |         | $       | 1.48 | 
|                                     |                                               |                                                                   | Net income                                           |         | $           | 1.52 |   |             | $     | (0.06 | ) |         | $       | 1.46 | 
|                                     |                                               | Basic:                                                            |                                                      |         |             |      |   |             |       |       |   |         |         |     
|                                     |                                               |                                                                   | Income before cumulative effect of accounting change |         | $           | 1.57 |   |             | $     | (0.06 | ) |         | $       | 1.51 | 
|                                     |                                               |                                                                   | Net income                                           |         | $           | 1.54 |   |             | $     | (0.06 | ) |         | $       | 1.48 | 
|Consolidated Balance Sheet           |                                               |                                                                   |                                                      |         |             |      |   |             |       |       |   |        
|                                     | Property and equipment, net                   |                                                                   | $                                                    | 577.7   |             |      | $ | 94.1        |       |       | $ | 671.8   |        
|                                     | Deferred income taxes                         |                                                                   |                                                      | 1.3     |             |      |   | 24.3        |       |       |   | 25.6    |        
|                                     |                                               | Total assets                                                      |                                                      |         | 2,466.2     |      |   |             | 118.4 |       |   |         | 2,584.6 |     
|                                     | Taxes, including income taxes                 |                                                                   |                                                      | 133.1   |             |      |   | (7.4        | )     |       |   | 125.7   |        
|                                     |                                               | Total current liabilities                                         |                                                      |         | 1,164.1     |      |   |             | (7.4  | )     |   |         | 1,156.7 |     
|                                     | Other long-term liabilities                   |                                                                   |                                                      | 90.2    |             |      |   | 178.2       |       |       |   | 268.4   |        
|                                     |                                               | Total liabilities                                                 |                                                      |         | 1,311.5     |      |   |             | 170.8 |       |   |         | 1,482.3 |     
|                                     |                                               | Total liabilities and minority interest                           |                                                      |         | 1,313.2     |      |   |             | 170.8 |       |   |         | 1,484.0 |     
|                                     | Accumulated other comprehensive income        |                                                                   |                                                      | 24.1    |             |      |   | (1.4        | )     |       |   | 22.7    |        
|                                     | Retained earnings                             |                                                                   |                                                      | 483.2   |             |      |   | (51.0       | )     |       |   | 432.2   |        
|                                     |                                               | Total stockholders equity                                        |                                                      |         | 1,153.0     |      |   |             | (52.4 | )     |   |         | 1,100.6 |     
|                                     |                                               | Total liabilities, minority interest and stockholders
    equity |                                                      | $       | 2,466.2     |      |   | $           | 118.4 |       |   | $       | 2,584.6 |     

50



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


|                                     |                                                  |               |   |        |             |  |   |             |   |  |   |        |  
|------------------------------------ | ------------------------------------------------ | ------------- | - | ------ | ----------- |  | - | ----------- | - |  | - | ------ | -
|                                     |                                                  | Jan. 25, 2004 |  
|                                     |                                                  | As Previously |   |        |            
|                                     |                                                  | Reported      |   |        | Adjustments |  |   | As Restated |  
|                                     |                                                  |               |   |        |             |  |   |             |  
|Consolidated Statement of Cash Flows |                                                  |               |   |        |             |  |   |             |   |  |   |       
|                                     | Net cash provided by operations                  |               | $ | 228.1  |             |  | $ | 10.2        |   |  | $ | 238.3  |  
|                                     | Net cash used for
    investing(1)               |               |   | (103.4 | )           |  |   | (128.4      | ) |  |   | (231.8 | )
|                                     | Effect of exchange rates on cash and equivalents |               |   | 0.8    |             |  |   | 0.2         |   |  |   | 1.0    |  

|                                     |                                                  |                          |                                                      |         |             |      |   |             |      |       |   |         |       |      | 
|------------------------------------ | ------------------------------------------------ | ------------------------ | ---------------------------------------------------- | ------- | ----------- | ---- | - | ----------- | ---- | ----- | - | ------- | ----- | ---- | 
|                                     |                                                  | Jan. 26, 2003            |                                                     
|                                     |                                                  | As Previously            |                                                      |         |            
|                                     |                                                  | Reported                 |                                                      |         | Adjustments |      |   | As Restated |     
|                                     |                                                  |                          |                                                      |         |             |      |   |             |     
|Consolidated Statement of Operations |                                                  |                          |                                                      |         |             |      |   |             |      |       |   |        
|                                     | Cost of merchandise sold (includes occupancy)    |                          | $                                                    | 2,513.1 |             |      | $ | 5.5         |      |       | $ | 2,518.6 |      
|                                     |                                                  | Gross margin             |                                                      |         | 1,001.6     |      |   |             | (5.5 | )     |   |         | 996.1 |     
|                                     | Selling, general and administrative expenses     |                          |                                                      | 785.9   |             |      |   | 0.4         |      |       |   | 786.3   |      
|                                     | Asset impairments and other writedowns           |                          |                                                      | 14.9    |             |      |   | 0.4         |      |       |   | 15.3    |      
|                                     |                                                  | Operating income         |                                                      |         | 193.9       |      |   |             | (6.3 | )     |   |         | 187.6 |     
|                                     |                                                  | Income before income tax |                                                      |         | 181.3       |      |   |             | (6.3 | )     |   |         | 175.0 |     
|                                     | Income tax provision                             |                          |                                                      | 69.6    |             |      |   | (2.2        | )    |       |   | 67.4    |      
|                                     |                                                  | Net income               |                                                      | $       | 111.7       |      |   | $           | (4.1 | )     |   | $       | 107.6 |     
|                                     | Earnings (loss) per common share data:           |                          |                                                      |         |             |      |   |             |      |       |   |         |      
|                                     |                                                  | Diluted:                 |                                                      |         |             |      |   |             |      |       |   |         |       |     
|                                     |                                                  |                          | Income before cumulative effect of accounting change |         | $           | 1.36 |   |             | $    | (0.05 | ) |         | $     | 1.31 | 
|                                     |                                                  |                          | Net income                                           |         | $           | 1.36 |   |             | $    | (0.05 | ) |         | $     | 1.31 | 
|                                     |                                                  | Basic:                   |                                                      |         |             |      |   |             |      |       |   |         |       |     
|                                     |                                                  |                          | Income before cumulative effect of accounting change |         | $           | 1.39 |   |             | $    | (0.05 | ) |         | $     | 1.34 | 
|                                     |                                                  |                          | Net income                                           |         | $           | 1.39 |   |             | $    | (0.05 | ) |         | $     | 1.34 | 
|Consolidated Statement of Cash Flows |                                                  |                          |                                                      |         |             |      |   |             |      |       |   |        
|                                     | Net cash provided by operations                  |                          | $                                                    | 189.2   |             |      | $ | 12.2        |      |       | $ | 201.4   |      
|                                     | Net cash used for investing                      |                          |                                                      | (121.5  | )           |      |   | (12.5       | )    |       |   | (134.0  | )    
|                                     | Effect of exchange rates on cash and equivalents |                          |                                                      | 2.8     |             |      |   | 0.3         |      |       |   | 3.1     |      



|    |                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The change in net cash used for investing includes a
    reclassification of $118.0 of auction rate securities, unrelated
    to the Restatement and further discussed in
    Note 1  Summary of Significant Accounting
    Policies.

