SECURITIES
      AND EXCHANGE COMMISSION





Washington,
      D.C. 20549





FORM
      10 -
      Q


(Mark
      One)


[X]
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended October 22, 2005OR[
                ]
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHANGE ACT OF 1934





For
      the
      transition period from ______ to _______.





Commission
      file number 1-13740





BORDERS
      GROUP, INC.


(Exact
      name of registrant as specified in its charter)





MICHIGAN
            
            38-3294588(State
                or other jurisdiction of
            
            (I.R.S.
                Employerincorporation
                or organization)
            
            Identification
                No.)





100
      Phoenix Drive, Ann Arbor, Michigan 48108


(Address
      of principal executive offices)


(zip
      code)





(734)
      477-1100


(Registrant's
      telephone number, including area code)





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
      _____





Indicate
      by check mark whether the registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Exchange Act).


Yes X No
      _____





Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Exchange Act).


Yes _ No
      _ X ___





The
      number of shares of common stock outstanding at November 17, 2005 was
      66,771,926














**BORDERS
      GROUP, INC.**





**INDEX**


Part
                I - Financial Information**Page**Item
                1. Financial Statements
            
            
            1Item
                2. Management's Discussion and Analysis ofFinancial
                Condition and Results ofOperations
            
            
            12Item
                3. Quantitative and Qualitative Disclosures aboutMarket
                Risk
            
            
            27Item
                4. Controls and Procedures
            
            
            27Part
                II - Other informationItem
                1. Legal Proceedings
            
            
            28Item
                2. Unregistered Sales of Equity Securities and Use ofProceeds
            
            
            28Item
                3. Defaults Upon Senior Securities
            
            
            N/AItem
                4. Submission of Matters to a Vote ofSecurityholders
            
            
            N/AItem
                5. Other Information
            
            
            N/AItem
                6. Exhibits and Reports on Form 8-K
            
            
            29Signatures
            
            
            30








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(dollars
      in millions except per share data)**


**(UNAUDITED)**





**13****Weeks
                Ended****(Restated)****October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Sales
            
            $
            837.2
            
            $
            833.3Other
                revenue
            
            
            3.7
            
            
            5.3Total
                revenue
            
            
            840.9
            
            
            838.6Cost
                of merchandise sold, including occupancy costs
            
            
            640.9
            
            
            625.5Gross
                margin
            
            
            200.0
            
            
            213.1Selling,
                general and administrative expenses
            
            
            216.5
            
            
            210.8Pre-opening
                expense
            
            
            2.4
            
            
            1.7Asset
                impairments and other writedowns
            
            
            0.4
            
            
            0.2Operating
                income (loss)
            
            
            (19.3
            )
            
            0.4Interest
                expense
            
            
            3.5
            
            
            2.2Loss
                before income tax
            
            
            (22.8
            )
            
            (1.8
            )Income
                tax benefit
            
            
            (8.7
            )
            
            (0.7
            )Net
                loss
            
            $
            (14.1
            )
            $
            (1.1
            )Loss
                per common share data*Diluted:*Loss
                per common share
            
            $
            (0.20
            )
            $
            (0.01
            )Weighted
                average common shares outstanding (in millions)
            
            
            69.2
            
            
            76.5*Basic:*Loss
                per common share
            
            $
            (0.20
            )
            $
            (0.01
            )Weighted
                average common shares outstanding (in millions)
            
            
            69.2
            
            
            76.5Dividends
                declared per common share
            
            $
            0.09
            
            $
            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)**





**39****Weeks
                Ended****(Restated)****October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Sales
            
            $
            2,576.0
            
            $
            2,511.2Other
                revenue
            
            
            13.7
            
            
            18.9Total
                revenue
            
            
            2,589.7
            
            
            2,530.1Cost
                of merchandise sold, including occupancy costs
            
            
            1,949.2
            
            
            1,883.4Gross
                margin
            
            
            640.5
            
            
            646.7Selling,
                general and administrative expenses
            
            
            654.5
            
            
            621.5Pre-opening
                expense
            
            
            5.1
            
            
            3.4Asset
                impairments and other writedowns
            
            
            1.0
            
            
            0.8Operating
                income (loss)
            
