SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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## FORM 10 - Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 24, 2004
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to

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Commission file number 1-13740

# BORDERS GROUP, INC.

(Exact name of registrant as specified in its charter)

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|Michigan                        | 38-3294588          
|------------------------------- | --------------------
|(State or other jurisdiction of | (I.R.S. Employer    
|incorporation or organization)  | Indentification No.)

100 Phoenix Drive, Ann Arbor, Michigan 48108
(Address of principal executive offices with zip code)(734) 477-1100
(Registrant's telephone number, including area code)

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Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.

Yes X       
  No

|               | Shares Outstanding As of
|-------------- | ------------------------
|Title of Class | November 19, 2004       
|Common Stock   | 75,082,797              



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# BORDERS
GROUP, INC.

# INDEX

|                               |                                                             |     
|------------------------------ | ----------------------------------------------------------- | ----
|Part I - Financial Information |                                                             |     
|                               |                                                             |     
|                               |                                                             | Page
|                               |                                                             |     
|Item 1.                        | Financial Statements                                        | 1   
|                               |                                                             |     
|Item 2.                        | Management's Discussion and Analysis of                     |     
|                               | Financial Condition and Results of                          |     
|                               | Operations                                                  | 12  
|                               |                                                             |     
|Item 3.                        | Quantitative and Qualitative Disclosures about              |     
|                               | Market Risk                                                 | 26  
|                               |                                                             |     
|Item 4.                        | Controls and Procedures                                     | 26  
|                               |                                                             |     
|                               |                                                             |     
|                               |                                                             |     
|Part II - Other information    |                                                             |     
|                               |                                                             |     
|                               |                                                             |     
|                               |                                                             |     
|Item 1.                        | Legal Proceedings                                           | 26  
|                               |                                                             |     
|Item 2.                        | Unregistered Sales of Equity Securities and Use of Proceeds | 27  
|                               |                                                             |     
|Item 3.                        | Defaults Upon Senior Securities                             | N/A 
|                               |                                                             |     
|Item 4.                        | Submission of Matters to a vote of                          | N/A 
|                               | Securityholders                                             |     
|                               |                                                             |     
|Item 5.                        | Other Information                                           | N/A 
|                               |                                                             |     
|Item 6.                        | Exhibits                                                    | 28  
|                               |                                                             |     
|                               |                                                             |     
|                               |                                                             |     
|Signatures                     |                                                             | 29  
|                               |                                                             |     

i

---

# BORDERS GROUP,
INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS(dollars in millions except per share data)(UNAUDITED)

| |                                                     |                                                          |       |       |   |   |       |       |  | 
| | --------------------------------------------------- | -------------------------------------------------------- | ----- | ----- | - | - | ----- | ----- |  | 
|
|
|
| |                                                     |                                                          |       |       |   |   |       |       |  | 
| | Sales                                               |                                                          | $     | 833.3 |   |   | $     | 807.9 |  | 
| | Other revenue                                       |                                                          | 5.3   |       |   |   | 9.2   |       | 
| |                                                     |                                                          |       |       |   |  
| | Total revenue                                       |                                                          | 838.6 |       |   |   | 817.1 |       | 
| | Cost of merchandise sold, including occupancy costs |                                                          | 626.1 |       |   |   | 611.0 |       | 
| | Inventory writedowns                                |                                                          | 0.1   |       |   |   | -     |       | 
| |                                                     |                                                          |       |       |   |  
| | Gross margin                                        |                                                          | 212.4 |       |   |   | 206.1 |       | 
| | Selling, general and administrative expenses        |                                                          | 210.8 |       |   |   | 201.4 |       | 
| | Pre-opening expense                                 |                                                          | 1.7   |       |   |   | 2.3   |       | 
| | Asset impairments and other writedowns              |                                                          | 0.2   |       |   |   | (0.6  | )     | 
| |                                                     |                                                          |       |       |   |  
| | Operating income (loss)                             |                                                          | (0.3  | )     |   |   | 3.0   |       | 
| | Interest expense                                    |                                                          | 2.2   |       |   |   | 2.2   |       | 
| |                                                     |                                                          |       |       |   |  
| | Income (loss) before income tax                     |                                                          | (2.5  | )     |   |   | 0.8   |       | 
| | Income tax provision (benefit)                      |                                                          | (1.0  | )     |   |   | 0.3   |       | 
| |                                                     |                                                          |       |       |   |  
| | Net income (loss)                                   | $                                                        | (1.5  | )     |   | $ | 0.5   |       | 
| |                                                     |                                                          |       |       |   |  
| | Earnings (loss) per common share data               |                                                          |       |       |   |   |       |       | 
| | Diluted:                                            |                                                          |       |       |   |   |       |       | 
| |                                                     | Income (loss) per common share                           | $     | (0.02 | ) |   | $     | 0.01  |  | 
| |                                                     |                                                          |       |       |   |  
| |                                                     | Weighted average common shares outstanding (in millions) |       | 76.5  |   |   |       | 79.0  |  | 
| |                                                     |                                                          |       |       |   |  
| | Basic:                                              |                                                          |       |       |   |   |       |       | 
| |                                                     | Income (loss) per common share                           | $     | (0.02 | ) |   | $     | 0.01  |  | 
| |                                                     |                                                          |       |       |   |  
| |                                                     | Weighted average common shares outstanding (in millions) |       | 76.5  |   |   |       | 77.5  |  | 
| |                                                     |                                                          |       |       |   |  
| | Dividends declared per common share                 | $                                                        | 0.08  |       |   | $ | -     |       | 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

---

# BORDERS GROUP,
INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS(dollars in millions except per share data)(UNAUDITED)

| |                                                     |                                                          |         |         |  |   |         |         |  | 
| | --------------------------------------------------- | -------------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | 
|
|
|
| |                                                     |                                                          |         |         |  |   |         |         |  | 
| | Sales                                               |                                                          | $       | 2,511.2 |  |   | $       | 2,386.2 |  | 
| | Other revenue                                       |                                                          | 18.9    |         |  |   | 23.9    |         | 
| |                                                     |                                                          |         |         |  |  
| | Total revenue                                       |                                                          | 2,530.1 |         |  |   | 2,410.1 |         | 
| | Cost of merchandise sold, including occupancy costs |                                                          | 1,883.1 |         |  |   | 1,801.9 |         | 
| | Inventory writedowns                                |                                                          | 0.2     |         |  |   | 0.5     |         | 
| |                                                     |                                                          |         |         |  |  
| | Gross margin                                        |                                                          | 646.8   |         |  |   | 607.7   |         | 
| | Selling, general and administrative expenses        |                                                          | 620.3   |         |  |   | 594.9   |         | 
| | Pre-opening expense                                 |                                                          | 3.4     |         |  |   | 5.5     |         | 
| | Asset impairments and other writedowns              |                                                          | 0.8     |         |  |   | -       |         | 
| |                                                     |                                                          |         |         |  |  
| | Operating income                                    |                                                          | 22.3    |         |  |   | 7.3     |         | 
| | Interest expense                                    |                                                          | 6.5     |         |  |   | 7.0     |         | 
| |                                                     |                                                          |         |         |  |  
| | Income before income tax                            |                                                          | 15.8    |         |  |   | 0.3     |         | 
| | Income tax provision                                |                                                          | 5.8     |         |  |   | 0.1     |         | 
| |                                                     |                                                          |         |         |  |  
| | Net income                                          | $                                                        | 10.0    |         |  | $ | 0.2     |         | 
| |                                                     |                                                          |         |         |  |  
| | Earnings per common share data                      |                                                          |         |         |  |   |         |         | 
| | Diluted:                                            |                                                          |         |         |  |   |         |         | 
| |                                                     | Income per common share                                  | $       | 0.13    |  |   | $       | -       |  | 
| |                                                     |                                                          |         |         |  |  
| |                                                     | Weighted average common shares outstanding (in millions) |         | 78.6    |  |   |         | 78.8    |  | 
| |                                                     |                                                          |         |         |  |  
| | Basic:                                              |                                                          |         |         |  |   |         |         | 
| |                                                     | Income per common share                                  | $       | 0.13    |  |   | $       | -       |  | 
| |                                                     |                                                          |         |         |  |  
| |                                                     | Weighted average common shares outstanding (in millions) |         | 77.2    |  |   |         | 77.8    |  | 
| |                                                     |                                                          |         |         |  |  
| | Dividends declared per common share                 | $                                                        | 0.24    |         |  | $ | -       |         | 

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

---

# BORDERS
GROUP, INC.CONDENSED
CONSOLIDATED BALANCE SHEETS(dollars in millions except per share data)(UNAUDITED)

| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  |  | 
| | ------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  |  | 
|
|
| | Assets                                                  |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| | Current Assets:                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| |                                                         | Cash and cash equivalents                                   | $                                                             | 145.8   |         |  | $ | 110.6   |         |  | $ | 378.8   |         | 
| |                                                         | Merchandise inventories                                     |                                                               | 1,533.5 |         |  |   | 1,478.0 |         |  |   | 1,235.6 |         | 
| |                                                         | Accounts receivable and other current assets                |                                                               | 89.0    |         |  |   | 72.9    |         |  |   | 98.3    |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total Current Assets                                          |         | 1,768.3 |  |   |         | 1,661.5 |  |   |         | 1,712.7 |  | 
| |                                                         | Property and equipment, net of accumulated depreciation     |                                                               |         |         |  |   |         |         |  |   |         |         | 
| |                                                         |                                                             | of $819.5, $724.7 and $763.5 at October 24, 2004,             |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | October 26, 2003, and January 25, 2004, respectively          |         | 543.4   |  |   |         | 563.2   |  |   |         | 577.7   |  | 
| |                                                         | Other assets                                                |                                                               | 85.7    |         |  |   | 83.2    |         |  |   | 70.2    |         | 
| |                                                         | Deferred income taxes                                       |                                                               | 2.2     |         |  |   | 2.9     |         |  |   | 1.3     |         | 
| |                                                         | Goodwill                                                    |                                                               | 123.4   |         |  |   | 99.7    |         |  |   | 104.3   |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total Assets                                                  | $       | 2,523.0 |  |   | $       | 2,410.5 |  |   | $       | 2,466.2 |  | 
|
| | Liabilities, Minority Interest and Stockholders' Equity |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| | Current Liabilities:                                    |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| |                                                         | Short-term borrowings and current portion of long-term debt | $                                                             | 136.7   |         |  | $ | 136.9   |         |  | $ | 141.2   |         | 
| |                                                         | Trade accounts payable                                      |                                                               | 829.3   |         |  |   | 801.1   |         |  |   | 595.9   |         | 
| |                                                         | Accrued payroll and other liabilities                       |                                                               | 250.2   |         |  |   | 233.9   |         |  |   | 281.8   |         | 
| |                                                         | Taxes, including income taxes                               |                                                               | 57.2    |         |  |   | 53.2    |         |  |   | 133.1   |         | 
| |                                                         | Deferred income taxes                                       |                                                               | 12.1    |         |  |   | 8.7     |         |  |   | 12.1    |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total Current Liabilities                                     |         | 1,285.5 |  |   |         | 1,233.8 |  |   |         | 1,164.1 |  | 
| |                                                         | Long-term debt                                              |                                                               | 56.3    |         |  |   | 50.7    |         |  |   | 57.2    |         | 
| |                                                         | Long-term capital lease obligations                         |                                                               | -       |         |  |   | 12.9    |         |  |   | -       |         | 
| |                                                         | Other long-term liabilities                                 |                                                               | 100.3   |         |  |   | 86.8    |         |  |   | 90.2    |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total liabilities                                             |         | 1,442.1 |  |   |         | 1,384.2 |  |   |         | 1,311.5 |  | 
| |                                                         | Minority interest                                           |                                                               | 1.4     |         |  |   | -       |         |  |   | 1.7     |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total liabilities and minority interest                       |         | 1,443.5 |  |   |         | 1,384.2 |  |   |         | 1,313.2 |  | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         | Stockholders' Equity:                                       |                                                               |         |         |  |   |         |         |  |   |         |         | 
| |                                                         | Common stock; 200,000,000 shares authorized;                |                                                               |         |         |  |   |         |         |  |   |         |         | 
| |                                                         |                                                             | 76,121,261, 78,009,042 and 78,273,341 issued and              |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | outstanding at October 24, 2004, October 26, 2003,            |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | and January 25, 2004, respectively                            |         | 582.5   |  |   |         | 644.0   |  |   |         | 646.3   |  | 
| |                                                         | Deferred compensation                                       |                                                               | (0.5    | )       |  |   | (0.5    | )       |  |   | (0.6    | )       | 
| |                                                         | Accumulated other comprehensive income                      |                                                               | 22.8    |         |  |   | 13.2    |         |  |   | 24.1    |         | 
| |                                                         | Retained earnings                                           |                                                               | 474.7   |         |  |   | 369.6   |         |  |   | 483.2   |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total Stockholders' Equity                                    |         | 1,079.5 |  |   |         | 1,026.3 |  |   |         | 1,153.0 |  | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total liabilities, minority interest and stockholders' equity | $       | 2,523.0 |  |   | $       | 2,410.5 |  |   | $       | 2,466.2 |  | 
|