NOTE 3  WEIGHTED-AVERAGE SHARES
OUTSTANDING




|                                                     |  |      |        |  |      |  |        |      |  |  |        | 
|---------------------------------------------------- |  | ---- | ------ |  | ---- |  | ------ | ---- |  |  | ------ | 
|                                                     |  | 2004 |        |  | 2003 |  |        | 2002 | 
|                                                     |  |      |        |  |      |  |        |      | 
|Weighted-average common shares outstanding  basic   |  |      | 76,553 |  |      |  | 77,905 |      |  |  | 80,280 | 
|Dilutive effect of employee stock options            |  |      | 1,387  |  |      |  | 1,206  |      |  |  | 1,753  | 
|                                                     |  |      |        |  |      |  |        |      | 
|Weighted-average common shares outstanding  diluted |  |      | 77,940 |  |      |  | 79,111 |      |  |  | 82,033 | 
|                                                     |  |      |        |  |      |  |        |      | 

51



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)






|         |                                       
|-------- | --------------------------------------
|NOTE 4  | ASSET IMPAIRMENTS AND OTHER WRITEDOWNS

Asset Impairments: In
accordance with the provisions of FAS 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the
Company evaluates the carrying values of long-lived assets
whenever changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. In the fourth quarter of
2004, the Company recorded a charge of $6.2 related to the
impairment of certain long-lived assets (primarily leasehold
improvements, furniture, and fixtures), consisting of the
following: $4.5 related to underperforming domestic Borders
superstores, $0.4 related to underperforming Waldenbooks stores
and $1.3 related to underperforming Books etc. stores.








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








52



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)








|                                    |                         |   |     |      |  
|----------------------------------- | ----------------------- | - | --- | ---- | -
|Reserve balance at January 27, 2002 |                         | $ | 3.4 |     
|                                    |                         |   |    
|                                    | 2002 Charge             |   |     | 2.8  |  
|                                    | 2002 Reserve adjustment |   |     | (0.6 | )
|                                    | 2002 Cash payments      |   |     | (3.0 | )
|                                    |                         |   |    
|Reserve balance at January 26, 2003 |                         | $ | 2.6 |     
|                                    |                         |   |    
|                                    | 2003 Charge             |   |     | 2.3  |  
|                                    | 2003 Reserve adjustment |   |     | (0.9 | )
|                                    | 2003 Cash payments      |   |     | (2.9 | )
|                                    |                         |   |    
|Reserve balance at January 25, 2004 |                         | $ | 1.1 |     
|                                    |                         |   |    
|                                    | 2004 Charge             |   |     | 2.4  |  
|                                    | 2004 Reserve adjustment |   |     | (0.2 | )
|                                    | 2004 Cash payments      |   |     | (2.7 | )
|                                    |                         |   |    
|Reserve balance at January 23, 2005 |                         | $ | 0.6 |     
|                                    |                         |   |    



|               |  |      |      |   |      |   |      |      |  |   |      |  
|-------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|               |  | 2004 |      |   | 2003 |   |      | 2002 | 
|               |  |      |      |   |      |   |      |      | 
|Sales          |  | $    | 19.2 |   |      | $ | 30.3 |      |  | $ | 22.8 |  
|Operating loss |  |      | (0.6 | ) |      |   | (0.9 | )    |  |   | (0.1 | )







53



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




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











|         |                 
|-------- | ----------------
|NOTE 6  | LEGAL SETTLEMENT





|         |                           
|-------- | --------------------------
|NOTE 7  | SALE-LEASEBACK TRANSACTION





NOTE 8  ACQUISITION OF PAPERCHASE PRODUCTS,
LTD.




54



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|         |                                          
|-------- | -----------------------------------------
|NOTE 9  | SEATTLES BEST COFFEE LICENSING AGREEMENT





|          |                       
|--------- | ----------------------
|NOTE 10  | PROPERTY AND EQUIPMENT



|                                                 |                          |      |         |            |      |   |         |       | 
|------------------------------------------------ | ------------------------ | ---- | ------- | ---------- | ---- | - | ------- | ----- | 
|                                                 |                          | 2004 |         |            | 2003 |  
|                                                 |                          |      |         |            |      |  
|                                                 |                          |      |         | (restated) |     
|Property and equipment                           |                          |      |         |            |      |   |         |      
|                                                 | Land                     |      | $       | 0.2        |      |   | $       | 11.8  | 
|                                                 | Buildings                |      |         | 6.7        |      |   |         | 26.9  | 
|                                                 | Leasehold improvements   |      |         | 600.6      |      |   |         | 580.4 | 
|                                                 | Furniture and fixtures   |      |         | 914.7      |      |   |         | 848.5 | 
|                                                 | Construction in progress |      |         | 25.6       |      |   |         | 24.4  | 
|                                                 |                          |      |         |            |      |  
|                                                 |                          |      | 1,547.8 |            |      |   | 1,492.0 |      
|Less  accumulated depreciation and amortization |                          |      | (912.2  | )          |      |   | (820.2  | )    
|                                                 |                          |      |         |            |      |  
|Property and equipment, net                      |                          | $    | 635.6   |            |      | $ | 671.8   |      
|                                                 |                          |      |         |            |      |  



|          |             
|--------- | ------------
|NOTE 11  | INCOME TAXES



|                           |                 |      |      |            |      |   |            |      |   |   |      |      |  
|-------------------------- | --------------- | ---- | ---- | ---------- | ---- | - | ---------- | ---- | - | - | ---- | ---- | -
|                           |                 | 2004 |      |            | 2003 |   |            | 2002 |  
|                           |                 |      |      |            |      |   |            |      |  
|                           |                 |      |      | (restated) |      |   | (restated) |     
|Current                    |                 |      |      |            |      |   |            |      |   |   |      |     
|                           | Federal         |      | $    | 52.6       |      |   | $          | 61.6 |   |   | $    | 45.2 |  
|                           | State and local |      |      | 10.7       |      |   |            | 9.1  |   |   |      | 8.0  |  
|                           | Foreign         |      |      | 1.1        |      |   |            | 0.4  |   |   |      |     |  
|Deferred                   |                 |      |      |            |      |   |            |      |   |   |      |     
|                           | Federal         |      |      | 8.0        |      |   |            | (2.1 | ) |   |      | 15.4 |  
|                           | State and local |      |      | 0.7        |      |   |            |     |   |   |      | (0.1 | )
|                           | Foreign         |      |      | 2.6        |      |   |            | 3.1  |   |   |      | (1.1 | )
|                           |                 |      |      |            |      |   |            |      |  
|Total income tax provision |                 | $    | 75.7 |            |      | $ | 72.1       |      |   | $ | 67.4 |     
|                           |                 |      |      |            |      |   |            |      |  

55



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                                                  |  |      |      |            |      |   |            |      |  |   |      | 
|------------------------------------------------- |  | ---- | ---- | ---------- | ---- | - | ---------- | ---- |  | - | ---- | 
|                                                  |  | 2004 |      |            | 2003 |   |            | 2002 | 
|                                                  |  |      |      |            |      |   |            |      | 
|                                                  |  |      |      | (restated) |      |   | (restated) |     
|Federal statutory rate                            |  | $    | 72.7 |            |      | $ | 66.3       |      |  | $ | 61.2 | 
|State and local taxes, net of federal tax benefit |  |      | 7.4  |            |      |   | 5.9        |      |  |   | 5.1  | 
|Impact of foreign operations                      |  |      | (2.8 | )          |      |   | (1.3       | )    |  |   |     | 
|Other                                             |  |      | (1.6 | )          |      |   | 1.2        |      |  |   | 1.1  | 
|                                                  |  |      |      |            |      |   |            |      | 
|Total income tax provision                        |  | $    | 75.7 |            |      | $ | 72.1       |      |  | $ | 67.4 | 
|                                                  |  |      |      |            |      |   |            |      | 