            
            (20.1
            )
            
            21.0Interest
                expense
            
            
            9.0
            
            
            6.5Income
                (loss) before income tax
            
            
            (29.1
            )
            
            14.5Income
                tax provision (benefit)
            
            
            (11.0
            )
            
            5.4Net
                income (loss)
            
            $
            (18.1
            )
            $
            9.1Earnings
                (loss) per common share data*Diluted:*Income
                (loss) per common share
            
            $
            (0.25
            )
            $
            0.12Weighted
                average common shares outstanding (in millions)
            
            
            71.0
            
            
            78.6*Basic:*Income
                (loss) per common share
            
            $
            (0.25
            )
            $
            0.12Weighted
                average common shares outstanding (in millions)
            
            
            71.0
            
            
            77.2Dividends
                declared per common share
            
            $
            0.27
            
            $
            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)**








**(Restated)****October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **January
                23,**
              **2005****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            67.7
            
            $
            145.8
            
            $
            244.8Investments
            
            
            -
            
            
            -
            
            
            95.4Merchandise
                inventories
            
            
            1,612.9
            
            
            1,533.5
            
            
            1,306.9Accounts
                receivable and other current assets
            
            
            112.3
            
            
            89.0
            
            
            118.3Total
                current assets
            
            
            1,792.9
            
            
            1,768.3
            
            
            1,765.4Property
                and equipment, net of accumulated depreciation of$970.1,
                $884.3 and $912.2 at October 22, 2005, October 24,2004
                and January 23, 2005, respectively
            
            
            680.6
            
            
            635.8
            
            
            635.6Other
                assets
            
            
            78.7
            
            
            85.7
            
            
            84.8Deferred
                income taxes
            
            
            14.3
            
            
            30.5
            
            
            14.4Goodwill
            
            
            123.6
            
            
            123.4
            
            
            128.6Total
                assets
            
            $
            2,690.1
            
            $
            2,643.7
            
            $
            2,628.8**Liabilities,
                Minority Interest and Stockholders’ Equity**Current
                liabilities:Short-term
                borrowings and current portion of long-term debt
            
            $
            378.2
            
            $
            136.7
            
            $
            141.2Trade
                accounts payable
            
            
            790.2
            
            
            829.3
            
            
            615.1Accrued
                payroll and other liabilities
            
            
            250.0
            
            
            250.2
            
            
            306.4Taxes,
                including income taxes
            
            
            35.0
            
            
            53.4
            
            
            118.3Deferred
                income taxes
            
            
            15.0
            
            
            12.1
            
            
            15.0Total
                current liabilities
            
            
            1,468.4
            
            
            1,281.7
            
            
            1,196.0Long-term
                debt
            
            
            5.4
            
            
            56.3
            
            
            55.8Other
                long-term liabilities
            
            
            319.6
            
            
            277.9
            
            
            286.7Total
                liabilities
            
            
            1,793.4
            
            
            1,615.9
            
            
            1,538.5Minority
                interest
            
            
            1.3
            
            
            1.4
            
            
            1.4Total
                liabilities and minority interest
            
            
            1,794.7
            
            
            1,617.3
            
            
            1,539.9Stockholders'
                equity:Common
                stock; 200,000,000 shares authorized;68,002,960,
                76,121,261 and 73,875,627 shares issuedand
                outstanding at October 22, 2005, October 24, 2004 andJanuary
                23, 2005, respectively
            
            
            375.1
            
            
            582.5
            
            
            525.1Deferred
                compensation
            
            
            (0.5
            )
            
            (0.5
            )
            