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

---

# BORDERS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE 39 WEEKS ENDED OCTOBER 24, 2004(dollars in millions except share amounts)
(UNAUDITED)

| |                                      |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |   | 
| | ------------------------------------ | ------------------------------- | ---------- | - | - | ----- | ------ | - | - | ---- | --- |  | - | ---- | --- |  | - | ----- | - |  | - | ------- | ------ | - | 
|
|
|
|
| | Balance at January 25, 2004          | 78,273,341                      |            |   | $ | 646.3 |        |   | $ | (0.6 | )   |  | $ | 24.1 |     |  | $ | 483.2 |   |  | $ | 1,153.0 |        |  
| |                                      |                                 |            |   |   |       |        |   |   |      |     |  |   |     
| | Net income                           | -                               |            |   |   | -     |        |   |   | -    |     |  |   | -    |     |  |   | 10.0  |   |  |   | 10.0    |        |  
| | Currency translation adjustment      | -                               |            |   |   | -     |        |   |   | -    |     |  |   | (1.6 | )   |  |   | -     |   |  |   | (1.6    | )      |  
| | Change in fair value of              |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |  
| |                                      | derivatives, net of tax of $0.0 | -          |   |   |       | -      |   |   |      | -   |  |   |      | 0.3 |  |   |       | - |  |   |         | 0.3    |   | 
| |                                      |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |  
| | Comprehensive income                 |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   | 8.7     |        |  
| | Cash dividends declared              | -                               |            |   |   | -     |        |   |   | -    |     |  |   | -    |     |  |   | (18.5 | ) |  |   | (18.5   | )      |  
| | Issuance of common stock pursuant to |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |  
| |                                      | stock-based compensation plans  | 2,373,332  |   |   |       | 32.1   |   |   |      | -   |  |   |      | -   |  |   |       | - |  |   |         | 32.1   |   | 
| | Repurchase and retirement of         |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |  
| |                                      | common stock                    | (4,525,412 | ) |   |       | (104.6 | ) |   |      | -   |  |   |      | -   |  |   |       | - |  |   |         | (104.6 | ) | 
| | Change in deferred                   |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |  
| |                                      | compensation                    | -          |   |   |       | -      |   |   |      | 0.1 |  |   |      | -   |  |   |       | - |  |   |         | 0.1    |   | 
| | Tax benefit of equity                |                                 |            |   |   |       |        |   |   |      |     |  |   |      |     |  |   |       |   |  |   |         |        |  
| |                                      | compensation                    | -          |   |   |       | 8.7    |   |   |      | -   |  |   |      | -   |  |   |       | - |  |   |         | 8.7    |   | 
| |                                      |                                 |            |   |   |       |        |   |   |      |     |  |   |     
| | Balance at October 24, 2004          | 76,121,261                      |            |   | $ | 582.5 |        |   | $ | (0.5 | )   |  | $ | 22.8 |     |  | $ | 474.7 |   |  | $ | 1,079.5 |        |  
| |                                      |                                 |            |   |   |       |        |   |   |      |     |  |   |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

---

# BORDERS
GROUP, INC.CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS(dollars in millions)(UNAUDITED)

| |                                                                     |                                                                     |                                                      |                                           |        |       |        |      |        |       |   | 
| | ------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------ | ----- | ------ | ---- | ------ | ----- | - | 
|
|
|
|
| | Cash provided by (used for):                                        |                                                                     |                                                      |                                           |        |       |        |      |       
| | Operations                                                          |                                                                     |                                                      |                                           |        |       |        |      |       
| | Net income                                                          | $                                                                   | 10.0                                                 |                                           |        | $     | 0.2    |      |       
| | Adjustments to reconcile net income to operating cash flows:        |                                                                     |                                                      |                                           |        |       |        |      |       
| |                                                                     | Depreciation                                                        |                                                      | 72.0                                      |        |       |        | 73.3 |        |      
| |                                                                     | Gain on deconsolidation of variable interest entities               |                                                      | (2.9                                      | )      |       |        | -    |        |      
| |                                                                     | Increase in deferred income taxes                                   |                                                      | (1.0                                      | )      |       |        | -    |        |      
| |                                                                     | Increase in other long-term assets                                  |                                                      | (7.8                                      | )      |       |        | (8.5 | )      |      
| |                                                                     | Increase (decrease) in other long-term liabilities                  |                                                      | 6.2                                       |        |       |        | (0.2 | )      |      
| |                                                                     | Asset impairments and other writedowns                              |                                                      | -                                         |        |       |        | 0.6  |        |      
| |                                                                     | Cash provided by (used for) current assets and current liabilities: |                                                      |                                           |        |       |        |      |        |      
| |                                                                     |                                                                     | Increase in inventories                              |                                           | (292.4 | )     |        |      | (286.4 | )     |  
| |                                                                     |                                                                     | Decrease in accounts receivable                      |                                           | 23.0   |       |        |      | 21.1   |       |  
| |                                                                     |                                                                     | Increase in prepaid expenses                         |                                           | (9.7   | )     |        |      | (4.1   | )     |  
| |                                                                     |                                                                     | Increase in accounts payable                         |                                           | 229.7  |       |        |      | 232.6  |       |  
| |                                                                     |                                                                     | Decrease in taxes payable                            |                                           | (67.2  | )     |        |      | (64.6  | )     |  
| |                                                                     |                                                                     | Decrease in expenses payable and accrued liabilities |                                           | (35.8  | )     |        |      | (48.3  | )     |  
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash used for operations              | (75.9  | )     |        |      | (84.3  | )     |  
| | Investing                                                           |                                                                     |                                                      |                                           |        |       |        |      |       
| | Capital expenditures                                                |                                                                     | (73.9                                                | )                                         |        |       | (77.5  | )    |       
| | Loss on disposal of assets                                          |                                                                     | 1.2                                                  |                                           |        |       | 0.9    |      |       
| | Proceeds from sale-leaseback of assets                              |                                                                     | 32.3                                                 |                                           |        |       | -      |      |       
| | Acquisition                                                         |                                                                     | (31.2                                                | )                                         |        |       | (2.9   | )    |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash used for investing               |        | (71.6 | )      |      |        | (79.5 | ) | 
| | Financing                                                           |                                                                     |                                                      |                                           |        |       |        |      |       
| | Net repayment of long-term capital lease obligations                |                                                                     | (0.4                                                 | )                                         |        |       | (0.9   | )    |       
| | Net funding from credit facility and other financing obligations    |                                                                     | 6.5                                                  |                                           |        |       | 19.4   |      |       
| | Issuance of common stock pursuant to stock-based compensation plans |                                                                     | 32.1                                                 |                                           |        |       | 15.8   |      |       
| | Payment of cash dividend                                            |                                                                     | (18.5                                                | )                                         |        |       | -      |      |       
| | Repurchase of common stock                                          |                                                                     | (104.6                                               | )                                         |        |       | (31.5  | )    |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash provided by (used for) financing |        | (84.9 | )      |      |        | 2.8   |   | 
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Effect of exchange rates on cash and equivalents                    |                                                                     | (0.6                                                 | )                                         |        |       | 2.5    |      |       
| | Net decrease in cash and equivalents                                |                                                                     | (233.0                                               | )                                         |        |       | (158.5 | )    |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Cash and equivalents at beginning of year                           |                                                                     | 378.8                                                |                                           |        |       | 269.1  |      |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Cash and equivalents at end of period                               | $                                                                   | 145.8                                                |                                           |        | $     | 110.6  |      |       
| |                                                                     |                                                                     |                                                      |                                           |        |       |        |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

## NOTE 1 - BASIS
OF PRESENTATION

The accompanying unaudited condensed
consolidated financial statements of Borders Group, Inc. (the Company) have been
prepared in accordance with Rule 10-01 of Regulation S-X and do not include all
the information and notes required by accounting principles generally accepted
in the United States for complete financial statements. All adjustments,
consisting only of normal recurring adjustments, have been made which, in the
opinion of management, are necessary for a fair presentation of the results of
the interim periods. The results of operations for such interim periods are not
necessarily indicative of results of operations for a full year. The unaudited
condensed consolidated financial statements should be read in conjunction with
the Companys consolidated financial statements and notes thereto for the
fiscal year ended January 25, 2004.

The Companys fiscal
year ends on the Sunday immediately preceding the last Wednesday in January. At
October 24, 2004, the Company operated 498 superstores under the Borders name,
including 24 in the United Kingdom, 11 in Australia, two in Puerto Rico, and one
each in Singapore and New Zealand. The Company also operated 710 mall-based and
other bookstores primarily under the Waldenbooks name, 36 bookstores under the
Books etc. name in the United Kingdom and 72 Paperchase locations, also in the
United Kingdom, approximately one-third of which are located inside Borders
International superstores.

## NOTE 2 -
COMMITMENTS AND CONTINGENCIES

Litigation: Two
former employees, individually and on behalf of a purported class consisting of
all current and former employees who worked as assistant managers in Borders
stores in the state of California at any time between April 10, 1996, and the
present, have filed an action against the Company in the Superior Court of
California for the County of San Francisco. The action alleges that the
individual plaintiffs and the purported class members worked hours for which
they were entitled to receive, but did not receive, overtime compensation under
California law, and that they were classified as exempt store management
employees but were forced to work more than 50% of their time in non-exempt
tasks. The Amended Complaint, which names two additional plaintiffs, alleges
violations of the California Labor Code and the California Business and
Professions Code. The relief sought includes compensatory and punitive damages,
penalties, preliminary and permanent injunctions requiring Borders to pay
overtime compensation as required under California and Federal law, prejudgment
interest, costs, and attorneys fees and such other relief as the court
deems proper. On July 29, 2002, the Superior Court of California granted the
plaintiffs motion for class certification in the action. The class
certified consists of all individuals who worked as Assistant Managers in a
Borders superstore in California at any time between April 10, 1996 and March
18, 2001. The class was further certified by the Court into the following
subclasses: Assistant Manager-Merchandising; Assistant Manager-Inventory;
Assistant Manager-Human Resources; Assistant Manager-Music; Assistant
Manager-Training; Assistant Manager-Café. On January 28, 2004, a tentative
settlement, subject to court approval, was reached pursuant to which the Company
has agreed to pay $3.5 to resolve all claims asserted in the litigation. On July
29, 2004, the court granted preliminary approval of the tentative settlement,
and scheduled the hearing on the final approval of the tentative settlement for
December 2, 2004. The Company classified this charge as Legal settlement
expense in the consolidated statements of operations in 2003.

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 lawsuit and has
expensed as incurred all legal costs to date. Although an adverse resolution of
the 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 litigation will have a material effect on its liquidity or
financial position.