|                                      |                                        |      |      |            |      |   |      |       |  
|------------------------------------- | -------------------------------------- | ---- | ---- | ---------- | ---- | - | ---- | ----- | -
|                                      |                                        | 2004 |      |            | 2003 |  
|                                      |                                        |      |      |            |      |  
|                                      |                                        |      |      | (restated) |     
|Deferred tax assets                   |                                        |      |      |            |      |   |      |      
|                                      | Accruals and other current liabilities |      | $    | 2.7        |      |   | $    | 4.3   |  
|                                      | Deferred revenue                       |      |      | 0.6        |      |   |      | 4.6   |  
|                                      | Other long-term liabilities            |      |      | 3.1        |      |   |      | 1.4   |  
|                                      | Deferred compensation                  |      |      | 2.2        |      |   |      | 2.3   |  
|                                      | Deferred rent                          |      |      | 73.4       |      |   |      | 73.2  |  
|                                      | Foreign deferred tax assets            |      |      | 22.6       |      |   |      | 17.4  |  
|                                      | Asset impairments and other writedowns |      |      | 10.2       |      |   |      | 13.9  |  
|                                      | Valuation allowance                    |      |      | (8.5       | )    |   |      | (7.3  | )
|                                      |                                        |      |      |            |      |  
|                                      | Total deferred tax assets              |      |      | 106.3      |      |   |      | 109.8 |  
|                                      |                                        |      |      |            |      |  
|Deferred tax liabilities              |                                        |      |      |            |      |   |      |      
|                                      | Inventory                              |      |      | 17.6       |      |   |      | 18.3  |  
|                                      | Property and equipment                 |      |      | 74.6       |      |   |      | 72.6  |  
|                                      | Net state deferred tax liability       |      |      | 0.4        |      |   |      | (1.0  | )
|                                      | Foreign deferred tax liabilities       |      |      | 14.3       |      |   |      | 6.4   |  
|                                      |                                        |      |      |            |      |  
|                                      | Total deferred tax liabilities         |      |      | 106.9      |      |   |      | 96.3  |  
|                                      |                                        |      |      |            |      |  
|Net deferred tax assets (liabilities) |                                        | $    | (0.6 | )          |      | $ | 13.5 |      
|                                      |                                        |      |      |            |      |  







56



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|          |                              
|--------- | -----------------------------
|NOTE 12  | COMMITMENTS AND CONTINGENCIES

Litigation: On
October 29, 2002, Gary Gerlinger, individually and on
behalf of all other similarly situated consumers in the United
States who, during the period from August 1, 2001 to the
present, purchased books online from either Amazon.com, Inc.
(Amazon) or the Company, instituted an action
against the Company and Amazon in the United States District
Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of
Amazon operates Borders.com as a co-branded site (the
Mirror Site) violates federal anti-trust laws,
California statutory law and the common law of unjust
enrichment. The Complaint seeks injunctive relief, damages,
including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all
sums obtained by allegedly wrongful acts, interest and
declaratory relief. The Company has filed an answer denying any
liability and also has filed a motion for summary judgment. The
Court has issued an order granting the motion as to certain of
plaintiffs claims, denying it as to others and requesting
additional briefing on certain issues. The order also denied
certain cross-motions filed by the plaintiff. The Company
intends to vigorously defend the action. The Company has not
included any liability in its consolidated financial statements
in connection with this matter and has expensed as incurred all
legal costs to date. Although an adverse resolution of this
matter could have a material adverse effect on the result of the
operations of the Company for the applicable period or periods,
the Company does not believe that this matter will have a
material effect on its liquidity or financial position.










|          |     
|--------- | ----
|NOTE 13  | DEBT

Credit Facility: The
Company has a Multicurrency Revolving Credit Agreement (the
Credit Agreement), which was amended in July 2004
and will expire in July 2009. The Credit Agreement provides for
borrowings of up to $500.0 (which may be increased to $700.0
under certain circumstances) secured by eligible inventory and
accounts receivable and related assets. Borrowings under the
Credit Agreement are limited to a specified percentage of
eligible inventories and accounts receivable and bear interest
at a variable base rate plus an increment or LIBOR plus an
increment at the Companys option. The Credit Agreement
(i) includes a fixed charge coverage ratio requirement of
1.1 to 1 that is applicable only if outstanding borrowings under
the facility exceed 90% of permitted borrowings thereunder,
(ii) contains covenants that limit, among other things, the
Companys ability to incur indebtedness, grant liens, make
investments, consolidate or merge or dispose of assets,
(iii) prohibits dividend payments and share repurchases
that would result in borrowings under the facility exceeding 90%
of permitted borrowings thereunder, and (iv) contains


57



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




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


Debt of Consolidated VIEs: The Company includes the debt of two variable interest entities
(VIEs), consolidated pursuant to Financial
Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), in its consolidated balance sheets.
Scheduled principal payments of this debt as of January 23,
2005 total $0.1 in 2005, $0.2 in 2006, $0.2 in 2007, $0.2 in
2008, $0.2 in 2009, $4.8 in all later years, and in the
aggregate, total $5.7. See Note 14 
Leases for further discussion of the Companys
consolidation of these VIEs.






|          |       
|--------- | ------
|NOTE 14  | LEASES

Operating Leases: The
Company conducts operations primarily in leased facilities.
Store leases are generally for terms of three to 20 years.
Borders leases generally contain multiple three- to
five-year renewal options which allow Borders the option to
extend the life of the leases up to 25 years beyond the
initial noncancellable term. Waldenbooks 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 23, 2005 total $344.7 in 2005, $331.9 in 2006,
$324.6 in 2007, $308.9 in 2008, $293.5 in 2009, $2,229.5 in all
later years, and in the aggregate, total $3,833.1.


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


|                   |       |      |       |       |      |   |       |       |  |   |       |       | 
|------------------ | ----- | ---- | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                   |       | 2004 |       |       | 2003 |   |       | 2002  | 
|                   |       |      |       |       |      |   |       |       | 
|Minimum rentals    |       | $    | 370.2 |       |      | $ | 352.6 |       |  | $ | 322.1 |      
|Percentage rentals |       |      | 8.0   |       |      |   | 2.0   |       |  |   | 1.6   |      
|                   |       |      |       |       |      |   |       |       | 
|                   | Total |      | $     | 378.2 |      |   | $     | 354.6 |  |   | $     | 323.7 | 
|                   |       |      |       |       |      |   |       |       | 

Capitalized Leases: The
Company accounts for certain items under capital leases.
Scheduled principal payments of capitalized leases as of
January 23, 2005 total $0.1, due in 2005.


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


58



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




Consolidated VIEs:








Mortgage Notes: 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 2001, the Company was obligated
to purchase the notes for $33.5, due to Kmart Corporations
(the former guarantor of the leases) failure to maintain
investment grade credit ratings. As a result, the Company has
categorized this prepaid rent amount as part of Other
assets in the consolidated balance sheets and is
amortizing the balance over each propertys remaining lease
term. The remaining balance at January 23, 2005 was
approximately $26.8.




|          |                       
|--------- | ----------------------
|NOTE 15  | EMPLOYEE BENEFIT PLANS

Employee Savings Plan: Employees of the Company who meet certain requirements as to age
and service are eligible to participate in the Companys
Savings Plan. The Companys expense related to this plan
was $4.7, $4.3, and $4.2 for 2004, 2003 and 2002, respectively.




|          |                          
|--------- | -------------------------
|NOTE 16  | STOCK-BASED BENEFIT PLANS

2004 Long-Term Incentive
Plan: The Company maintains
the 2004 Long-Term Incentive Plan (the 2004 Plan),
pursuant to which the Company may grant stock-based awards to
employees and non-employee directors of the Company, including
restricted shares and share units of its common stock and
options to purchase its common stock. The 2004 Plan was approved
by shareholders in May 2004, and replaced all prior stock-based
benefit plans. At January 23, 2005, the Company has
3.0 million shares authorized for the grant of stock-based
awards under the 2004 Plan (plus any shares forfeited or
cancelled under the 2004 Plan or any prior plan).