            (0.5
            )Accumulated
                other comprehensive income
            
            
            18.9
            
            
            21.6
            
            
            25.3Retained
                earnings
            
            
            501.9
            
            
            422.8
            
            
            539.0Total
                stockholders' equity
            
            
            895.4
            
            
            1,026.4
            
            
            1,088.9Total
                liabilities, minority interest and stockholders' equity
            
            $
            2,690.1
            
            $
            2,643.7
            
            $
            2,628.8








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 22, 2005**


**(dollars
      in millions except share amounts)**


**(UNAUDITED)**








**Common
                Stock**
            
            **Deferred**
            
            **Accumulated**
              **Other**
              **Comprehensive**
            
            **Retained****Shares**
            
            **Amount**
            
            **Compensation**
            
            **Income**
            
            **Earnings**
            
            **Total**Balance
                at January 23, 2005
            
            
            73,875,627
            
            $
            525.1
            
            $
            (0.5
            )
            $
            25.3
            
            $
            539.0
            
            $
            1,088.9Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (18.1
            )
            
            (18.1
            )Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            (6.4
            )
            
            -
            
            
            (6.4
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (24.5
            )Cash
                dividends declared ($0.27 per
              common
                share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (19.0
            )
            
            (19.0
            )Issuance
                of common stock
            
            
            1,237,880
            
            
            18.6
            
            
            -
            
            
            -
            
            
            -
            
            
            18.6Repurchase
                and retirement ofcommon
                stock
            
            
            (7,110,547
            )
            
            (172.7
            )
            
            -
            
            
            -
            
            
            -
            
            
            (172.7
            )Change
                in deferredcompensation
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Tax
                benefit of equitycompensation
            
            
            -
            
            
            4.1
            
            
            -
            
            
            -
            
            
            -
            
            
            4.1Balance
                at October 22, 2005
            
            
            68,002,960
            
            $
            375.1
            
            $
            (0.5
            )
            $
            18.9
            
            $
            501.9
            
            $
            895.4








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





4


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(dollars
      in millions)**


**(UNAUDITED)**








**39
                Weeks Ended****(Restated)****October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Cash
                provided by (used for):OperationsNet
                income (loss)
            
            $
            (18.1
            )
            $
            9.1Adjustments
                to reconcile net income (loss) to operating cash flows:Depreciation
            
            
            88.2
            
            
            80.1Gain
                on deconsolidation of variable interest entity
            
            
            -
            
            
            (2.9
            )Loss
                on disposal of assets
            
            
            4.3
            
            
            1.2Gain
                on sale of investments
            
            
            (1.2
            )
            
            -Increase
                in deferred income taxes
            
            
            (0.4
            )
            
            (5.0
            )Increase
                in other long-term assets
            
            
            (2.9
            )
            
            (7.8
            )Increase
                in other long-term liabilities
            
            
            25.7
            
            
            5.7Cash
                provided by (used for) current assets and current
                liabilities:Increase
                in inventories
            
            
            (313.0
            )
            
            (292.4
            )Decrease
                in accounts receivable
            
            
            14.0
            
            
            22.3Increase
                in prepaid expenses
            
            
            (9.5
            )
            
            (9.7
            )Increase
                in accounts payable
            
            
            178.5
            
            
            229.7Decrease
                in taxes payable
            
            
            (78.3
            )
            
            (63.6
            )Decrease
                in expenses payable and accrued liabilities
            
            
            (48.4
            )
            
            (35.8
            )Net
                cash used for operations
            
            
            (161.1
            )
            
            (69.1
            )InvestingCapital
                expenditures
            
            
            (142.6
            )
            
            (79.7
            )Proceeds
                from sale of investments
            
            
            105.2
            
            
            118.0Proceeds
                from sale-leaseback of assets
            
            
            -
            
            
            32.3Acquisition
            
            
            -
            
            
            (31.2
            )Net
                cash provided by (used for) investing
            
            
            (37.4
            )
            