6

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

Certain states and private
litigants have sought to impose sales or other tax collection efforts on
out-of-jurisdiction companies that engage in e-commerce. The Company currently
is disputing a claim by the state of California relating to sales taxes that the
state claims should have been collected on certain Borders.com sales in
California prior to implementation of the Companys Mirror Site agreement
with Amazon. Also, the Company and Amazon have been named as defendants in
actions filed by a private litigant on behalf of the states of Nevada and
Illinois under the applicable states False Claims Act relating to the
failure to collect use taxes on Internet sales in Nevada and Illinois for
periods both before and after the implementation of the Mirror Site Agreement.
The Complaints seek judgments, jointly and severally, against the defendants
for, among other things, injunctive relief, treble the amount of damages
suffered by the states of Nevada and Illinois as a result of the alleged
violations of the defendants, penalties, costs and expenses, including legal
fees. A similar action previously filed against the Company in Tennessee has
been dismissed and the appeal period has expired. A motion of the Attorney
General of Nevada to dismiss the Nevada action was denied, and the Attorney
General has appealed that ruling to the Nevada Supreme Court. On July 29, 2004,
the Illinois Attorney General filed a motion to dismiss the Illinois matter
as against the Company. This motion has been stayed pending the decision on an
appeal in a similar action.

The Company is vigorously
defending all claims against the Company relating to any failure by it or Amazon
to collect sales or other taxes relating to Internet sales, and intends to file,
with other retailers, a motion to dismiss the Nevada action on additional
grounds not included in the respective Nevada Attorney Generals motion.
The Company and other retailer defendants have filed a similar joint motion in
the Illinois matter but no ruling has been made on the motion. Although an
adverse resolution of claims relating to the failure to collect sales or other
taxes on online sales could have a material effect on the results of the
operations of the Company for the applicable period or periods, the Company does
not believe that any such claims will have a material adverse effect on its
liquidity or financial position.

On October 22, 2004, Ann
Arbor Store No. 1 L.L.C. (the Plaintiff ), a variable interest
entity formed by Agree LP and Agree Realty Corporation (collectively
Agree) that leases to the Company the Borders store and adjacent
office space in downtown Ann Arbor, Michigan (the Property), filed a
Complaint for Declaratory Relief against the Company. The Complaint seeks a
judgment ordering the Company to execute a lease for the Property at a rental
rate that the Company disputes, as well as other relief. The litigation relates
to the calculation of rent under a 1996 agreement pursuant to which the
Plaintiff and the Company agreed to enter into a long-term lease of the Property
upon the termination of the Companys synthetic lease financing facility,
which occurred in July of 2004. The Company has filed an Answer disputing the
rent calculation of Plaintiff, and a Counterclaim against the Plaintiff and a
Third Party Complaint against Agree seeking a declaratory judgment relating to
the rent payable under the long-term lease, damages and other relief. The
Company repaid a loan in the amount of approximately $9.7 in connection with the
termination of the synthetic lease facility, which was accounted for as prepaid
rent on the Property, as discussed in Note 3  Financing 
Lease Financing Facilities. Agree contends the Company should not
be given credit for the repayment of the loan in determining the annual rent
under the long-term lease on the Property. An adverse decision could result in
the impairment of all or a portion of this asset, as well as a rental obligation
under the long-term lease in an amount greater than is currently being paid and
accrued for by the Company. The parties have agreed to engage in a non-binding
facilitation process in an effort to resolve the dispute.

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

Relationship with Kmart
 General: Prior to its initial public offering in May 1995, the
Company was a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no
shares of common stock of the Company. On January 22, 2002, Kmart filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code, and emerged from
Chapter 11 on May 6, 2003. Such filings have not affected the operations of the
Company.

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

Tax Allocation and Indemnification
Agreement: Prior to the completion of its initial public offering (IPO), the
Company was included in the consolidated federal income tax returns of Kmart and
filed on a combined basis with Kmart in certain states. Pursuant to a tax
allocation and indemnification agreement between the Company and Kmart (Tax
Allocation Agreement) the Company will remain obligated to pay to Kmart any
income taxes the Company would have had to pay if it had filed separate tax
returns for the tax period beginning on January 26, 1995, and ending on June 1,
1995, the date of the consummation of the IPO (to the extent that it has not

7

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

previously paid such
amounts to Kmart). In addition, if the tax liability attributable to the Company
for any previous tax period during which the Company was included in a
consolidated federal income tax return filed by Kmart or a combined state return
is adjusted as a result of an action of a taxing authority or a court, then the
Company will pay to Kmart the amount of any increase in such liability and Kmart
has agreed to pay to the Company the amount of any decrease in such liability
(in either case together with interest and penalties). The Companys tax
liability for previous years will not be affected by any increase or decrease in
Kmarts tax liability if such increase or decrease is not directly
attributable to the Company. After completion of the IPO, the Company continued
to be subject under existing federal regulations to several liability for the
consolidated federal income taxes for any tax year in which it was a member of
any consolidated group of which Kmart was the common parent. Pursuant to the Tax
Allocation Agreement, however, Kmart agreed to indemnify the Company for any
federal income tax liability of Kmart or any of its subsidiaries (other than
that which is attributable to the Company) that the Company could be required to
pay and the Company agreed to indemnify Kmart for any of the Companys
separate company taxes.

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

## NOTE 3 -
FINANCING

Credit Agreement.
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
default provisions that are typical for this type of financing, including a
cross default provision relating to other indebtedness of more than $25.0. The
Company had borrowings outstanding under the Credit Agreement of $127.7 at
October 24, 2004, $136.9 at October 26, 2003 and $126.9 at January 25, 2004.

8

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

Term Loan. On July 30,
2002, the Company issued $50.0 of senior guaranteed notes (the
Notes) due July 30, 2006 and bearing interest at 6.31% (payable
semi-annually). The proceeds of the sale of the Notes were used to refinance
existing indebtedness of the Company and its subsidiaries and for general
corporate purposes. The 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.

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 variable interest entities
(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 non-current portion as a component of Other
assets on the consolidated balance sheets at October 24, 2004. In
conjunction with this transaction, the Lease Financing Facilities were
terminated.

Consolidated VIEs.
As a result of the repayment and termination of the Lease Financing Facilities,
the Company deconsolidated the two VIEs which had participated in the Lease
Financing Facilities as of July 25, 2004, pursuant to the provisions of
Financial Accounting Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). The
deconsolidation of the two VIEs resulted in a reduction of land, property and
equipment, net of accumulated depreciation, of $12.5, short-term borrowings of
$13.8, and minority interest of $1.3 at July 25, 2004. The Company also recorded
an after-tax gain of $1.7 as a result of the deconsolidation of these VIEs.
These amounts have been treated as non-cash items on the consolidated statements
of cash flows.

Separately, the Company is
the primary beneficiary of two VIEs due to the Companys guarantee of the
debt of these entities. As a result, the Company consolidates these VIEs and has
recorded property and equipment, net of accumulated depreciation, of $5.5,
long-term debt of $5.8, and minority interest of $0.4 at October 24, 2004.

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 October
24, 2004 was approximately $27.3.

## NOTE 4 
STOCK-BASED BENEFIT PLANS

The Company accounts for
equity-based compensation under the guidance of 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). 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:

9

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

| |                                                        |                                                    |      |       |   |   |      |       |   |   |      |      |  |   |      |       |   |  | 
| | ------------------------------------------------------ | -------------------------------------------------- | ---- | ----- | - | - | ---- | ----- | - | - | ---- | ---- |  | - | ---- | ----- | - |  | 
|
|
|
| | Net income (loss), as reported                         | $                                                  | (1.5 | )     |   | $ | 0.5  |       |   | $ | 10.0 |      |  | $ | 0.2  |       |  
| | Add: Stock-based employee expense included in reported |                                                    |      |       |   |   |      |       |   |   |      |      |  |   |      |       |  
| |                                                        | net income, net of related tax effects             |      | 0.1   |   |   |      | -     |   |   |      | 0.1  |  |   |      | -     |   | 
| | Deduct: Total stock-based employee compensation        |                                                    |      |       |   |   |      |       |   |   |      |      |  |   |      |       |  
| |                                                        | expense determined under fair value method for all |      |       |   |   |      |       |   |   |      |      |  |   |      |       |   | 
| |                                                        | awards, net of tax                                 |      | 1.3   |   |   |      | 3.1   |   |   |      | 3.7  |  |   |      | 6.1   |   | 
| |                                                        |                                                    |      |       |   |   |      |       |   |   |     
| | Pro-forma net income (loss)                            | $                                                  | (2.7 | )     |   | $ | (2.6 | )     |   | $ | 6.4  |      |  | $ | (5.9 | )     |  
| |                                                        |                                                    |      |       |   |   |      |       |   |   |     
| | Earnings (loss) per share:                             |                                                    |      |       |   |   |      |       |   |   |      |      |  |   |      |       |  
| |                                                        | Basic -- as reported                               | $    | (0.02 | ) |   | $    | 0.01  |   |   | $    | 0.13 |  |   | $    | -     |   | 
| |                                                        | Basic -- pro-forma                                 | $    | (0.03 | ) |   | $    | (0.03 | ) |   | $    | 0.08 |  |   | $    | (0.08 | ) | 
| |                                                        | Diluted -- as reported                             | $    | (0.02 | ) |   | $    | 0.01  |   |   | $    | 0.13 |  |   | $    | -     |   | 
| |                                                        | Diluted -- pro-forma                               | $    | (0.03 | ) |   | $    | (0.03 | ) |   | $    | 0.08 |  |   | $    | (0.08 | ) | 

## NOTE 5 -
SEGMENT INFORMATION

The Company is organized
based upon the following operating segments: domestic Borders stores,
Waldenbooks stores, International Borders, Books etc. and Paperchase stores, and
Corporate (consisting of the unallocated portion of interest expense, certain
corporate governance costs, and corporate incentive costs).

Segment data includes
charges allocating all corporate support costs to each segment. Transactions
between segments, consisting principally of inventory transfers, are recorded
primarily at cost. Interest income and expense are allocated to segments based
upon the cash flow generated or absorbed by those segments. The Company utilizes
fixed interest rates, approximating the Companys medium-term borrowing and
investing rates, in calculating segment interest income and expense. The Company
evaluates the performance of its segments and allocates resources to them based
on anticipated future contribution.

Total assets for the
Corporate segment include certain corporate headquarters property and equipment,
net of accumulated depreciation, of $68.9 and $72.2 at October 24, 2004 and
October 26, 2003, respectively, whose related depreciation expense has been
allocated to the Borders, Waldenbooks and International segments. Depreciation
expense allocated to the Borders segment totaled $2.5 and $2.8 for the 13 weeks
ended October 24, 2004 and October 26, 2003, respectively, and $7.3 and $8.6 for
the 39 weeks ended October 24, 2004 and October 26, 2003, respectively.
Depreciation expense allocated to the Waldenbooks segment totaled $1.2 and $1.4
for the 13 weeks ended October 24, 2004 and October 26, 2003, respectively, and
$3.5 and $4.4 for the 39 weeks ended October 24, 2004 and October 26, 2003,
respectively. Depreciation expense allocated to the International segment
totaled $0.0 and $0.0 for the 13 weeks ended October 24, 2004 and October 26,
2003, respectively, and $0.1 and $0.0 for the 39 weeks ended October 24, 2004
and October 26, 2003 respectively.