59



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)










Employee Stock Purchase
Plan: The Company also
maintains an employee stock purchase plan (the Employee
Plan), which allows the Companys associates not
eligible under the 2004 Plan to purchase shares of the
Companys common stock at a 15% discount from their fair
market value. At January 23, 2005, the Company has
0.6 million shares authorized for issuance under the
Employee Plan.






|                                |                  |           |        |           |                |   |       |       | 
|------------------------------- | ---------------- | --------- | ------ | --------- | -------------- | - | ----- | ----- | 
|                                |                  |           |        | Weighted- |               
|                                |                  | Number    |        |           | Average        |  
|All Plans                       |                  | of Shares |        |           | Exercise Price |  
|                                |                  |           |        |           |                |  
|Outstanding at January 27, 2002 |                  |           | 15,415 |           |                | $ | 18.11 |      
|                                | Granted          |           |        | 3,232     |                |   |       | 20.02 | 
|                                | Exercised        |           |        | 1,305     |                |   |       | 12.42 | 
|                                | Forfeited        |           |        | 2,273     |                |   |       | 20.52 | 
|Outstanding at January 26, 2003 |                  |           | 15,069 |           |                |   | 18.76 |      
|                                | Granted          |           |        | 1,455     |                |   |       | 21.24 | 
|                                | Exercised        |           |        | 1,907     |                |   |       | 12.90 | 
|                                | Forfeited        |           |        | 1,574     |                |   |       | 20.63 | 
|Outstanding at January 25, 2004 |                  |           | 13,043 |           |                |   | 19.67 |      
|                                | Granted          |           |        | 69        |                |   |       | 23.52 | 
|                                | Exercised        |           |        | 3,121     |                |   |       | 13.85 | 
|                                | Forfeited        |           |        | 995       |                |   |       | 21.81 | 
|Outstanding at January 23, 2005 |                  |           | 8,996  |           |                |   | 21.48 |      
|Balance exercisable at          |                  |           |        |           |                |   |       |      
|                                | January 26, 2003 |           |        | 8,832     |                |   |       | 18.59 | 
|                                | January 25, 2004 |           |        | 8,750     |                |   |       | 19.86 | 
|                                | January 23, 2005 |           |        | 6,985     |                |   |       | 21.95 | 



60



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|                        |  |      |           |   |      |  |            |      |  |  |             |  
|----------------------- |  | ---- | --------- | - | ---- |  | ---------- | ---- |  |  | ----------- | -
|                        |  | 2004 |           |   | 2003 |  |            | 2002 | 
|                        |  |      |           |   |      |  |            |      | 
|Risk-free interest rate |  |      | 2.8-4.7   | % |      |  | 1.5-3.4    | %    |  |  | 2.2-5.3     | %
|Expected life           |  |      | 3-5 years |   |      |  | 3-5 years  |      |  |  | 3-10  years |  
|Expected volatility     |  |      | 29.9-35.2 | % |      |  | 35.2- 41.6 | %    |  |  | 46.3        | %
|Expected dividends      |  |      | 1.3-1.6   | % |      |  | 0.0-1.5    | %    |  |  | 0.0         | %



|                |  |             |       |  |                  |  |     |                  |  |   |           |  |  |                  |       |  |  |   |       | 
|--------------- |  | ----------- | ----- |  | ---------------- |  | --- | ---------------- |  | - | --------- |  |  | ---------------- | ----- |  |  | - | ----- | 
|                |  | 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    |  |             | 215   |  |                  |  | 0.8 |                  |  | $ | 8.69      |  |  |                  | 215   |  |  | $ | 8.69  | 
|$10.23-$13.63   |  |             | 1,010 |  |                  |  | 2.2 |                  |  |   | 12.91     |  |  |                  | 1,010 |  |  |   | 12.91 | 
|$13.64-$17.03   |  |             | 1,321 |  |                  |  | 3.0 |                  |  |   | 14.75     |  |  |                  | 1,160 |  |  |   | 14.74 | 
|$17.04-$20.44   |  |             | 1,460 |  |                  |  | 4.1 |                  |  |   | 17.55     |  |  |                  | 752   |  |  |   | 17.76 | 
|$20.45-$27.25   |  |             | 2,302 |  |                  |  | 3.7 |                  |  |   | 22.69     |  |  |                  | 1,160 |  |  |   | 23.25 | 
|$27.26-$30.66   |  |             | 2,199 |  |                  |  | 2.4 |                  |  |   | 29.79     |  |  |                  | 2,199 |  |  |   | 29.79 | 
|$30.67-$34.06   |  |             | 489   |  |                  |  | 2.9 |                  |  |   | 31.68     |  |  |                  | 489   |  |  |   | 31.68 | 



|                                      |                           |           |  |  |                  |  |  |                   |       |  |  |  |       | 
|------------------------------------- | ------------------------- | --------- |  |  | ---------------- |  |  | ----------------- | ----- |  |  |  | ----- | 
|                                      |                           | Number of |  |  | Weighted-Average |  |  | Weighted-Average  |      
|                                      |                           | Shares    |  |  | Purchase Price   |  |  | at Grant Date FMV |      
|                                      |                           |           |  |  |                  |  |  |                   |      
|Stock issued:                         |                           |           |  |  |                  |  |  |                   |       |  |  | 
|                                      | 2004 Plan (or prior plan) |           |  |  |                  |  |  |                   |       |  |  |  |      
|                                      |                           | 2002      |  |  | 28               |  |  | $                 | 18.26 |  |  |  | 23.91 | 
|                                      |                           | 2003      |  |  | 82               |  |  |                   | 13.56 |  |  |  | 17.29 | 
|                                      |                           | 2004      |  |  | 45               |  |  |                   | 17.74 |  |  |  | 23.59 | 
|                                      | Employee plan             |           |  |  |                  |  |  |                   |       |  |  |  |      
|                                      |                           | 2002      |  |  | 35               |  |  |                   | 15.29 |  |  |  | 17.99 | 
|                                      |                           | 2003      |  |  | 34               |  |  |                   | 15.24 |  |  |  | 17.92 | 
|                                      |                           | 2004      |  |  | 28               |  |  |                   | 20.64 |  |  |  | 24.29 | 
|Performance-based stock units issued: |                           |           |  |  |                  |  |  |                   |       |  |  | 
|                                      | 2004 Plan                 |           |  |  |                  |  |  |                   |       |  |  |  |      
|                                      |                           | 2004      |  |  | 288              |  |  |                   |      |  |  |  | 23.50 | 

61



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)




|          |                      
|--------- | ---------------------
|NOTE 17  | FINANCIAL INSTRUMENTS









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



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

| |  |                  |      |     |             |  |          |        |  |  |                   |  |  |   |      |  
| |  | ---------------- | ---- | --- | ----------- |  | -------- | ------ |  |  | ----------------- |  |  | - | ---- | -
| |  | January 25, 2004 |     
| |  | Notional Amount  |      |     | Strike Rate |  |          | Period |  |  | Fair Market Value | 
| |  |                  |      |     |             |  |          |        |  |  |                   | 
| |  | $                | 36.5 | (a) |             |  | 4.9%     |        |  |  | 10/98-6/05        |  |  | $ | (0.4 | )
| |  | $                | 36.5 | (a) |             |  | 4.7%     |        |  |  | 9/98-6/05         |  |  | $ | (0.1 | )
| |  | $                | 50.0 |     |             |  | variable |        |  |  | 8/03-7/06         |  |  | $ | 1.4  |  