            39.4FinancingNet
                repayment of long-term capital lease obligations
            
            
            -
            
            
            (0.4
            )Net
                funding from credit facility
            
            
            195.4
            
            
            6.5Issuance
                of common stock
            
            
            18.6
            
            
            32.1Payment
                of cash dividends
            
            
            (19.0
            )
            
            (18.5
            )Repurchase
                of common stock
            
            
            (172.7
            )
            
            (104.6
            )Net
                cash provided by (used for) financing
            
            
            22.3
            
            
            (84.9
            )Effect
                of exchange rates on cash and equivalents
            
            
            (0.9
            )
            
            (0.4
            )Net
                decrease in cash and equivalents
            
            
            (177.1
            )
            
            (115.0
            )Cash
                and equivalents at beginning of year
            
            
            244.8
            
            
            260.8Cash
                and equivalents at end of period
            
            $
            67.7
            
            $
            145.8








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








5


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      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, included in its Annual Report on Form
      10-K for the fiscal year ended January 23, 2005.





On
      December 10, 2004, the Board of Directors of the Company approved a change
      in
      the Company’s fiscal year-end. Effective with respect to fiscal 2005, the
      Company elected to change its fiscal year to a 52/53-week fiscal year ending
      on
      the Saturday closest to the last day of January. The Company implemented this
      change in order to conform to industry standards and for certain administrative
      purposes. As a result of the change, the Company’s 2005 fiscal year will consist
      of 53 weeks, and will end on January 28, 2006. The Company’s third quarter of
      fiscal 2005 ended October 22, 2005. The Company’s fiscal years had ended on the
      Sunday immediately preceding the last Wednesday in January. Fiscal 2004
      consisted of 52 weeks and ended January 23, 2005. References herein to years
      are
      to the Company’s fiscal years.





At
      October 22, 2005, the Company operated 516 superstores under the Borders name,
      including 466 in the United States, 32 in the United Kingdom, 12 in Australia,
      three in Puerto Rico, two in New Zealand and one in Singapore. The Company
      also
      operated 700 mall-based and other bookstores, including stores operated under
      the Waldenbooks, Borders Express and Borders Outlet names, as well as
      Borders-branded airport stores, and 33 bookstores under the Books etc. name
      in
      the United Kingdom. In addition, the Company owned and operated United
      Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and
      retailer of stationery, cards and gifts, with 85 locations, including 36 located
      inside Borders International superstores, at October 22, 2005.





**NOTE
      2 - RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS**





In
      light
      of announcements made by a number of public companies regarding lease accounting
      and a SEC clarification on the subject, the Company reevaluated its lease
      accounting practices near the end of 2004. As a result, the Company corrected
      its computation of straight-line rent expense, depreciation of leasehold
      improvements and the classification of landlord allowances related to leasehold
      improvements (the “Restatement”), as further discussed in the Company’s most
      recent Annual Report on Form 10-K. For the quarter ended October 24, 2004,
      the
      Restatement increased net income by $0.4, or $0.01 per share, and for
      the
      nine months ended October 24, 2004 ,
      the
      Restatement reduced net income by $0.9, or $0.01 per share, increased total
      assets by $120.7 and increased cash used for operations by $6.8.





**NOTE
      3 - COMMITMENTS AND CONTINGENCIES**





*Litigation:* Two
      former employees, individually and on behalf of a purported class consisting
      of
      all current and former employees who work or worked as Inventory Managers or
      Sales Managers in Borders stores in the State of California at any time from
      September 30, 2001 through the trial date, have filed an action against the
      Company in the Superior Court of California for the County of San Francisco.
      The
      Complaint alleges, among other things, that the individual plaintiffs and the
      purported class members were improperly classified as exempt employees and
      that
      the Company violated the California Labor Code and the California Business
      and
      Professions Code by failing to (i) pay required overtime, (ii) provide meal
      periods, rest periods, and accurate itemized wage statements, (iii) keep
      accurate records of employees' hours of work, and (iv) pay all compensation
      owed
      at the time of termination of employment to certain members of the purported
      class. The relief sought includes damages, restitution, penalties, injunctive
      relief, interest, costs, and attorneys' fees and such other relief as the court
      deems proper. The Company intends to vigorously defend the action. The Company
      has not included any liability in its consolidated financial statements in
      connection with this matter and has expensed as incurred all legal costs to
      date.