10

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

| |                         |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |   |  | 
| | ----------------------- | ------------- | ----- | ----- | - | - | ----- | ----- | - | - | ------- | ------- | - | - | ------- | ------- | - |  | 
|
|
|
| | Sales                   |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                         | Borders       | $     | 564.1 |   |   | $     | 551.7 |   |   | $       | 1,734.2 |   |   | $       | 1,643.2 |   | 
| |                         | Walden        |       | 150.6 |   |   |       | 161.5 |   |   |         | 451.4   |   |   |         | 480.5   |   | 
| |                         | International |       | 118.6 |   |   |       | 94.7  |   |   |         | 325.6   |   |   |         | 262.5   |   | 
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total sales             | $             | 833.3 |       |   | $ | 807.9 |       |   |   | 2,511.2 |         |   |   | 2,386.2 |         |  
| |                         |               |       |       |   |   |       |       |   |   |        
| | Net income (loss)       |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                         | Borders       | $     | 8.3   |   |   | $     | 7.4   |   |   | $       | 34.9    |   |   | $       | 22.8    |   | 
| |                         | Walden        |       | (1.1  | ) |   |       | 0.7   |   |   |         | 3.4     |   |   |         | 3.8     |   | 
| |                         | International |       | (2.1  | ) |   |       | (2.1  | ) |   |         | (7.9    | ) |   |         | (9.8    | ) | 
| |                         | Corporate     |       | (6.6  | ) |   |       | (5.5  | ) |   |         | (20.4   | ) |   |         | (16.6   | ) | 
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total net income (loss) | $             | (1.5  | )     |   | $ | 0.5   |       |   | $ | 10.0    |         |   | $ | 0.2     |         |  
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total assets            |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                         | Borders       |       |       |   |   |       |       |   |   | $       | 1,533.5 |   |   | $       | 1,476.1 |   | 
| |                         | Walden        |       |       |   |   |       |       |   |   |         | 391.5   |   |   |         | 413.2   |   | 
| |                         | International |       |       |   |   |       |       |   |   |         | 411.4   |   |   |         | 366.4   |   | 
| |                         | Corporate     |       |       |   |   |       |       |   |   |         | 186.6   |   |   |         | 154.8   |   | 
| |                         |               |       |       |   |   |       |       |   |   |         |         |   |  
| | Total assets            |               |       |       |   |   |       |       |   | $ | 2,523.0 |         |   | $ | 2,410.5 |         |  
| |                         |               |       |       |   |   |       |       |   |   |         |         |   |  

## NOTE 6 
SALE-LEASEBACK TRANSACTION

In March 2004, the Company
entered into an agreement with GE Pension Limited to sell and subsequently
leaseback a Company-owned property owned by its Books, Etc. subsidiary. There
were no future commitments, obligations, provisions, or circumstances included
in either the sale contract or the lease contract that would result in the
Companys continuing involvement; therefore, the assets associated with the
property were removed from the Companys condensed consolidated balance
sheets.

The transaction was
recorded in the International segment. The sale proceeds were $32.3 and the net
book value of the property upon the completion date of the sale was $28.4.
Direct costs associated with the transaction were $0.4. A deferred gain of $3.5
was recorded on the consolidated balance sheets in Other long-term
liabilities and is being amortized over the 20-year term of the operating
lease.

## NOTE 7 -
ACQUISITION OF PAPERCHASE PRODUCTS, LTD.

In July 2004, the Company
invested cash of $24.1, including debt repayment of $4.1, in connection with an
increase in its 15% equity stake in Paperchase Products, Ltd. (Paperchase), a
leading stationery retailer in the United Kingdom, to 97%, which was allocated
primarily to fixed assets, inventory and goodwill of $28.0. The Company also
recorded minority interest of $1.1. During the third quarter of 2004, the
Company received an independent valuation of the acquired assets of Paperchase,
and as a result, recorded fair market value adjustments to the purchased value
of fixed assets and intangible assets, resulting in a $9.0 reduction of the
previously-recorded goodwill balance.  At the time of the acquisition, Paperchase
operated 61 locations, including more than a third of which are located inside
Borders International superstores. The acquisition has been accounted for as
a purchase in the Companys International segment. The acquisition was not
material to the consolidated statements of operations, the consolidated balance
sheets, or the consolidated statements of cash flows of the Company.

## NOTE 8 
SEATTLES BEST COFFEE LICENSING AGREEMENT

In August 2004, the Company
entered into a licensing agreement with Seattles Best Coffee LLC (SBC), a
wholly-owned subsidiary of Starbucks Corporation, through which the Company will
operate SBC-branded cafés within substantially all of the Companys
existing Borders superstores in the continental U.S. and Alaska and new stores
in that territory as they are opened. Cafés located within

11

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
FINANCIAL STATEMENTS(dollars in
millions except per share data)

existing Borders
superstores will be converted to SBC cafés beginning in early 2005, and
continue over the next few years. The SBC cafés will continue to be managed
and staffed by Company employees, who will be trained on SBC brand standards and
procedures. SBC will also provide brand direction and oversight, as well as
in-store promotional support, and will receive royalty payments from the
Company.

## NOTE 9 - NEW
ACCOUNTING GUIDANCE

On March 31, 2004, the
Financial Accounting Standards Board (FASB) issued an exposure draft,
Share-Based Payment, an Amendment of FASB Statements No. 123 and
95".  The proposed change in accounting would replace existing
requirements under SFAS 123, Accounting for Stock-Based
Compensation, and APB Opinion No. 25, Accounting for Stock Issued to
Employees.  The exposure draft covers a wide range of equity-based
compensation arrangements.  Under the FASBs proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement.  The expense of the award would generally be
measured at fair value at the grant date.  The comment period for the
exposure draft ended on June 30, 2004 and final rules are expected to be
issued in late 2004.  The standard would be applicable for fiscal quarters
beginning after June 30, 2005.  The Company will evaluate the impact of any
change in the accounting standards on the Companys financial position and
results of operations when the final rules are issued.

## ITEM 2. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

## General

Borders Group, Inc.,
through its subsidiaries, Borders, Inc. (Borders), Walden Book Company, Inc.
(Waldenbooks), Borders U.K. 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 October 24, 2004, the Company operated 498 superstores under the Borders
name, including 24 in the United Kingdom, 11 in Australia, two in Puerto Rico,
and one each in Singapore and New Zealand. The Company also operated 710
mall-based and other bookstores primarily under the Waldenbooks name, 36
bookstores under the Books etc. name in the United Kingdom and 72 Paperchase
locations, also in the United Kingdom, approximately one-third of which are
located inside Borders International superstores.

The Companys business
strategy is to continue its growth and increase its profitability through (i)
expanding and refining its core domestic superstore business, (ii) driving
International growth by expanding established markets and leveraging
infrastructure investments, (iii) leveraging strategic alliances and in-store
Web-based commerce technologies which enhance the customer experience, and (iv)
maximizing cash flow and profitability at Waldenbooks through a combination of
selective growth and profit initiatives. Specifically, by the end of 2004 the
Company will have opened 19 domestic Borders stores and will have undertaken an
expanded remodel program, through which the Company will have completed close to
40 major remodels of existing stores. International store growth over the next
several years will primarily focus on existing markets with approximately six to
eight International store openings expected annually. The International segment
achieved full year profitability for the first time in 2003 and full year profit
growth is expected going forward. The Waldenbooks segment has experienced
negative comparable store sales percentages for the past several years primarily
due to the overall decrease in mall traffic and the impact of superstore
openings. Waldenbooks manages the Companys kiosks and small format stores,
including those in airports and outlet malls and selective growth in these small
format stores is expected in 2004. The Companys objectives with respect to
these initiatives are to continue to grow consolidated sales, earnings, and free
cash flow in 2004. These initiatives could result in store closing costs, store
asset write offs or asset impairments over the next few years. In addition,
subject to Board approval, the Company plans to provide returns to stockholders
through quarterly cash dividends and share repurchases by utilizing free cash
flow generated by the business. In September 2004, the Board of Directors
declared a quarterly cash dividend of $0.08 per share on the Companys
common stock, payable October 27, 2004 to stockholders of record at the close of
business October 6, 2004. In May 2003, the Board of Directors authorized an
increase in the amount of share repurchases to $150 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).

12

---

From May 1998 to August
2001, the Company operated an Internet commerce site, Borders.com. In 2001, the
Company entered into an agreement with an affiliate of Amazon.com, Inc. (Amazon)
for Amazon to develop and operate a Web site utilizing the Borders.com URL (the
Mirror Site). Operation of the Mirror Site began August 1, 2001. As
of that date, the Company stopped selling merchandise via its Company-owned and
-operated Borders.com Web site (and the Internet). In 2002, the Company entered
into an additional agreement with Amazon for Amazon to develop and operate a Web
site utilizing the Waldenbooks.com URL (the Second Mirror Site).
Operation of the Second Mirror Site began November 11, 2002. In 2004, the
Company entered into an additional agreement with a UK affiliate of Amazon for
Amazon to develop and operate a Web site utilizing the Borders.co.uk and
Booksetc.co.uk URLs (the Third Mirror Site). The Third Mirror Site
launched in October 2004.

Under these agreements,
Amazon is the merchant of record for all sales made through the Mirror Sites,
and determines all prices and other terms and conditions applicable to such
sales. Amazon is responsible for the fulfillment of all products sold through
the Mirror Sites and retains all payments from customers. The Company receives
referral fees for products purchased through the Mirror Sites. The agreements
contain mutual indemnification provisions, including provisions that essentially
allocate between the parties responsibilities with respect to any liabilities
for sales, use and similar taxes, including penalties and interest, associated
with products sold on the Mirror Sites. Currently, taxes are not collected with
respect to products sold on the Mirror Sites except in certain states.

Also in 2002, Borders
entered into an agreement with Amazon to allow customers ordering certain book,
music and movie products through certain of Amazons Web sites to purchase
and pick up their merchandise at Borders stores in the United States (Express
In-Store Pick Up). Under this agreement, the Company is the merchant of record
for all sales made through this service, and determines all prices and other
terms and conditions applicable to such sales. The Company fulfills all products
sold through Express In-Store Pick Up. In addition, the Company assumes all
risk, cost and responsibility related to the sale and fulfillment of all
products sold. The Company recognizes revenue upon customers pick up of
the merchandise at the store, and classifies this revenue as a component of
Sales in the Companys consolidated statements of operations.
The Company also pays referral fees to Amazon pursuant to this agreement. This
service was offered to customers beginning November 27, 2002.

In July 2004, the Company
invested cash of $24.1 million, including debt repayment of $4.1 million, in
connection with an increase in its 15% equity stake in Paperchase Products, Ltd.
(Paperchase), a leading stationery retailer in the United Kingdom, to 97%, which
was allocated primarily to fixed assets, inventory and goodwill of $28.0
million. The Company also recorded minority interest of $1.1 million. During the
third quarter of 2004, the Company received an independent valuation of the
acquired assets of Paperchase, and as a result, recorded fair market value
adjustments to the purchased value of fixed assets and intangible assets,
resulting in a $9.0 reduction of the previously-recorded goodwill balance. At the time of the acquisition, Paperchase
operated 61 locations, including more than a third of which are located inside
Borders International superstores.  The
acquisition has been accounted for as a purchase in the Companys
International segment. The acquisition was not material to the consolidated
statements of operations, the consolidated balance sheets, or the consolidated
statements of cash flows of the Company.

In August 2004, the Company
entered into a licensing agreement with Seattles Best Coffee LLC (SBC), a
wholly-owned subsidiary of Starbucks Corporation, through which the Company will
operate SBC-branded cafés within substantially all of the Companys
existing Borders superstores in the continental U.S. and Alaska and new stores
in that territory as they are opened. Cafés located within existing Borders
superstores will be converted to SBC cafés beginning in early 2005, and
continue over the next few years. The SBC cafés will continue to be managed
and staffed by Company employees, who will be trained on SBC brand standards and
procedures. SBC will also provide brand direction and oversight, as well as
in-store promotional support, and will receive royalty payments from the
Company.

The Company has signed a
memorandum of understanding with Berjaya Group Berhad, a publicly listed
diversified corporation headquartered in Malaysia, to establish a franchise
arrangement under which Berjaya will operate Borders stores in Malaysia, the
first of which is expected to open in April 2005.

The Companys third
quarters of 2004 and 2003 consisted of the 13 weeks ended October 24, 2004 and
October 26, 2003, respectively.