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

62



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


NOTE 18  SEGMENT INFORMATION




|                               |               |                            |   |            |         |  |            |         |         |  |   |         |         | 
|------------------------------ | ------------- | -------------------------- | - | ---------- | ------- |  | ---------- | ------- | ------- |  | - | ------- | ------- | 
|                               |               | 2004                       |   |            | 2003    |  |            | 2002    |        
|                               |               |                            |   |            |         |  |            |         |        
|                               |               |                            |   | (restated) |         |  | (restated) |        
|Sales                          |               |                            |   |            |         |  |            |         |         |  |   |        
|                               | Borders       |                            | $ | 2,588.9    |         |  | $          | 2,470.2 |         |  | $ | 2,319.0 |        
|                               | Waldenbooks   |                            |   | 779.9      |         |  |            | 820.9   |         |  |   | 852.2   |        
|                               | International |                            |   | 510.7      |         |  |            | 407.5   |         |  |   | 314.9   |        
|                               |               |                            |   |            |         |  |            |         |        
|                               |               | Total sales                |   | $          | 3,879.5 |  |            | $       | 3,698.6 |  |   | $       | 3,486.1 | 
|                               |               |                            |   |            |         |  |            |         |        
|Interest expense (income)      |               |                            |   |            |         |  |            |         |         |  |   |        
|                               | Borders       |                            | $ | (5.4       | )       |  | $          | (1.9    | )       |  | $ | 2.5     |        
|                               | Waldenbooks   |                            |   | (42.2      | )       |  |            | (38.8   | )       |  |   | (33.5   | )      
|                               | International |                            |   | 19.1       |         |  |            | 19.0    |         |  |   | 17.2    |        
|                               | Corporate     |                            |   | 37.6       |         |  |            | 30.4    |         |  |   | 26.4    |        
|                               |               |                            |   |            |         |  |            |         |        
|                               |               | Total interest expense     |   | $          | 9.1     |  |            | $       | 8.7     |  |   | $       | 12.6    | 
|                               |               |                            |   |            |         |  |            |         |        
|Income tax provision (benefit) |               |                            |   |            |         |  |            |         |         |  |   |        
|                               | Borders       |                            | $ | 70.9       |         |  | $          | 61.8    |         |  | $ | 62.8    |        
|                               | Waldenbooks   |                            |   | 26.6       |         |  |            | 30.5    |         |  |   | 24.3    |        
|                               | International |                            |   | (0.3       | )       |  |            | (3.6    | )       |  |   | (6.7    | )      
|                               | Corporate     |                            |   | (21.5      | )       |  |            | (16.6   | )       |  |   | (13.0   | )      
|                               |               |                            |   |            |         |  |            |         |        
|                               |               | Total income tax expense   |   | $          | 75.7    |  |            | $       | 72.1    |  |   | $       | 67.4    | 
|                               |               |                            |   |            |         |  |            |         |        
|Depreciation expense           |               |                            |   |            |         |  |            |         |         |  |   |        
|                               | Borders       |                            | $ | 80.4       |         |  | $          | 79.5    |         |  | $ | 76.3    |        
|                               | Waldenbooks   |                            |   | 16.7       |         |  |            | 18.5    |         |  |   | 20.6    |        
|                               | International |                            |   | 15.8       |         |  |            | 13.3    |         |  |   | 10.2    |        
|                               | Corporate     |                            |   |           |         |  |            |        |         |  |   |        |        
|                               |               |                            |   |            |         |  |            |         |        
|                               |               | Total depreciation expense |   | $          | 112.9   |  |            | $       | 111.3   |  |   | $       | 107.1   | 
|                               |               |                            |   |            |         |  |            |         |        
|Net income (loss)              |               |                            |   |            |         |  |            |         |         |  |   |        
|                               | Borders       |                            | $ | 112.0      |         |  | $          | 97.3    |         |  | $ | 100.2   |        
|                               | Waldenbooks   |                            |   | 41.5       |         |  |            | 48.8    |         |  |   | 41.1    |        
|                               | International |                            |   | 5.6        |         |  |            | (1.3    | )       |  |   | (13.8   | )      
|                               | Corporate     |                            |   | (27.2      | )       |  |            | (29.6   | )       |  |   | (19.9   | )      
|                               |               |                            |   |            |         |  |            |         |        
|                               |               | Total net income           |   | $          | 131.9   |  |            | $       | 115.2   |  |   | $       | 107.6   | 
|                               |               |                            |   |            |         |  |            |         |        

63



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


|                     |               |                            |   |            |         |  |            |         |         |  |   |         |         | 
|-------------------- | ------------- | -------------------------- | - | ---------- | ------- |  | ---------- | ------- | ------- |  | - | ------- | ------- | 
|                     |               | 2004                       |   |            | 2003    |  |            | 2002    |        
|                     |               |                            |   |            |         |  |            |         |        
|                     |               |                            |   | (restated) |         |  | (restated) |        
|Total assets         |               |                            |   |            |         |  |            |         |         |  |   |        
|                     | Borders       |                            | $ | 1,484.7    |         |  | $          | 1,469.7 |         |  | $ | 1,418.5 |        
|                     | Waldenbooks   |                            |   | 328.3      |         |  |            | 321.7   |         |  |   | 335.2   |        
|                     | International |                            |   | 452.8      |         |  |            | 374.6   |         |  |   | 321.5   |        
|                     | Corporate     |                            |   | 363.0      |         |  |            | 418.6   |         |  |   | 302.8   |        
|                     |               |                            |   |            |         |  |            |         |        
|                     |               | Total assets               |   | $          | 2,628.8 |  |            | $       | 2,584.6 |  |   | $       | 2,378.0 | 
|                     |               |                            |   |            |         |  |            |         |        
|Capital expenditures |               |                            |   |            |         |  |            |         |         |  |   |        
|                     | Borders       |                            | $ | 64.5       |         |  | $          | 69.8    |         |  | $ | 72.6    |        
|                     | Waldenbooks   |                            |   | 12.2       |         |  |            | 6.5     |         |  |   | 6.7     |        
|                     | International |                            |   | 20.6       |         |  |            | 20.7    |         |  |   | 26.5    |        
|                     | Corporate     |                            |   | 18.2       |         |  |            | 13.9    |         |  |   | 28.2    |        
|                     |               |                            |   |            |         |  |            |         |        
|                     |               | Total capital expenditures |   | $          | 115.5   |  |            | $       | 110.9   |  |   | $       | 134.0   | 
|                     |               |                            |   |            |         |  |            |         |        



|              |       |      |      |            |      |   |            |      |  |   |      |      | 
|------------- | ----- | ---- | ---- | ---------- | ---- | - | ---------- | ---- |  | - | ---- | ---- | 
|              |       | 2004 |      |            | 2003 |   |            | 2002 | 
|              |       |      |      |            |      |   |            |      | 
|              |       |      |      | (restated) |      |   | (restated) |     
|Borders       |       | $    | 10.2 |            |      | $ | 11.6       |      |  | $ | 10.4 |     
|Walden        |       |      | 4.8  |            |      |   | 6.0        |      |  |   | 5.3  |     
|International |       |      | 0.2  |            |      |   |           |      |  |   |     |     
|              |       |      |      |            |      |   |            |      | 
|              | Total |      | $    | 15.2       |      |   | $          | 17.6 |  |   | $    | 15.7 | 
|              |       |      |      |            |      |   |            |      | 



|                   |               |                         |   |            |       |  |            |       |       |  |   |       |       | 
|------------------ | ------------- | ----------------------- | - | ---------- | ----- |  | ---------- | ----- | ----- |  | - | ----- | ----- | 
|                   |               | 2004                    |   |            | 2003  |  |            | 2003  |      
|                   |               |                         |   |            |       |  |            |       |      
|                   |               |                         |   | (restated) |       |  | (restated) |      
|Long-lived assets: |               |                         |   |            |       |  |            |       |       |  |   |      
|                   | Domestic      |                         | $ | 628.0      |       |  | $          | 644.4 |       |  | $ | 641.5 |      
|                   | International |                         |   | 235.4      |       |  |            | 227.5 |       |  |   | 195.2 |      
|                   |               |                         |   |            |       |  |            |       |      
|                   |               | Total long-lived assets |   | $          | 863.4 |  |            | $     | 871.9 |  |   | $     | 836.7 | 
|                   |               |                         |   |            |       |  |            |       |      