6


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





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. On November 1, 2005, the Court granted
      the Company’s Motion to Dismiss all of the remaining claims of the plaintiff.
      The anti-trust claims were dismissed with prejudice, and the unfair competition
      claims were dismissed without prejudice. The plaintiff has until December 1,
      2005 to file an appeal. The Company has not included any liability in its
      consolidated financial statements in connection with this matter and has
      expensed as incurred all legal costs to date.





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. On May
      31,
      2005, an appellate court in California upheld a lower court ruling that the
      Company was not entitled to recover taxes that it had previously paid on certain
      Borders.com sales in California prior to implementation of the Company’s Mirror
      Site agreement with Amazon. The Company did not appeal this decision. 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. Various motions to dismiss the Nevada and Illinois actions have been
      made by the Company and other retailers and by the respective attorney generals
      of those states. Certain of these motions have been denied and others remain
      pending.





Although
      an adverse resolution of any of the matters described above could have a
      material adverse effect on the results of the operations of the Company for
      the
      applicable period or periods, the Company does not believe that these matters
      will have a material effect on its liquidity or financial position.





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. 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 other pending
      litigation or claims will have a material adverse effect on its liquidity,
      financial position, or results of operations.





**NOTE
      4 - FINANCING**





*Credit
      Facility:* The
      Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
      which was amended in July 2004 and will expire in July 2009. The Credit
      Agreement provides for borrowings of up to $500.0 (which may be increased to
      $700.0 under certain circumstances) secured by eligible inventory and accounts
      receivable and related assets. Borrowings under the Credit Agreement are limited
      to a specified percentage of eligible inventories and accounts receivable and
      bear interest at a variable base rate plus an increment or LIBOR plus an
      increment at the Company’s option. The Credit Agreement (i) includes a fixed
      charge coverage ratio requirement of 1.1 to 1 that is applicable only if
      outstanding borrowings under the facility exceed 90% of permitted borrowings
      thereunder, (ii) contains covenants that limit, among other things, the
      Company’s ability to incur indebtedness, grant liens, make investments,
      consolidate or merge or dispose of assets, (iii) prohibits dividend payments
      and
      share repurchases that would result in borrowings under the facility exceeding
      90% of permitted borrowings thereunder, and (iv) contains 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 $324.3 at October 22, 2005, $127.7
      at
      October 24, 2004 and $131.7 at January 23, 2005. See “Note 11 - Subsequent
      Event” for further discussion of the Credit Agreement.





*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


7


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





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 (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”), both of which had been previously consolidated. The Company 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. As a result of
      the repayment of borrowings under the Lease Financing Facilities, the Company
      deconsolidated the two borrowing VIEs in July 2004. Also, in conjunction with
      this transaction, the Lease Financing Facilities were terminated.





*Consolidated
      VIEs:* At
      October 22, 2005, the Company is the primary beneficiary of two VIEs (unrelated
      to the two VIEs previously discussed), 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
      $5.3,
      long-term debt (including current portion) of $5.6 and minority interest of
      $0.3
      at October 22, 2005 .
      The
      Company leased two store locations from these VIEs at October 22,
      2005.





As
      of
      October 22, 2005 the Company was in compliance with its debt
      covenants.