13

---

## Results of
Operations

The following table
presents the Companys consolidated statements of operations data, as a
percentage of sales, for the periods indicated.

| |                                               |       |     |  |       |   |  |       |   |  |       |   | 
| | --------------------------------------------- | ----- | --- |  | ----- | - |  | ----- | - |  | ----- | - | 
|
|
|
|
| | Sales                                         | 100.0 | %   |  | 100.0 | % |  | 100   | % |  | 100   | % | 
| | Other revenue                                 | 0.6   |     |  | 1.1   |   |  | 0.8   |   |  | 1.0   |   | 
| |                                               |       |     |  |       |   |  |       |  
| | Total revenue                                 | 100.6 |     |  | 101.1 |   |  | 100.8 |   |  | 101.0 |   | 
| | Cost of merchandise sold (includes occupancy) | 75.1  |     |  | 75.6  |   |  | 75.0  |   |  | 75.5  |   | 
| | Inventory writedowns                          | -     |     |  | -     |   |  | -     |   |  | -     |   | 
| |                                               |       |     |  |       |   |  |       |  
| | Gross margin                                  | 25.5  |     |  | 25.5  |   |  | 25.8  |   |  | 25.5  |   | 
| | Selling, general and administrative expenses  | 25.3  |     |  | 24.9  |   |  | 24.8  |   |  | 25.0  |   | 
| | Pre-opening expense                           | 0.2   |     |  | 0.3   |   |  | 0.1   |   |  | 0.2   |   | 
| | Asset impairments and other writedowns        | -     |     |  | (0.1  | ) |  | -     |   |  | -     |   | 
| |                                               |       |     |  |       |   |  |       |  
| | Operating income (loss)                       | -     |     |  | 0.4   |   |  | 0.9   |   |  | 0.3   |   | 
| | Interest expense                              | 0.3   |     |  | 0.3   |   |  | 0.3   |   |  | 0.3   |   | 
| |                                               |       |     |  |       |   |  |       |  
| | Income (loss) before income tax               | (0.3  | )   |  | 0.1   |   |  | 0.6   |   |  | -     |   | 
| | Income tax provision (benefit)                | (0.1  | )   |  | -     |   |  | 0.2   |   |  | -     |   | 
| |                                               |       |     |  |       |   |  |       |  
| | Net income (loss)                             | (0.2  | ) % |  | 0.1   | % |  | 0.4   | % |  | -     | % | 
| |                                               |       |     |  |       |   |  |       |  

Consolidated Results --
Comparison of the 13 weeks ended October 24, 2004 to the 13 weeks ended October
26, 2003

Sales

Consolidated sales
increased $25.4 million, or 3.1%, to $833.3 million in 2004 from $807.9 million
in 2003. This resulted primarily from increased sales in the Borders and
International segments, partially offset by a decrease in the Waldenbooks
segment.

Comparable store sales for
all Borders superstores decreased 1.6% in the 13 weeks ended October 24, 2004.
Comparable store sales measures for all Borders superstores, which are based
upon a 52-week year, include all stores open more than one year except those not
offering music (of which there are 10, representing approximately 2% of total
sales). New stores are included in the calculation of comparable store sales
measures upon the 13th month of operation. The comparable store sales decrease
for 2004 was due primarily to decreased store traffic, a slowdown in sales of
bestsellers and continued negative comparable store sales in the music category.
Partially offsetting this decrease was positive comparable store sales in the
movie category. Sales of movies improved on a comparable store basis primarily
as the result of increased sales of digital videodiscs (DVDs). The impact of
price changes on comparable store sales was not significant.

Waldenbooks
comparable store sales decreased 4.1% in the 13 weeks ended October 24, 2004.
Waldenbooks comparable store sales measures, which are based upon a
52-week year, include all stores open more than one year. New stores are
included in the calculation of comparable store sales measures upon the 13th
month of operation. The Companys seasonal mall-based kiosks are also
included in Waldenbooks comparable store sales measures. The comparable
store sales decrease for 2004 was primarily due to a decline in store traffic
due to the sluggish mall environment. The impact of price changes on comparable
store sales was not significant.

Other revenue

Other revenue consists
primarily of membership income from Waldenbooks Preferred Reader Program.

Until October 2004,
Waldenbooks sold memberships in its Preferred Reader Program, which offers
members discounts on purchases and other benefits. Waldenbooks has begun
de-emphasizing its Preferred Reader Program and is replacing it with other
promotional programs in order to maximize long-term sales and earnings. 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.

Due primarily to the change
in the Preferred Reader Program, other revenue has decreased $3.9 million, or
42.4%, to $5.3 million in 2004 from $9.2 million in 2003.

14

---

Gross margin

Consolidated gross margin
increased $6.3 million, or 3.1%, to $212.4 million in 2004 from $206.1 million
in 2003. As a percentage of sales, consolidated gross margin remained flat at
25.5% in 2004 as compared to 2003. This was mainly due to the Borders and
International segments gross margin as a percentage of sales increasing,
offset by a decrease in the Waldenbooks segment. In the Borders and
International segments, this was primarily due to a reduction in markdowns due
to decreased sales of bestsellers in 2004 as compared to 2003. The decrease in
the Waldenbooks segment was due to decreased other revenue as a percentage of
sales due to the change in the Preferred Reader Program, as previously
discussed, as well as increased occupancy expense as a percentage of sales, as a
result of occupancy costs for stores open more than one year remaining
essentially flat while comparable store sales declined.

The Company classifies the
following items as Cost of merchandise sold (includes occupancy) on
its consolidated statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs, distribution center
costs (including payroll, rent, supplies, depreciation, and other operating
expenses), and store occupancy costs (including rent, common area maintenance,
depreciation, repairs and maintenance, taxes, insurance, and others). The
Companys gross margin may not be comparable to that of other retailers,
which may exclude the costs related to their distribution network from cost of
sales and include them in other financial statement lines.

Selling, general and administrative expenses

Consolidated selling,
general and administrative expenses (SG&A) increased $9.4 million, or 4.7%,
to $210.8 million in 2004 from $201.4 million in 2003. As a percentage of sales,
SG&A increased to 25.3% in 2004 from 24.9% in 2003. This increase primarily
resulted from an increase in SG&A expenses as a percentage of sales for the
Borders, Waldenbooks and International segments. This resulted from increased
store payroll and store expenses as a percentage of sales in all segments due to
the decline in comparable store sales, as well as increased corporate payroll
costs in the International segment as a percentage of sales. These increases
were partially offset by decreased corporate payroll costs as a percentage of
sales in the Borders segment as a result of disciplined cost controls at the
corporate level.

The Company classifies the
following items as Selling, general and administrative expenses on
its consolidated statements of operations: store and administrative payroll,
utilities, supplies and equipment costs, credit card and bank processing fees,
bad debt, legal and consulting fees, certain advertising income and expenses and
others.

Interest expense

Consolidated interest
expense remained flat at $2.2 million in 2004 as compared to 2003.

Taxes

The effective tax rate for
the years presented differed from the federal statutory rate primarily as a
result of state income taxes. The Companys effective tax rate used was
37.0% in 2004 compared to 38.0% in 2003.

Net income

Due to the factors
mentioned above, net loss as a percentage of sales was 0.2% in 2004 as compared
to net income as a percentage of sales of 0.1% in 2003, and net loss was $1.5
million in 2004 compared to net income of $0.5 million in 2003.

Consolidated Results --
Comparison of the 39 weeks ended October 24, 2004 to the 39 weeks ended October
26, 2003

Sales

Consolidated sales
increased $125.0 million, or 5.2%, to $2,511.2 million in 2004 from $2,386.2
million in 2003. This resulted primarily from increased sales in the Borders and
International segments, partially offset by a decrease in the Waldenbooks
segment.

Comparable store sales for
all Borders superstores increased 0.7% in the 39 weeks ended October 24, 2004.
Comparable store sales measures for all Borders superstores, which are based
upon a 52-week year, include all stores open more than one year except those not
offering music (of which there are 10, representing approximately 2% of total
sales). New stores are included in the calculation of comparable store sales
measures upon the 13th month of operation. The comparable store sales increase
for 2004 was due primarily to

15

---

the movie and gifts and stationery categories,
which experienced strong positive comparable store sales, as well as slightly
positive comparable store sales of books on a year-to-date basis, partially
offset by negative comparable store sales in the music category. Sales of movies
improved on a comparable store basis primarily as the result of increased sales
of digital videodiscs (DVDs). Sales of the gifts and stationery category also
increased, principally the result of category management initiatives resulting
in product enhancements, improved placements, and a slight increase in space
allocation. The impact of price changes on comparable store sales was not
significant.

Waldenbooks
comparable store sales decreased 2.2% in the 39 weeks ended October 24, 2004.
Waldenbooks comparable store sales measures, which are based upon a
52-week year, include all stores open more than one year. New stores are
included in the calculation of comparable store sales measures upon the 13th
month of operation. The Companys seasonal mall-based kiosks are also
included in Waldenbooks comparable store sales measures. The comparable
store sales decrease for 2004 was primarily due to the sluggish mall environment
and a challenging comparison to a year ago when the fifth book in the Harry
Potter series was released. The impact of price changes on comparable store
sales was not significant.

Other revenue

Other revenue consists
primarily of membership income from Waldenbooks Preferred Reader Program.

Until October 2004,
Waldenbooks sold memberships in its Preferred Reader Program, which offers
members discounts on purchases and other benefits. As discussed previously,
Waldenbooks has begun de-emphasizing its Preferred Reader Program and is
replacing it with other promotional programs in order to maximize long-term
sales and earnings. 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.

Due primarily to the change
in the Preferred Reader Program, other revenue has decreased $5.0 million, or
20.9%, to $18.9 million in 2004 from $23.9 million in 2003.

Gross margin

Consolidated gross margin
increased $39.1 million, or 6.4%, to $646.8 million in 2004 from $607.7 million
in 2003. As a percentage of sales, consolidated gross margin increased to 25.8%
in 2004 from 25.5% in 2003. This was primarily due to the Borders and
International segments gross margin as a percentage of sales increasing,
partially offset by a decrease in the Waldenbooks segment. In the Borders and
International segments, the increase was primarily due to higher bestseller
discounts in 2003 related to the release of the fifth book in the Harry Potter
series, and to a lesser degree reduced discounts due to the slowdown in sales of
other bestsellers in the third quarter. The decrease in the Waldenbooks segment
was due to decreased other revenue as a percentage of sales due to the change in
the Preferred Reader Program, as previously discussed.

The Company classifies the
following items as Cost of merchandise sold (includes occupancy) on
its consolidated statements of operations: product costs and related discounts,
markdowns, freight, shrinkage, capitalized inventory costs, distribution center
costs (including payroll, rent, supplies, depreciation, and other operating
expenses), and store occupancy costs (including rent, common area maintenance,
depreciation, repairs and maintenance, taxes, insurance, and others). The
Companys gross margin may not be comparable to that of other retailers,
which may exclude the costs related to their distribution network from cost of
sales and include them in other financial statement lines.

Selling, general and administrative expenses

Consolidated selling,
general and administrative expenses (SG&A) increased $25.4 million, or 4.3%,
to $620.3 million in 2004 from $594.9 million in 2003. As a percentage of sales,
SG&A decreased to 24.8% in 2004 from 25.0% in 2003. This decrease primarily
resulted from a decrease in SG&A expenses as a percentage of sales for the
Borders and International segments, partially offset by an increase in SG&A
expenses as a percentage of sales for the Waldenbooks segment. The improvement
in the Borders segment resulted from reduced corporate non-payroll costs as a
percentage of sales, and the improvement in the International segment resulted
from reduced store payroll costs as a percentage of sales. The increase in the
Waldenbooks segment was primarily due to increased store payroll costs and store
operating expenses as a percentage of sales as a result of the decline in
comparable store sales.

The Company classifies the
following items as Selling, general and administrative expenses on
its consolidated statements of

16

---

operations: store and administrative payroll,
utilities, supplies and equipment costs, credit card and bank processing fees,
bad debt, legal and consulting fees, certain advertising income and expenses and
others.

Interest expense

Consolidated interest
expense decreased $0.5 million, or 7.1%, to $6.5 million in 2004 from $7.0
million in 2003. This was primarily due to lower average debt levels in 2004 as
compared to 2003, which primarily resulted from increased cash flow generated by
the Borders segment.

Taxes

The effective tax rate for
the years presented differed from the federal statutory rate primarily as a
result of state income taxes. The Companys effective tax rate used was
37.0% in 2004 compared to 38.0% in 2003.

Net income

Due to the factors
mentioned above, net income as a percentage of sales increased to 0.4% in 2004
from 0.0% in 2003, and net income dollars increased to $10.0 million in 2004
from $0.2 million in 2003.