64



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


(dollars in millions except per share data)


NOTE 19  UNAUDITED QUARTERLY FINANCIAL
DATA


|                  |                                          |                           |       |      |            |   |       |            |  |   |         |       |   |   |         |      | 
|----------------- | ---------------------------------------- | ------------------------- | ----- | ---- | ---------- | - | ----- | ---------- |  | - | ------- | ----- | - | - | ------- | ---- | 
|                  |                                          | Fiscal 2004 Quarter Ended |      
|                  |                                          | April                     |       |      | July       |   |       | October    |  |   | January |      
|                  |                                          |                           |       |      |            |   |       |            |  |   |         |      
|                  |                                          | (restated)                |       |      | (restated) |   |       | (restated) |  |   |        
|Total revenue     |                                          | $                         | 838.1 |      |            | $ | 853.4 |            |  | $ | 838.6   |       |   | $ | 1,372.9 |     
|Gross margin      |                                          |                           | 210.3 |      |            |   | 223.3 |            |  |   | 213.1   |       |   |   | 452.7   |     
|Net income (loss) |                                          |                           | 2.3   |      |            |   | 7.9   |            |  |   | (1.1    | )     |   |   | 122.8   |     
|                  | Diluted earnings (loss) per common share |                           |       | 0.03 |            |   |       | 0.10       |  |   |         | (0.01 | ) |   |         | 1.62 | 
|                  | Basic earnings (loss) per common share   |                           |       | 0.03 |            |   |       | 0.10       |  |   |         | (0.01 | ) |   |         | 1.65 | 

|                                                            |                                          |                           |       |       |            |   |       |            |  |   |            |       |   |   |         |      | 
|----------------------------------------------------------- | ---------------------------------------- | ------------------------- | ----- | ----- | ---------- | - | ----- | ---------- |  | - | ---------- | ----- | - | - | ------- | ---- | 
|                                                            |                                          | Fiscal 2003 Quarter Ended |      
|                                                            |                                          | April                     |       |       | July       |   |       | October    |  |   | January    |      
|                                                            |                                          |                           |       |       |            |   |       |            |  |   |            |      
|                                                            |                                          | (restated)                |       |       | (restated) |   |       | (restated) |  |   | (restated) |      
|Total revenue                                               |                                          | $                         | 758.7 |       |            | $ | 834.3 |            |  | $ | 817.1      |       |   | $ | 1,320.9 |     
|Gross margin                                                |                                          |                           | 187.0 |       |            |   | 210.9 |            |  |   | 204.1      |       |   |   | 440.0   |     
|Income (loss) before cumulative effect of accounting change |                                          |                           | (6.4  | )     |            |   | 3.5   |            |  |   | (0.9       | )     |   |   | 121.1   |     
|                                                            | Diluted earnings (loss) per common share |                           |       | (0.08 | )          |   |       | 0.04       |  |   |            | (0.01 | ) |   |         | 1.52 | 
|                                                            | Basic earnings (loss) per common share   |                           |       | (0.08 | )          |   |       | 0.05       |  |   |            | (0.01 | ) |   |         | 1.55 | 
|Net income (loss)                                           |                                          |                           | (6.4  | )     |            |   | 3.5   |            |  |   | (0.9       | )     |   |   | 119.0   |     
|                                                            | Diluted earnings (loss) per common share |                           |       | (0.08 | )          |   |       | 0.04       |  |   |            | (0.01 | ) |   |         | 1.49 | 
|                                                            | Basic earnings (loss) per common share   |                           |       | (0.08 | )          |   |       | 0.05       |  |   |            | (0.01 | ) |   |         | 1.52 | 





|                  |                                          |                           |       |      |      |   |       |         |  |   |       |       |  
|----------------- | ---------------------------------------- | ------------------------- | ----- | ---- | ---- | - | ----- | ------- |  | - | ----- | ----- | -
|                  |                                          | Fiscal 2004 Quarter Ended |      
|                  |                                          | April                     |       |      | July |   |       | October | 
|                  |                                          |                           |       |      |      |   |       |         | 
|Total revenue     |                                          | $                         | 838.1 |      |      | $ | 853.4 |         |  | $ | 838.6 |      
|Gross margin      |                                          |                           | 210.8 |      |      |   | 223.6 |         |  |   | 212.4 |      
|Net income (loss) |                                          |                           | 3.0   |      |      |   | 8.5   |         |  |   | (1.5  | )    
|                  | Diluted earnings (loss) per common share |                           |       | 0.04 |      |   |       | 0.11    |  |   |       | (0.02 | )
|                  | Basic earnings (loss) per common share   |                           |       | 0.04 |      |   |       | 0.11    |  |   |       | (0.02 | )

|                                                            |                                          |                           |       |       |      |   |       |         |  |   |         |      |  |   |         |      | 
|----------------------------------------------------------- | ---------------------------------------- | ------------------------- | ----- | ----- | ---- | - | ----- | ------- |  | - | ------- | ---- |  | - | ------- | ---- | 
|                                                            |                                          | Fiscal 2003 Quarter Ended |      
|                                                            |                                          | April                     |       |       | July |   |       | October |  |   | January |     
|                                                            |                                          |                           |       |       |      |   |       |         |  |   |         |     
|Total revenue                                               |                                          | $                         | 758.7 |       |      | $ | 834.3 |         |  | $ | 817.1   |      |  | $ | 1,320.9 |     
|Gross margin                                                |                                          |                           | 189.0 |       |      |   | 212.6 |         |  |   | 206.1   |      |  |   | 439.9   |     
|Income (loss) before cumulative effect of accounting change |                                          |                           | (4.8  | )     |      |   | 4.5   |         |  |   | 0.5     |      |  |   | 121.9   |     
|                                                            | Diluted earnings (loss) per common share |                           |       | (0.06 | )    |   |       | 0.06    |  |   |         | 0.01 |  |   |         | 1.53 | 
|                                                            | Basic earnings (loss) per common share   |                           |       | (0.06 | )    |   |       | 0.06    |  |   |         | 0.01 |  |   |         | 1.56 | 
|Net income (loss)                                           |                                          |                           | (4.8  | )     |      |   | 4.5   |         |  |   | 0.5     |      |  |   | 119.8   |     
|                                                            | Diluted earnings (loss) per common share |                           |       | (0.06 | )    |   |       | 0.06    |  |   |         | 0.01 |  |   |         | 1.50 | 
|                                                            | Basic earnings (loss) per common share   |                           |       | (0.06 | )    |   |       | 0.06    |  |   |         | 0.01 |  |   |         | 1.53 | 

65



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




















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





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






Item 9A. Controls and Procedures


Controls and Procedures: The Companys Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the Companys
disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act), as of
January 23, 2005 (the Evaluation Date). In
performing this evaluation, management reviewed the
Companys lease accounting practices in light of
announcements made by a number of public companies and a
recently issued SEC clarification on the subject. As a result of
this review, the Company concluded that its previously
established lease accounting practices were not appropriate.
Accordingly, as described below, the Company determined to
restate certain of its previously issued financial statements to
reflect the correction of the Companys lease accounting
practices. Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Companys
disclosure controls and procedures were not effective in
alerting them on a timely basis to material information relating
to the Company (including its consolidated subsidiaries)
required to be included in the Companys periodic filings
under the Exchange Act. In coming to the conclusion that the
Companys internal control over financial reporting was not
effective as of January 23, 2005, management considered,
among other things, the control deficiency related to periodic
review of the application of generally accepted accounting
principles, which resulted in the need to restate the
Companys previously issued financial statements as
disclosed in Note 2 to the accompanying consolidated
financial statements included in this Form 10-K.