**NOTE
      5 - STOCK-BASED BENEFIT PLANS**





The
      Company accounts for equity-based compensation under the guidance of APB No.
      25,
“Accounting for Stock Issued to Employees” (“APB No. 25”). As permitted, the
      Company has adopted the disclosure-only option of Statement of Financial
      Accounting Standards No. 123, "Accounting for Stock Based Compensation" (“FAS
      123”). 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:





**13
                Weeks Ended**
            
            **39
                Weeks Ended****(Restated)**
            
            
            
            **(Restated)****October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Net
                income (loss), as reported
            
            $
            (14.1
            )
            $
            (1.1
            )
            $
            (18.1
            )
            $
            9.1Add:
                Stock-based employee expense included in reported net income, net
                of
                related tax effects
            
            
            -
            
            
            -
            
            
            0.1
            
            
            0.1Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value method for all awards, net of tax
            
            
            1.3
            
            
            1.3
            
            
            3.7
            
            
            3.7Pro
                forma net income (loss)
            
            $
            (15.4
            )
            $
            (2.4
            )
            $
            (21.7
            )
            $
            5.5Earnings
                (loss) per share:Basic
                -- as reported
            
            $
            (0.20
            )
            $
            (0.01
            )
            $
            (0.25
            )
            $
            0.12Basic
                -- pro forma
            
            $
            (0.22
            )
            $
            (0.03
            )
            $
            (0.31
            )
            $
            0.07Diluted
                -- as reported
            
            $
            (0.20
            )
            $
            (0.01
            )
            $
            (0.25
            )
            $
            0.12Diluted
                -- pro forma
            
            $
            (0.22
            )
            $
            (0.03
            )
            $
            (0.31
            )
            $
            0.07





8


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment” (“FAS 123(R)”), which is a revision of FAS 123. FAS 123(R) supersedes
      APB No. 25, amends FAS No. 95, “Statement of Cash Flows,” and requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair values. The Company
      will adopt FAS 123 (R) in the first quarter of 2006 using the
      modified-prospective method in which compensation cost is recognized beginning
      with the adoption date based on (a) the requirements of FAS 123(R) for all
      share-based payments granted after the effective date and (b) based on the
      requirements of Statement 123 for all awards granted to employees prior to
      the
      effective date of Statement 123(R) that remain unvested on the effective date.
      As of October 22, 2005, there were approximately 2.4 million stock option awards
      granted to employees that remain unvested. Based on the adoption of FAS 123(R)
      in the first quarter of 2006, the Company estimates the impact to be an
      after-tax charge of approximately $0.6. FAS 123(R) also requires the benefits
      of
      tax deductions in excess of recognized compensation cost to be reported as
      a
      financing cash flow, rather than as an operating cash flow as required under
      current literature. This requirement will reduce net operating cash flows and
      increase net financing cash flows in periods after adoption. While the Company
      cannot estimate what those amounts will be in the future (because they depend
      on, among other things, when employees exercise stock options), the amount
      of
      operating cash flows recognized in prior periods for such excess tax deductions
      were $4.1 and $8.7 for the nine months ended October 22, 2005 and October 24,
      2004, respectively.





**NOTE
      6- SEGMENT INFORMATION**





The
      Company is organized based upon the following operating segments: domestic
      Borders stores, Waldenbooks Specialty Retail stores (“Waldenbooks”),
      International stores (including 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.





**13
                Weeks Ended**
            
            **39
                Weeks Ended****(Restated)**
            
            
            
            **(Restated)********October
                22,**
              **2005**
            
            ******October
                24,**
              **2004**
            
            ******October
                22,**
              **2005**
            
            ******October
                24,**
              **2004**SalesBorders
            
            $
            572.9
            
            $
            564.1
            
            $
            1,770.8
            
            $
            1,734.2Waldenbooks
            
            
            138.4
            
            
            150.6
            
            
            432.5
            
            
            451.4International
            
            
            125.9
            
            
            118.6
            
            
            372.7
            
            
            325.6Total
                sales
            
            $
            837.2
            
            $
            833.3
            
            $
            2,576.0
            
            $
            2,511.2Net
                income (loss)Borders
            
            $
            7.6
            
            $
            9.1
            
            $
            30.3
            
            $
            34.9Waldenbooks
            
            
            (3.4
            )
            