## Segment Results

The Company is organized
based upon the following operating segments: domestic Borders stores,
Waldenbooks stores, International Borders, Books etc. and Paperchase stores, and
Corporate (consisting of the unallocated portion of interest expense, certain
corporate governance costs and corporate incentive costs). See Note 5 -
Segment Information in the notes to consolidated financial statements for
further information relating to these segments.

Segment data includes
charges allocating all corporate headquarters costs to each segment. Interest
income and expense are allocated to segments based upon the cash flow generated
or absorbed by those segments. The Company utilizes fixed interest rates,
approximating the Companys medium-term borrowing and investing rates, in
calculating segment interest income and expense.

## Borders

| |                          |   |       |   |  |   |       |   |  |   |         |   |  |   |         |   |  |  | 
| | ------------------------ | - | ----- | - |  | - | ----- | - |  | - | ------- | - |  | - | ------- | - |  |  | 
|
|
|
|
| | Sales                    | $ | 564.1 |   |  | $ | 551.7 |   |  | $ | 1,734.2 |   |  | $ | 1,643.2 |   | 
| | Net income               | $ | 8.3   |   |  | $ | 7.4   |   |  | $ | 34.9    |   |  | $ | 22.8    |   | 
| | Net income as % of sales |   | 1.5   | % |  |   | 1.3   | % |  |   | 2.0     | % |  |   | 1.4     | % | 
| | Depreciation expense     | $ | 17.1  |   |  | $ | 17.7  |   |  | $ | 51.2    |   |  | $ | 52.4    |   | 
| | Interest income          | $ | 1.1   |   |  | $ | 0.1   |   |  | $ | 4.0     |   |  | $ | 1.4     |   | 
| | Store openings           |   | 9     |   |  |   | 16    |   |  |   | 15      |   |  |   | 32      |   | 
| | Store closings           |   | -     |   |  |   | -     |   |  |   | 1       |   |  |   | -       |   | 
| | Store count              |   | 459   |   |  |   | 436   |   |  |   | 459     |   |  |   | 436     |   | 

Borders - Comparison of
the 13 weeks ended October 24, 2004 to the 13 weeks ended October 26, 2003

Sales

Borders sales
increased $12.4 million, or 2.2 %, to $564.1 million in 2004 from $551.7 million
in 2003. This increase was comprised of non-comparable sales primarily
associated with 2004 and 2003 store openings of $26.6 million and comparable
store sales decreases of $14.2 million.

Gross margin

Gross margin as a
percentage of sales increased to 27.1% in 2004 from 26.8% in 2003, primarily due
to decreases in markdowns of 0.7%, resulting from greater sales discounts on
popular new-release titles in 2003. Partially offsetting the decrease in these
costs were higher store occupancy costs of 0.4% as a percentage of sales.

17

---

Gross margin dollars
increased $4.8 million, or 3.2%, to $152.9 million in 2004 from $148.1 million
in 2003, which was primarily due to increased sales and the increase in gross
margin as a percentage of sales.

Selling, general and administrative expenses

SG&A as a percentage of
sales increased to 24.7% in 2004 from 24.4% in 2003. This was primarily due to
increased store payroll expense of 0.2% and increased store operating expenses
and other costs of 0.4% as a percentage of sales, resulting from the decrease in
comparable store sales, partially offset by decreased corporate payroll costs of
0.3% as a percentage of sales.

SG&A dollars increased
$4.8 million, or 3.6%, to $139.1 million in 2004 from $134.3 million in 2003
primarily due to increased store payroll and non-payroll expenses resulting from
new store openings, partially offset by decreases in corporate payroll and
non-payroll expenses due to disciplined cost controls at the corporate level.

Depreciation expense

Depreciation expense
decreased $0.6 million, or 3.4 %, to $17.1 million in 2004 from $17.7 million in
2003. This was primarily due to the maturation of the store base.

Interest income

Borders interest income
increased $1.0 million to $1.1 million in 2004 from $0.1 million in 2003. This
was primarily due to the increased generation of positive cash flow.

Net income

Due to the factors
mentioned above, net income as a percentage of sales increased to 1.5% in 2004
from 1.3% in 2003, and net income dollars increased to $8.3 million in 2004 from
$7.4 million in 2003.

Borders - Comparison of
the 39 weeks ended October 24, 2004 to the 39 weeks ended October 26, 2003

Sales

Borders sales
increased $91.0 million, or 5.5%, to $1,734.2 million in 2004 from $1,643.2
million in 2003. This increase was comprised of non-comparable sales primarily
associated with 2004 and 2003 store openings of $94.8 million and comparable
store sales decreases of $3.8 million.

Gross margin

Gross margin as a
percentage of sales increased to 27.4% in 2004 from 26.9% in 2003, primarily due
to decreases in markdowns of 0.7% as a percentage of sales, primarily due to
higher bestseller discounts in 2003 related to the release of the fifth book in
the Harry Potter series, and to a lesser degree reduced discounts due to the
slowdown in sales of other bestsellers in the third quarter. Partially
offsetting the decrease in these costs were higher store occupancy costs of 0.2%
as a percentage of sales.

Gross margin dollars
increased $32.5 million, or 7.4%, to $474.5 million in 2004 from $442.0 million
in 2003, which was primarily due to increased sales and the increase in gross
margin as a percentage of sales.

Selling, general and administrative expenses

SG&A as a percentage of
sales decreased to 24.2% in 2004 from 24.5% in 2003. This was primarily due to a
decrease of 0.6% in corporate payroll and non-payroll costs as a percentage of
sales, due to disciplined cost controls at the corporate level, partially offset
by an increase of 0.3% in advertising expense as a percentage of sales.

SG&A dollars increased
$16.7 million, or 4.2%, to $418.8 million in 2004 from $402.1 million in 2003
primarily due to increased store payroll and non-payroll expenses resulting from
new store openings, partially offset by a decrease in corporate payroll and
non-payroll costs due to disciplined cost controls at the corporate level.

18

---

Depreciation expense

Depreciation expense
decreased $1.2 million, or 2.3 %, to $51.2 million in 2004 from $52.4 million in
2003. This was primarily due to the maturation of the store base.

Interest income

Borders interest income
increased $2.6 million to $4.0 million in 2004 from $1.4 million in 2003. This
was primarily due to the increased generation of positive cash flow.

Net income

Due to the factors
mentioned above, net income as a percentage of sales increased to 2.0% in 2004
from 1.4% in 2003, and net income dollars increased to $34.9 million in 2004
from $22.8 million in 2003.

## Waldenbooks

| |                          |   |       |    |  |   |       |   |  |   |       |   |  |   |       |  |  |  | 
| | ------------------------ | - | ----- | -- |  | - | ----- | - |  | - | ----- | - |  | - | ----- |  |  |  | 
|
|
|
|
| | Sales                    | $ | 150.6 |    |  | $ | 161.5 |   |  | $ | 451.4 |   |  | $ | 480.5 |  | 
| | Other revenue            | $ | 3.4   |    |  | $ | 6.0   |   |  | $ | 13.3  |   |  | $ | 18.0  |  | 
| | Net income               | $ | (1.1  | )  |  | $ | 0.7   |   |  | $ | 3.4   |   |  | $ | 3.8   |  | 
| | Net income as % of sales |   | (0.7  | )% |  |   | 0.4   | % |  |   | 0.8   | % |  |   | 0.8%  |  | 
| | Depreciation expense     | $ | 3.6   |    |  | $ | 4.0   |   |  | $ | 10.5  |   |  | $ | 12.1  |  | 
| | Interest income          | $ | 10.2  |    |  | $ | 9.7   |   |  | $ | 31.0  |   |  | $ | 28.3  |  | 
| | Store openings           |   | 1     |    |  |   | -     |   |  |   | 3     |   |  |   | 4     |  | 
| | Store closings           |   | 2     |    |  |   | 9     |   |  |   | 9     |   |  |   | 32    |  | 
| | Store count              |   | 710   |    |  |   | 750   |   |  |   | 710   |   |  |   | 750   |  | 

Waldenbooks - Comparison
of the 13 weeks ended October 24, 2004 to the 13 weeks ended October 26, 2003

Sales

Waldenbooks sales
decreased $10.9 million, or 6.7%, to $150.6 million in 2004 from $161.5 million
in 2003. This decrease was comprised of decreased comparable store sales of $6.4
million and decreased non-comparable sales associated with 2004 and 2003 store
closings of $4.5 million.

Other revenue

Waldenbooks other
revenue, which consists of membership income from the Preferred Reader Program,
decreased $2.6 million, or 43.3%, to $3.4 million in 2004 from $6.0 million in
2003. This was due to the change in the Preferred Reader Program as previously
discussed.

Gross margin

Gross margin as a
percentage of sales decreased to 21.6% in 2004 from 23.5% in 2003. This was
primarily due to a 1.5% decrease in other revenue as a percentage of sales, due
to the change in the Preferred Reader Program, as previously discussed, as well
as a 0.7% increase in occupancy as a percentage of sales, as a result of
occupancy costs for stores open more than one year remaining essentially flat
while comparable store sales declined, and an increase in freight costs as a
percentage of sales of 0.1%. These factors were partially offset by a decrease
in markdowns of 0.4%, due to decreased sales of
bestsellers in 2004 as compared to 2003.

Gross margin dollars
decreased $5.5 million, or 14.5%, to $32.5 million in 2004 from $38.0 million in
2003, primarily due to store closures and the decrease in comparable store
sales.

19

---

Selling, general and administrative expenses

SG&A as a percentage of
sales increased to 29.5% in 2004 from 28.5% in 2003. This was primarily due to
increased store payroll expense of 0.7% and increased store operating expenses
of 0.3% as a percentage of sales, resulting from the decrease in comparable
store sales.

SG&A dollars decreased
$1.7 million, or 3.7%, to $44.4 million in 2004 from $46.1 million in 2003
primarily due to store closings.

Depreciation expense

Depreciation expense
decreased $0.4 million, or 10.0%, to $3.6 million in 2004 from $4.0 million in
2003. This was primarily due to a lower fixed asset base resulting from prior
year asset impairments and store closings.

Interest income

Interest income increased
$0.5 million, or 5.2%, to $10.2 million in 2004 from $9.7 million in 2003. This
was the result of Waldenbooks continued positive cash flow at fixed
internal interest rates.

Net income (loss)

Due to the factors
mentioned above, net loss as a percentage of sales was 0.7% in 2004 as compared
to income as a percentage of sales of 0.4% in 2003, while net loss was $1.1
million in 2004 as compared to net income of $0.7 million in 2003.

Waldenbooks - Comparison
of the 39 weeks ended October 24, 2004 to the 39 weeks ended October 26, 2003

Sales

Waldenbooks sales
decreased $29.1 million, or 6.1%, to $451.4 million in 2004 from $480.5 million
in 2003. This decrease was comprised of decreased comparable store sales of $9.9
million and decreased non-comparable sales associated with 2004 and 2003 store
closings of $19.2 million.

Other revenue

Waldenbooks other
revenue, which consists of membership income from the Preferred Reader Program,
decreased $4.7 million, or 26.1%, to $13.3 million in 2004 from $18.0 million in
2003. This was due to the change in the Preferred Reader Program.

Gross margin

Gross margin as a
percentage of sales decreased to 22.9% in 2004 from 23.3% in 2003. This was
primarily due to a 0.8% decrease in other revenue as a percentage of sales, due
to the change in the Preferred Reader Program, as well as an increase in freight
costs as a percentage of sales of 0.1%. These factors were partially offset by a
decrease in markdowns, product and other costs of 0.5%, due to a reduction in
markdowns due to decreased sales of bestsellers in 2004 as compared to 2003.

Gross margin dollars
decreased $8.7 million, or 7.8%, to $103.3 million in 2004 from $112.0 million
in 2003, primarily due to store closings and the decrease in comparable store
sales.