Changes in Internal
Control: There were no changes
in the Companys internal control over financial reporting
during the quarter ended January 23, 2005 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.


Managements Annual Report on Internal Control over
Financial Reporting: Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended). Management assessed the effectiveness of the
Companys internal control over financial reporting as of
January 23, 2005. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in
Internal Control  Integrated Framework. In
performing this assessment, management reviewed the
Companys lease accounting practices in light of
announcements made by a number of public companies and a
recently issued SEC clarification on the subject. As a result of
this review, the Company concluded that its previously
established lease accounting practices were not appropriate.
Accordingly, the Audit Committee of the Companys Board of
Directors adopted a recommendation of the Companys
management to restate certain of its previously issued financial
statements to reflect the correction in the Companys lease
accounting practices.




Remediation Steps to Address Material
Weakness: To remediate the
material weakness in the Companys internal control over
financial reporting, subsequent to January 23, 2005 the
Company has implemented additional review procedures over the
selection and monitoring of appropriate assumptions and factors
affecting lease accounting practices.


67



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


ON INTERNAL CONTROL OVER FINANCIAL REPORTING
















68



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





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|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



Section 16(a) Beneficial Ownership Reporting
Compliance




Code of Ethics and Other Corporate Governance
Information









|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








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








|         |                                                     
|-------- | ----------------------------------------------------
|Item 13. | Certain Relationships and Related Party Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14: | Principal Accounting Fees and Services



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PART IV







|         |                                        
|-------- | ---------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules



|                                                                                                                                           |  |      |    | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | -- | 
|                                                                                                                                           |  | Page |   
|                                                                                                                                           |  |      |   
|Consolidated Statements of Operations for the fiscal years ended
    January 23, 2005, January 25, 2004 and
    January 26, 2003           |  |      | 41 | 
|Consolidated Balance Sheets as of January 23, 2005 and
    January 25, 2004                                                                |  |      | 42 | 
|Consolidated Statements of Cash Flows for the fiscal years ended
    January 23, 2005, January 25, 2004 and
    January 26, 2003           |  |      | 43 | 
|Consolidated Statements of Stockholders Equity for the
    fiscal years ended January 23, 2005, January 25, 2004
    and January 26, 2003 |  |      | 44 | 
|Notes to Consolidated Financial Statements                                                                                                 |  |      | 45 | 
|Report of Independent Registered Public Accounting Firm                                                                                    |  |      | 66 | 







|        |    |             |  |                                                                                                                             
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1(3)       |  | Agreement and plan of Merger dated as of April 8, 1997
    between Michigan Borders Group, Inc. and Borders Group, Inc.     
|        | 3  | .1(5)       |  | Restated Articles of Incorporation of Borders Group, Inc.                                                                   
|        | 3  | .2(8)       |  | Restated bylaws of Borders Group, Inc.                                                                                      
|        | 10 | .1(8)       |  | Form of Severance Agreement                                                                                                 
|        | 10 | .2(3)       |  | Borders Group, Inc. Stock Option Plan                                                                                       
|        | 10 | .3(8)       |  | Amendment to the Borders Group, Inc. Stock Option Plan                                                                      
|        | 10 | .4(1)       |  | Borders Group, Inc. Employee Stock Purchase Plan                                                                            
|        | 10 | .5(2)       |  | First Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                 
|        | 10 | .6(5)       |  | Second Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                
|        | 10 | .7(5)       |  | Third Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                 
|        | 10 | .8(15)      |  | Restated Borders Group, Inc. Annual Incentive Bonus Plan                                                                    
|        | 10 | .9(4)       |  | Borders Group, Inc. Stock Option Plan for International Employees                                                           
|        | 10 | .10(5)      |  | 1998 Borders Group, Inc. Stock Option Plan                                                                                  
|        | 10 | .11(7)      |  | Agreement dated November 15, 1999, between Borders Group,
    Inc. and Gregory P. Josefowicz                                
|        | 10 | .12(5)      |  | Participation Agreement dated as of December 1, 1998 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto
|        | 10 | .13(6)      |  | Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
    Plan                                                           
|        | 10 | .14(8)      |  | Participation Agreement dated as of January 22, 2001 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto
|        | 10 | .15(9)      |  | Note Purchase Agreement dated as of July 30, 2002 relating
    to the 6.31% Senior Guaranteed Notes of Borders Group, Inc.  
|        | 10 | .16(10)     |  | Borders Group, Inc. Long Term Incentive Plan                                                                                

71



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|        |    |         |             |                                                                                                                                                                             
|------- | -- | ------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|Number  |    |         | Description
|        |    |         |            
|        | 10 | .17(11) |             | Participation Agreement dated as of November 15, 2002 by
    and among Borders Group, Inc., Borders, Inc. and Parties thereto                                               
|        | 10 | .18(12) |             | Borders Group, Inc. 2004 Long-Term Incentive Plan                                                                                                                           
|        | 10 | .19(13) |             | First Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of May 20, 2004                                                                       
|        | 10 | .20(13) |             | Amended and Restated Multicurrency Revolving Credit Agreement
    dated as of July 30, 2004 among Borders Group, Inc., its
    subsidiaries and Parties thereto             
|        | 10 | .21(13) |             | Security Agreement dated as of July 30, 2004 among Borders
    Group, Inc., its subsidiaries and Parties thereto                                                            
|        | 10 | .22(13) |             | Amendment No. 1 to the Note Purchase Agreement dated as of
    July 30, 2004 among Borders Group, Inc., its subsidiaries
    and Parties thereto                            
|        | 10 | .23(14) |             | Restricted Share Unit Grant Agreement                                                                                                                                       
|        | 14 | .1(11)  |             | Code of Ethics Relating to Financial Reporting                                                                                                                              
|        | 14 | .2(11)  |             | Business Conduct Policy                                                                                                                                                     
|        | 21 | .1      |             | Subsidiaries of Registrant                                                                                                                                                  
|        | 23 | .1      |             | Consent of Ernst & Young LLP                                                                                                                                                
|        | 31 | .1      |             | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002
|        | 31 | .2      |             | Statement of Edward W. Wilhelm, Senior Vice President and Chief
    Financial Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002  
|        | 32 | .1      |             | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
|        | 32 | .2      |             | Statement of Edward W. Wilhelm, Senior Vice President and Chief
    Financial Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002  
|        | 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 Registration
    Statement on Form S-1 (File No. 333-80643).                                    
|    
|(3)  | Incorporated by reference from the Companys Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).          
|    
|(4)  | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 26,
    1998 (File No. 1-13740).   
|    
|(5)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 24, 1999 (File
    No. 1-13740).      
|    
|(6)  | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended October 24,
    1999 (File No. 1-13740).
|    
|(7)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 23, 2000 (File
    No. 1-13740).      
|    
|(8)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 27, 2002 (File
    No. 1-13740).      
|    
|(9)  | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 28,
    2002 (File No. 1-13740).   
|    
|(10) | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 27,
    2003 (Filed No. 1-13740).  
|    
|(11) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 25, 2004
    (Filed No. 1-13740).     