            (1.1
            )
            
            (2.4
            )
            
            3.3International
            
            
            (10.4
            )
            
            (2.5
            )
            
            (21.4
            )
            
            (8.8
            )Corporate
            
            
            (7.9
            )
            
            (6.6
            )
            
            (24.6
            )
            
            (20.3
            )Total
                net income (loss)
            
            $
            (14.1
            )
            $
            (1.1
            )
            $
            (18.1
            )
            $
            9.1Total
                assetsBorders
            
            
            
            
            
            
            
            $
            1,688.1
            
            $
            1,642.1Waldenbooks
            
            
            
            
            
            
            
            
            407.0
            
            
            392.7International
            
            
            
            
            
            
            
            
            473.3
            
            
            423.8Corporate
            
            
            
            
            
            
            
            
            121.7
            
            
            185.1Total
                assets
            
            
            
            
            
            
            
            $
            2,690.1
            
            $
            2,643.7





9


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


**(dollars
      in millions except per share data)**





Total
      assets for the Corporate segment include certain corporate headquarters property
      and equipment, net of accumulated depreciation, of $84.7 and $66.7 at October
      22, 2005 and October 24, 2004, respectively, which have not been allocated
      to
      the other segments; however, depreciation expense associated with such assets
      has been allocated to the other segments as follows:





**13
                Weeks Ended**
            
            **39
                Weeks Ended****(Restated)**
            
            
            
            **(Restated)********October
                22,**
              ******2005**
            
            ******October
                24,**
              **2004**
            
            ******October
                22,**
              **2005**
            
            ******October
                24,**
              **2004**Borders
            
            $
            2.3
            
            $
            2.6
            
            $
            7.3
            
            $
            7.6Waldenbooks
            
            
            1.1
            
            
            1.3
            
            
            3.4
            
            
            3.6International
            
            
            -
            
            
            -
            
            
            0.1
            
            
            0.1Total
            
            $
            3.4
            
            $
            3.9
            
            $
            10.8
            
            $
            11.3





**NOTE
      7 - CORRECTION OF PRIOR YEARS’ LEASE ACCOUNTING**





As
      a
      result of the Company’s continuing review of its internal controls over the
      selection and monitoring of appropriate assumptions and factors affecting lease
      accounting practices, the Company is correcting its accounting for international
      leases and mortgage note receivables in the quarter ended October 22,
      2005.





The
      Company’s accounting policies require that rent expense pursuant to operating
      lease agreements be recognized on a straight-line basis over the term of the
      lease agreement. During the quarter ended October 22, 2005, the Company
      concluded that rent payments required by several of the International segment’s
      lease agreements were not being recognized on the required straight-line basis.
      Specifically, certain lease agreements contained provisions that increased
      rent
      payments over time, and the Company had recognized the effect of these rent
      escalations in the period the escalations occurred, rather than on a
      straight-line basis over the lease term. In fiscal 2004, as part of the year-end
      restatement pertaining to various lease accounting matters discussed in Note
      2,
      straight-line rent liabilities were recorded for the International segment’s
      store lease agreements; however, these recorded liabilities resulted from
      recognizing pre-opening rent on a straight-line basis, not from post-opening
      rent escalation provisions. As a result, the Company has increased other
      long-term liabilities (which includes straight-line rent liabilities) for its
      International segment by $4.9, and has increased the segment’s occupancy expense
      by the same amount. The after-tax impact of this non-cash adjustment was
      $3.4.