Selling, general and administrative expenses

SG&A as a percentage of
sales increased to 28.3% in 2004 from 27.7% in 2003. This was primarily due to
increased store payroll expense of 0.6% and increased store operating expenses
of 0.2% as a percentage of sales, offset by a decrease in corporate non-payroll
costs of 0.1% as a percentage of sales, due to disciplined cost controls at the
corporate level, and decreased advertising expenses of 0.1% as a percentage of
sales.

SG&A dollars decreased
$5.3 million, or 4.0%, to $127.8 million in 2004 from $133.1 million in 2003
primarily due to store closings.

20

---

Depreciation expense

Depreciation expense
decreased $1.6 million, or 13.2%, to $10.5 million in 2004 from $12.1 million in
2003. This was primarily due to a lower fixed asset base resulting from prior
year asset impairments and store closings.

Interest income

Interest income increased
$2.7 million, or 9.5%, to $31.0 million in 2004 from $28.3 million in 2003. This
was the result of Waldenbooks continued positive cash flow at fixed
internal interest rates.

Net income

Due to the factors
mentioned above, net income as a percentage of sales remained flat at 0.8% in
2004 as compared to 2003, while net income dollars decreased $0.4 million to
$3.4 million in 2004 from $3.8 million in 2003.

## International

| |                           |   |       |    |  |   |      |    |  |   |       |    |  |   |       |    |  |  | 
| | ------------------------- | - | ----- | -- |  | - | ---- | -- |  | - | ----- | -- |  | - | ----- | -- |  |  | 
|
|
|
|
| | Sales                     | $ | 118.6 |    |  | $ | 94.7 |    |  | $ | 325.6 |    |  | $ | 262.5 |    | 
| | Net loss                  | $ | (2.1  | )  |  | $ | (2.1 | )  |  | $ | (7.9  | )  |  | $ | (9.8  | )  | 
| | Net loss as % of sales    |   | (1.8  | )% |  |   | (2.2 | )% |  |   | (2.4  | )% |  |   | (3.7  | )% | 
| | Depreciation expense      | $ | 3.7   |    |  | $ | 3.0  |    |  | $ | 10.3  |    |  | $ | 8.8   |    | 
| | Interest expense          | $ | 4.9   |    |  | $ | 4.7  |    |  | $ | 13.9  |    |  | $ | 14.0  |    | 
| | Superstore store openings |   | 2     |    |  |   | 2    |    |  |   | 2     |    |  |   | 7     |    | 
| | Superstore store count    |   | 39    |    |  |   | 37   |    |  |   | 39    |    |  |   | 37    |    | 
| | Books etc. store openings |   | -     |    |  |   | 1    |    |  |   | 1     |    |  |   | 1     |    | 
| | Books etc. store closings |   | -     |    |  |   | -    |    |  |   | 1     |    |  |   | 2     |    | 
| | Books etc. store count    |   | 36    |    |  |   | 36   |    |  |   | 36    |    |  |   | 36    |    | 

International -
Comparison of the 13 weeks ended October 24, 2004 to the 13 weeks ended October
26, 2003

Sales

International sales
increased $23.9 million, or 25.2 %, to $118.6 million in 2004 from $94.7 million
in 2003. Of this increase in sales, 9.9% was due to the translation of foreign
currencies to U.S. dollars. The remaining 15.3% was the result of new superstore
openings and comparable store sales increases. The impact of price changes on
comparable store sales was not significant.

Gross margin

Gross margin as a
percentage of sales increased to 22.8% in 2004 from 21.1% in 2003. Gross margin
as a percentage of sales was impacted by a decrease in markdowns as a percentage
of sales of 2.6%, resulting from greater sales discounts on popular new-release
titles in 2003. Offsetting the decrease in these costs were higher store
occupancy costs of 0.7% as a percentage of sales and increased freight costs of
0.2% as a percentage of sales.

Gross margin dollars
increased $7.0 million, or 35.0%, to $27.0 million in 2004 from $20.0 million in
2003. Of this increase, $1.8 million is the result of translation of foreign
currencies to U.S. dollars. The remainder of the increase is due to new
superstore openings and the improved gross margin rate.

Selling, general and administrative expenses

SG&A as a percentage of
sales increased to 21.7% in 2004 from 19.8% in 2003. This was primarily the
result of increases in store payroll and non-payroll costs of 0.9%, corporate
administrative expenses of 0.8% and advertising costs of 0.2% as a percentage of
sales.

SG&A dollars increased
$6.9 million, or 36.7%, to $25.7 million in 2004 from $18.8 million in 2003. Of
this increase, $1.7 million is the result of translation of foreign currencies
to U.S. dollars. The remainder of the increase is primarily due to store
openings and the

21

---

increased store payroll and operating expenses required.

Depreciation expense

Depreciation expense
increased $0.7 million, or 23.3%, to $3.7 million in 2004 from $3.0 million in
2003. This was primarily due to depreciation expense recognized on new
stores capital expenditures.

Interest expense

Interest expense increased
$0.2 million, or 4.3%, to $4.9 million in 2004 from $4.7 million in 2003. This
was primarily the result of currency fluctuations.

Net loss

Due to the factors
mentioned above, net loss as a percentage of sales decreased to 1.8% in 2004
from 2.2% in 2003, and net loss dollars remained flat at $2.1 million in 2004 as
compared to 2003.

International -
Comparison of the 39 weeks ended October 24, 2004 to the 39 weeks ended October
26, 2003

Sales

International sales
increased $63.1 million, or 24.0%, to $325.6 million in 2004 from $262.5 million
in 2003. Of this increase in sales, 12.1% was due to the translation of foreign
currencies to U.S. dollars. The remaining 11.9% was the result of new superstore
openings and comparable store sales increases. The impact of price changes on
comparable store sales was not significant.

Gross margin

Gross margin as a
percentage of sales increased to 21.2% in 2004 from 20.5% in 2003. Gross margin
as a percentage of sales was impacted by a decrease in markdowns of 1.4%,
resulting from greater sales discounts on popular new-release titles in 2003,
partially offset by higher store occupancy costs of 0.7% as a percentage of
sales.

Gross margin dollars
increased $15.3 million, or 28.5%, to $69.0 million in 2004 from $53.7 million
in 2003. Of this increase, $5.9 million is the result of translation of foreign
currencies to U.S. dollars. The remainder of the increase is due to new
superstore openings and the improved gross margin rate.

Selling, general and administrative expenses

SG&A as a percentage of
sales decreased to 21.0% in 2004 from 21.1% in 2003. This improvement was
primarily the result of decreases in store payroll costs of 0.3% and store
operating expenses of 0.1% as a percentage of sales, partially offset by an
increase in advertising costs of 0.3% as a percentage of sales. Although these
expenses increased in dollars, they increased at rates less than sales growth.

SG&A dollars increased
$13.1 million, or 23.7%, to $68.4 million in 2004 from $55.3 million in 2003. Of
this increase, $6.1 million is the result of translation of foreign currencies
to U.S. dollars. The remainder of the increase is primarily due to store
openings and the increased store payroll and operating expenses required.

Depreciation expense

Depreciation expense
increased $1.5 million, or 17.0%, to $10.3 million in 2004 from $8.8 million in
2003. This was primarily due to depreciation expense recognized on new
stores capital expenditures.

Interest expense

Interest expense decreased
$0.1 million, or 0.7%, to $13.9 million in 2004 from $14.0 million in 2003. This
was a result of interest earned on holdings from the sale of the Charing Cross
property in the first quarter of 2004.

22

---

Net loss

Due to the factors
mentioned above, net loss as a percentage of sales decreased to 2.4% in 2004
from 3.7% in 2003, and net loss dollars decreased $1.9 million to $7.9 million
in 2004 from $9.8 million in 2003.

## Corporate

| |                  |   |     |  |  |   |     |  |  |   |      |  |  |   |      |  |  |  | 
| | ---------------- | - | --- |  |  | - | --- |  |  | - | ---- |  |  | - | ---- |  |  |  | 
|
|
|
|
| | Net loss         | $ | 6.6 |  |  | $ | 5.5 |  |  | $ | 20.4 |  |  | $ | 16.6 |  | 
| | Interest expense | $ | 8.6 |  |  | $ | 7.3 |  |  | $ | 27.6 |  |  | $ | 22.7 |  | 

Corporate - Comparison
of the 13 weeks ended October 24, 2004 to the 13 weeks ended October 26, 2003

The Corporate segment
includes the unallocated portion of interest expense, certain corporate
governance costs and corporate incentive costs.

Net loss dollars increased
$1.1 million, or 20.0%, to $6.6 million in 2004 from $5.5 million in 2003. This
was primarily due to increased interest expense for this segment resulting from
increased borrowings to fund corporate stock repurchases in 2004. Interest
expense represents corporate-level interest costs not charged to the
Companys other segments.

Corporate - Comparison
of the 39 weeks ended October 24, 2004 to the 39 weeks ended October 26, 2003

Net loss dollars increased
$3.8 million, or 22.9%, to $20.4 million in 2004 from $16.6 million in 2003.
This was primarily due to increased interest expense for this segment resulting
from increased borrowings to fund corporate stock repurchases in 2004. Interest
expense represents corporate-level interest costs not charged to the
Companys other segments.

## Liquidity and
Capital Resources

The Companys
principal capital requirements are to fund the opening of new stores, the
refurbishment and expansion of existing stores, continued investment in new
corporate information technology systems, and maintenance spending on stores,
distribution centers and corporate information technology.

Net cash used for
operations was $75.9 million and $84.3 million for the 39 weeks ended October
24, 2004 and October 26, 2003, respectively. Operating cash inflows for the
period primarily reflect operating results net of non-cash charges for
depreciation, as well as an increase in accounts payable and other long-term
liabilities and a decrease in accounts receivable. The current year operating
cash outflows primarily resulted from increases in inventory, prepaid expenses
and other long-term assets, as well as decreases in expenses payable, accrued
liabilities and taxes payable during the period.

Net cash used for investing
was $71.6 million, which primarily funded capital expenditures for new stores,
the refurbishment of existing stores, new corporate information technology
systems and the acquisition of Paperchase.

Capital expenditures were
$73.9 million in 2004, which primarily reflects the opening of 17 new
superstores and two new airport stores, operated by the Waldenbooks segment, as
well as the remodel of 32 existing domestic superstores. Additional 2004 capital
spending reflected continued investment in new buying and merchandising systems.
In fiscal 2003, capital expenditures were $77.5 million, which primarily funded
capital expenditures for new stores and the refurbishment of existing stores.
Capital expenditures in 2003 reflect the opening of 39 new superstores and three
new airport stores, operated by the Waldenbooks segment. Additional capital
spending in 2003 reflected the development and installation of in-store
web-based technology and spending on corporate information technology
streamlining. The Company expects capital expenditures to be approximately
$110.0 million for the full year of 2004.

Net cash used for investing
was partially offset by the proceeds received from the sale-leaseback of a
Company-owned store and office building in the United Kingdom. The proceeds from
the sale, totaling $32.3 million, were offset against assets with a net book
value of $28.4 million. Direct costs associated with the transaction were $0.4
million. A deferred gain of $3.5 million was recorded on the consolidated
balance sheets in Other long-term liabilities and is being amortized
over the 20 year term of the operating lease.

23

---

Net cash used for financing
was $84.9 million, resulting primarily from the repurchase of common stock and
the payment of dividends, offset by the issuance of common stock pursuant to
stock-based compensation plans. Net cash used for financing in 2003 was $2.8
million, resulting primarily from the repurchase of common stock, offset by
funding from the credit agreement and the issuance of common stock pursuant to
stock-based compensation plans.

The Company currently has a
share repurchase program in place with remaining authorization to repurchase
approximately $60.2 million as of November 19, 2004. During the 39 weeks ended
October 24, 2004 and October 26, 2003, $104.6 million and $31.5 million of
common stock was repurchased, respectively. The Company plans to continue the
repurchase of its common stock throughout the remainder of fiscal 2004, subject
to the Companys share price and capital needs.

In September 2004, the
Board of Directors declared a quarterly cash dividend of $0.08 per share, which
equaled $6.2 million in total, on the Companys common stock, payable
October 27, 2004 to stockholders of record at the close of business October 6,
2004. The Company intends to pay regular quarterly cash dividends, subject to
Board approval, going forward.