72



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##### Table of Contents





|     |                                                                                                                                            
|---- | -------------------------------------------------------------------------------------------------------------------------------------------
|(12) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2004 (File No. 1-13740).                                  
|    
|(13) | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 25,
    2004 (Filed No. 1-13740).
|    
|(14) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated March 16, 2005 (Filed
    No. 1-13740).                  
|    
|(15) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File No. 1-13740).                                  









73



---



##### Table of Contents






SIGNATURES






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



| |     |                          
| | --- | -------------------------
| | By: | /s/ Gregory P. Josefowicz

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



|                                                           |  |                                                                                                    |  |               |  | 
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ------------- |  | 
|                                                           |  | Title                                                                                              |  | Date         
|Name                                                       |  |                                                                                                    |  |              
|                                                           |  |                                                                                                    |  |              
|                                                          
|/s/ Gregory P.
    JosefowiczGregory
    P. Josefowicz     |  | Chairman, Chief Executive Officer, and President                                                   |  | April 8, 2005
|                                                          
|/s/ Edward W. WilhelmEdward
    W. Wilhelm                 |  | Senior Vice President and Chief Financial Officer (Principal
    Financial and Accounting Officer) |  | April 8, 2005
|                                                          
|/s/ Joel J. CohenJoel
    J. Cohen                         |  | Director                                                                                           |  | April 8, 2005
|                                                          
|/s/ Amy B. LaneAmy
    B. Lane                             |  | Director                                                                                           |  | April 8, 2005
|                                                          
|/s/ Victor L. LundVictor
    L. Lund                       |  | Director                                                                                           |  | April 8, 2005
|                                                          
|/s/ Dr. Edna Greene
    MedfordDr.
    Edna Greene Medford |  | Director                                                                                           |  | April 8, 2005
|                                                          
|/s/ Lawrence I. PollockLawrence
    I. Pollock             |  | Director                                                                                           |  | April 8, 2005
|                                                          
|/s/ Beth M. PritchardBeth
    M. Pritchard                 |  | Director                                                                                           |  | April 8, 2005

74



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##### Table of Contents



EXHIBIT INDEX


|        |    |         |             |                                                                                                                                                                             
|------- | -- | ------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |         |            
|Number  |    |         | Description
|        |    |         |            
|        | 2  | .1(3)   |             | Agreement and plan of Merger dated as of April 8, 1997
    between Michigan Borders Group, Inc. and Borders Group, Inc.                                                     
|        | 3  | .1(5)   |             | Restated Articles of Incorporation of Borders Group, Inc.                                                                                                                   
|        | 3  | .2(8)   |             | Restated bylaws of Borders Group, Inc.                                                                                                                                      
|        | 10 | .1(8)   |             | Form of Severance Agreement                                                                                                                                                 
|        | 10 | .2(3)   |             | Borders Group, Inc. Stock Option Plan                                                                                                                                       
|        | 10 | .3(8)   |             | Amendment to the Borders Group, Inc. Stock Option Plan                                                                                                                      
|        | 10 | .4(1)   |             | Borders Group, Inc. Employee Stock Purchase Plan                                                                                                                            
|        | 10 | .5(2)   |             | First Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                                                                 
|        | 10 | .6(5)   |             | Second Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                                                                
|        | 10 | .7(5)   |             | Third Amendment to the Borders Group, Inc. Employee Stock
    Purchase Plan                                                                                                 
|        | 10 | .8(15)  |             | Restated Borders Group, Inc. Annual Incentive Bonus Plan                                                                                                                    
|        | 10 | .9(4)   |             | Borders Group, Inc. Stock Option Plan for International Employees                                                                                                           
|        | 10 | .10(5)  |             | 1998 Borders Group, Inc. Stock Option Plan                                                                                                                                  
|        | 10 | .11(7)  |             | Agreement dated November 15, 1999, between Borders Group,
    Inc. and Gregory P. Josefowicz                                                                                
|        | 10 | .12(5)  |             | Participation Agreement dated as of December 1, 1998 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto                                                
|        | 10 | .13(6)  |             | Amendment No. 1 to 1998 Borders Group, Inc. Stock Option
    Plan                                                                                                           
|        | 10 | .14(8)  |             | Participation Agreement dated as of January 22, 2001 by and
    among Borders Group, Inc., Borders, Inc. and Parties thereto                                                
|        | 10 | .15(9)  |             | Note Purchase Agreement dated as of July 30, 2002 relating
    to the 6.31% Senior Guaranteed Notes of Borders Group, Inc.                                                  
|        | 10 | .16(10) |             | Borders Group, Inc. Long Term Incentive Plan                                                                                                                                
|        | 10 | .17(11) |             | Participation Agreement dated as of November 15, 2002 by
    and among Borders Group, Inc., Borders, Inc. and Parties thereto                                               
|        | 10 | .18(12) |             | Borders Group, Inc. 2004 Long-Term Incentive Plan                                                                                                                           
|        | 10 | .19(13) |             | First Amendment to the Borders Group, Inc. 2004 Long Term
    Incentive Plan dated as of May 20, 2004                                                                       
|        | 10 | .20(13) |             | Amended and Restated Multicurrency Revolving Credit Agreement
    dated as of July 30, 2004 among Borders Group, Inc., its
    subsidiaries and Parties thereto             
|        | 10 | .21(13) |             | Security Agreement dated as of July 30, 2004 among Borders
    Group, Inc., its subsidiaries and Parties thereto                                                            
|        | 10 | .22(13) |             | Amendment No. 1 to the Note Purchase Agreement dated as of
    July 30, 2004 among Borders Group, Inc., its subsidiaries
    and Parties thereto                            
|        | 10 | .23(14) |             | Restricted Share Unit Grant Agreement                                                                                                                                       
|        | 14 | .1(11)  |             | Code of Ethics Relating to Financial Reporting                                                                                                                              
|        | 14 | .2(11)  |             | Business Conduct Policy                                                                                                                                                     
|        | 21 | .1      |             | Subsidiaries of Registrant                                                                                                                                                  
|        | 23 | .1      |             | Consent of Ernst & Young LLP                                                                                                                                                
|        | 31 | .1      |             | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002
|        | 31 | .2      |             | Statement of Edward W. Wilhelm, Senior Vice President and Chief
    Financial Officer of Borders Group, Inc. pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002  
|        | 32 | .1      |             | Statement of Gregory P. Josefowicz, Chairman, President and
    Chief Executive Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002



---



##### Table of Contents



|        |    |    |             |                                                                                                                                                                           
|------- | -- | -- | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |    |            
|Number  |    |    | Description
|        |    |    |            
|        | 32 | .2 |             | Statement of Edward W. Wilhelm, Senior Vice President and Chief
    Financial Officer of Borders Group, Inc. pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
|        | 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 Registration
    Statement on Form S-1 (File No. 333-80643).                                    
|    
|(3)  | Incorporated by reference from the Companys Proxy
    Statement dated April 9, 1997 of Borders Group, Inc. (File
    No. 1-13740).          
|    
|(4)  | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 26,
    1998 (File No. 1-13740).   
|    
|(5)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 24, 1999 (File
    No. 1-13740).      
|    
|(6)  | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended October 24,
    1999 (File No. 1-13740).
|    
|(7)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 23, 2000 (File
    No. 1-13740).      
|    
|(8)  | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 27, 2002 (File
    No. 1-13740).      
|    
|(16) | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 28,
    2002 (File No. 1-13740).   
|    
|(17) | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 27,
    2003 (Filed No. 1-13740).  
|    
|(18) | Incorporated by reference from the Companys Annual Report
    on Form 10-K for the year ended January 25, 2004
    (Filed No. 1-13740).     
|    
|(19) | Incorporated by reference from the Companys Proxy
    Statement dated April 14, 2004 (File No. 1-13740).                                    
|    
|(20) | Incorporated by reference from the Companys Quarterly
    Report on Form 10-Q for the quarter ended July 25,
    2004 (Filed No. 1-13740).  
|    
|(21) | Incorporated by reference from the Companys Current Report
    on Form 8-K dated March 16, 2005 (Filed
    No. 1-13740).                    
|    
|(22) | Incorporated by reference from the Companys Proxy
    Statement dated April 18, 2005 (File No. 1-13740).