At the Annual Stockholders
Meeting in May of 2004, the shareholders approved the Borders Group, Inc. 2004
Long-Term Incentive Plan as detailed in the Companys Proxy Statement dated
April 14, 2004. This plan will replace the existing stock option and restricted
stock plans on a going-forward basis, which will allow the Company to reduce its
annual stock grants as a percentage of outstanding shares by implementing a
greater use of restricted stock while reducing the number of stock options
issued.

The Company plans to
execute its expansion plans for Borders superstores and other strategic
initiatives principally with funds generated from operations and financing if
necessary through the Credit Agreement, discussed below. The Company believes
funds generated from operations, borrowings under the Credit Agreement will be
sufficient to fund its anticipated capital requirements for the next several
years.

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 million (which may be
increased to $700.0 million 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
default provisions that are typical for this type of financing, including a
cross default provision relating to other indebtedness of more than $25.0. The
Company had borrowings outstanding under the Credit Agreement of $127.7 million
at October 24, 2004, $136.9 million at October 26, 2003 and $126.9 million at
January 25, 2004. As of October 24, 2004 the Company was in compliance with all
covenants contained within this agreement.

The Company currently has
in place two interest rate swaps, which effectively convert a portion of the
Credit Agreements variable rate exposure to fixed interest rates. In
accordance with Statement of Financial Accounting Standards No. 133,
Accounting For Derivative Instruments and Hedging Activities (FAS
133), the Company has designated these swap agreements as cash flow hedges. The
notional amounts of these agreements total $73.1 million and the agreements
expire in June 2005.

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

In August 2003, the Company
entered into an interest rate swap agreement which effectively converted the
fixed interest rate on the Companys Notes to a variable rate based on
LIBOR. In accordance with the provisions of FAS 133, the Company has designated
this swap agreement as a fair market value hedge. The notional amount of the
swap agreement is $50.0 million, and it expires concurrently with the due date
of the Notes.

24

---

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 million) on behalf of the two
borrowing variable interest entities (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 non-current portion as a
component of Other assets on the consolidated balance sheets at
October 24, 2004. In conjunction with this transaction, the Lease Financing
Facilities were terminated.

As a result of the
repayment and termination of the Lease Financing Facilities, the Company
deconsolidated the two VIEs which had participated in the Lease Financing
Facilities as of July 25, 2004, pursuant to the provisions of Financial
Accounting Standards Board (FASB) Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46). The deconsolidation of the two VIEs
resulted in a reduction of land, property and equipment, net of accumulated
depreciation, of $12.5 million, short-term borrowings of $13.8 million, and
minority interest of $1.3 million at July 25, 2004. The Company also recorded an
after-tax gain of $1.7 million as a result of the deconsolidation of these VIEs.
These amounts have been treated as non-cash items on the consolidated statements
of cash flows.

Separately, the Company is
the primary beneficiary of two VIEs due to the Companys guarantee of the
debt of these entities. As a result, the Company consolidates these VIEs and has
recorded property and equipment, net of accumulated depreciation, of $5.5
million, long-term debt of $5.8 million, and minority interest of $0.4 million
at October 24, 2004.

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
million, 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 following table
summarizes the Companys significant financing and lease obligations at
October 24, 2004:

| |                             |   |       |  |   |       |  |   |       |  |   |         |  |   |         | 
| | --------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | ------- |  | - | ------- | 
|
|
|
| | Credit Agreement borrowings | $ | 127.7 |  | $ | -     |  | $ | -     |  | $ | -       |  | $ | 127.7   | 
| | Capital lease obligations   |   | 0.1   |  |   | -     |  |   | -     |  |   | -       |  |   | 0.1     | 
| | Operating lease obligations |   | 97.7  |  |   | 664.3 |  |   | 622.5 |  |   | 2,465.4 |  |   | 3,849.9 | 
| | Senior guaranteed notes     |   | -     |  |   | 50.0  |  |   | -     |  |   | -       |  |   | 50.0    | 
| | Debt of consolidated VIEs  |   | -     |  |   | 0.4   |  |   | 0.4   |  |   | 5.0     |  |   | 5.8     | 
| | Other borrowings            |   | 8.9   |  |   | -     |  |   | -     |  |   | -       |  |   | 8.9     | 
| |                             |   |       |  |   |       |  |   |       |  |   |         | 
| | Total                       | $ | 234.4 |  | $ | 714.7 |  | $ | 622.9 |  | $ | 2,470.4 |  | $ | 4,042.4 | 
|

## Critical
Accounting Policies and Estimates

In the ordinary course of
business, the Company has made a number of estimates and assumptions relating to
the reporting of results of operations and financial condition in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States. Actual results could differ from those
estimates under different assumptions and conditions. Such estimates have been
disclosed in the Companys last Annual Report on Form 10-K for the fiscal
year ended January 25, 2004. There have been no significant changes in these
estimates during the third quarter of fiscal 2004.

## New Accounting Guidance

On March 31, 2004, the
Financial Accounting Standards Board (FASB) issued an exposure draft,
Share-Based Payment, an Amendment of FASB Statements No. 123 and
95".  The proposed change in accounting would replace existing
requirements under SFAS 123, Accounting for Stock-Based
Compensation, and APB Opinion No. 25, Accounting for Stock Issued to
Employees.  The exposure draft covers a wide range of equity-based
compensation arrangements.  Under the FASBs proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement.  The expense of the award would generally be
measured at fair value at the grant

25

---

date.  The comment period for the
exposure draft ended on June 30, 2004 and final rules are expected to be
issued in late 2004.  The standard would be applicable for fiscal quarters
beginning after June 30, 2005.  The Company will evaluate the impact of any
change in the accounting standards on the Companys financial position and
results of operations when the final rules are issued.

## Related Party
Transactions

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

## Forward
Looking Statements

This Quarterly Report on
Form 10-Q contains forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995. Forward-looking statements reflect
managements current expectations and are inherently uncertain. The
Companys actual results may differ significantly from managements
expectations. Exhibit 99.1 to this report, Cautionary Statement under the
Private Securities Litigation Reform Act of 1995", identifies the
forward-looking statements and describes some, but not all, of the factors that
could cause these differences.

## Item 3.
Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to
market risk during the normal course of business from changes in interest rates
and foreign currency exchange rates. The exposure to these risks is managed
though a combination of normal operating and financing activities, which include
the use of derivative financial instruments in the form of interest rate swaps
and forward foreign currency exchange contracts.

There have been no material
changes in this Item since the Companys last Annual Report on Form 10-K
for the fiscal year ended January 25, 2004.

## Item 4.
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-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as
of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Companys disclosure
controls and procedures are effective in alerting them on a timely basis to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys periodic filings
under the Exchange Act.

Changes in Internal
Controls: Since the Evaluation Date, there have not been any significant
changes in the Companys internal controls or in other factors that could
significantly affect such controls.

## Part II 
Other Information

## Item 1. Legal
Proceedings

The Companys Form
10-K Annual Report for the fiscal year ended January 25, 2004, describes pending
lawsuits and claims against the Company. The status of such litigation and
claims has not changed in any significant respect in the fiscal quarter covered
by this report and, except as set forth below, the Company has not become a
party to any new matter of a nature required to be reported therein:

On October 22, 2004, Ann
Arbor Store No. 1 L.L.C. (the Plaintiff ), a variable interest
entity formed by Agree LP and Agree Realty Corporation (collectively
Agree) that leases to the Company the Borders store and adjacent
office space in downtown Ann Arbor, MI. (the Property), filed a
Complaint for Declaratory Relief against the Company. The Complaint seeks a
judgment ordering the Company to execute a lease for the Property at a rental
rate that the Company disputes, as well as other relief. The litigation relates
to the calculation of rent under a 1996 agreement pursuant to which the
Plaintiff and the Company agreed to enter into a long-term lease of the Property
upon the termination of the Companys synthetic lease financing facility,
which occurred in July of 2004. The Company has filed an Answer disputing the
rent calculation of Plaintiff, and a Counterclaim against the Plaintiff and a
Third Party Complaint against Agree seeking a declaratory judgment relating to
the rent payable under the long-term lease, damages and other relief. The
Company repaid a loan in the amount of approximately $9.7 in connection with the
termination of the synthetic lease

26

---

facility, which was accounted for as prepaid
rent on the Property. Agree contends the Company should not be given credit for
the repayment of the loan in determining the annual rent under the long-term
lease on the Property. An adverse decision could result in the impairment of all
or a portion of this asset, as well as a rental obligation under the long-term
lease in an amount greater than is currently being paid and accrued for by the
Company. The parties have agreed to engage in a non-binding facilitation process
in an effort to resolve the dispute.

In addition to the matters
described or referred to above, the Company is, from time to time, involved in
or affected by other litigation incidental to the conduct of its businesses.
While some of such matters may involve claims for large sums (including, from
time to time, actions which are asserted to be maintainable as class action
suits) the Company does not believe that any such other litigation or claims
will have a material adverse effect on its liquidity, financial position, or
results of operations.

## Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

| |                                                                                                                                                                                                                                                                                                                           |  |         |  |  |                |  |         |  |  |                | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- |  |  | -------------- |  | ------- |  |  | -------------- | 
| | (c) The table below presents the total number of shares
repurchased during the third quarter of fiscal 2004.                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                           |  |         |  |  |                |  |         |  |  |                | 
|
|
|
|
|
| | July 26, 2004                                                                                                                                                                                                                                                                                                             |  |         |  |  |                |  |         |  |  |                | 
| | through                                                                                                                                                                                                                                                                                                                   |  |         |  |  |                |  |         |  |  |                | 
| | August 22, 2004                                                                                                                                                                                                                                                                                                           |  | -       |  |  | $            - |  | -       |  |  | $   91,236,843 | 
| |                                                                                                                                                                                                                                                                                                                           |  |         |  |  |                |  |         |  |  |                | 
| | August 23, 2004                                                                                                                                                                                                                                                                                                           |  |         |  |  |                |  |         |  |  |                | 
| | through                                                                                                                                                                                                                                                                                                                   |  |         |  |  |                |  |         |  |  |                | 
| | September 19, 2004                                                                                                                                                                                                                                                                                                        |  | -       |  |  | $            - |  | -       |  |  | $   95,865,344 | 
| |                                                                                                                                                                                                                                                                                                                           |  |         |  |  |                |  |         |  |  |                | 
| | September 20, 2004                                                                                                                                                                                                                                                                                                        |  |         |  |  |                |  |         |  |  |                | 
| | through                                                                                                                                                                                                                                                                                                                   |  |         |  |  |                |  |         |  |  |                | 
| | October 24, 2004                                                                                                                                                                                                                                                                                                          |  | 578,500 |  |  | $   22.16      |  | 578,500 |  |  | $   84,513,593 | 
|
| | Total                                                                                                                                                                                                                                                                                                                     |  | 578,500 |  |  | $   22.16      |  | 578,500 |  |  | $   84,513,593 | 
|
| |                                                                                                                                                                                                                                                                                                                           |  |         |  |  |                |  |         |  |  |                | 
| | (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 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).

27

---

## ITEM 6. Exhibits

Exhibits:

| |  |  |      |                                                                                                                                                                      | 
| |  |  | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  |  | 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.                              | 
| |  |  |      |                                                                                                                                                                      | 
| |  |  |      |                                                                                                                                                                      | 

28

---

# SIGNATURES

Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereto duly
authorized.

# BORDERS
GROUP, INC.(Registrant)

|Date:        November 24, 2004 | By: /s/ Edward W. Wilhelm
|------------------------------ | -------------------------
|                               | Edward W. Wilhelm        
|                               | Senior Vice President and
|                               | Chief Financial Officer  
|                               | (Principal Financial and 
|                               | Accounting Officer)      

29

---

## EXHIBIT INDEX

## DESCRIPTION OF EXHIBITS

| |           |  |      |                                                                                                                                                                      | 
| | --------- |  | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | Exhibits: |  |     
| |           |  | 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.                              | 
| |           |  |      |                                                                                                                                                                      | 
| |           |  |      |                                                                                                                                                                      | 

30