In
      addition, the Company is correcting its accounting for four mortgage note
      receivables held by the Borders segment. The principal amounts due to Borders
      under the mortgage note agreements, which relate to stores and a distribution
      facility occupied by Borders, exceeded the amounts the Company had recorded
      on
      its balance sheet. As a result, the Company has increased other (non-current)
      assets for its Borders segment by $2.9, and has decreased the segment’s
      occupancy expense by the same amount. The after-tax impact of this non-cash
      adjustment was $1.8.





**NOTE
      8 - 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 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, and 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
      9 — 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


10


primarily
      to fixed assets, inventory and $22.4 of goodwill. The Company also recorded
      minority interest of $1.0. 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
      10 — SEATTLE’S BEST COFFEE LICENSING AGREEMENT**





In
      August
      2004, the Company entered into a licensing agreement with Seattle’s Best Coffee
      LLC (“Seattle’s Best”), a wholly-owned subsidiary of Starbucks Corporation,
      through which the Company will operate Seattle’s Best-branded cafes within
      substantially all of the Company’s existing Borders superstores in the
      continental U.S. and Alaska and new stores as they are opened. Cafes located
      within existing Borders superstores began conversion to Seattle’s Best cafes in
      early 2005, and will continue through 2007. These cafes will continue to be
      managed and staffed by Company employees, who will be trained on Seattle’s Best
      brand standards and procedures. Seattle’s Best will also provide brand direction
      and oversight, as well as in-store promotional support, and will receive royalty
      payments from the Company.





**NOTE
      11 — SUBSEQUENT EVENT**





Subsequent
      to the quarter ended October 22, 2005, the Company entered into an Increase
      of
      Total Commitment and Amendment No. 1 (the “Amendment”) to the Amended and
      Restated Multicurrency Revolving Credit Agreement dated as of July 30, 2004.
      The
      principal purposes of the Amendment were to increase the total commitment under
      the Amended and Restated Multicurrency Revolving Credit Agreement to $700.0
      from
      $500.0, and to extend the term of such Agreement until October 28, 2010.





11


**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 (UK) Limited, Borders Australia Pty
      Limited and others (individually and collectively, "the Company"), is the second
      largest operator of book, music and movie superstores and the largest operator
      of mall-based bookstores in the world based upon both sales and number of
      stores. At October 22, 2005, the Company operated 516 superstores under the
      Borders name, including 466 in the United States, 32 in the United Kingdom,
      12
      in Australia, three in Puerto Rico, two in New Zealand and one in Singapore.
      The
      Company also operated 700 mall-based and other bookstores, including stores
      operated under the Waldenbooks, Borders Express and Borders Outlet names, as
      well as Borders-branded airport stores, and 33 bookstores under the Books etc.
      name in the United Kingdom. In addition, the Company owned and operated United
      Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and
      retailer of stationery, cards and gifts, with 85 locations, including 36 located
      inside Borders International superstores, at October 22, 2005.





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 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, the Company has been engaged in
      an
      aggressive expansion and remodel program, pursuant to which it opened 19
      domestic Borders superstores and completed major remodels of 33 existing
      domestic superstores in 2004. In 2005, the Company has opened six domestic
      superstores to date, and expects to open 17 for the year including two
      relocations. The Company also completed remodels of 100 existing domestic
      superstores, which concludes the 2005 remodel program. New stores opened in
      2005, and the majority of stores remodeled in 2005, will feature cafe offerings
      by Seattle’s Best Coffee and gifts and stationery merchandise by Paperchase. The
      Company also opened five International superstores in 2004. International store
      growth over the next several years will focus on existing markets, primarily
      in
      the United Kingdom and Australia, with eight new International stores opened
      in
      2005, including the first Borders franchise store, which opened in Malaysia
      in
      April 2005. The total number of International stores expected to open in 2005
      is
      15, including two franchise stores in Malaysia. The International segment
      achieved full year profitability in 2004. 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. The Company is continuing to implement its plan for the
      optimization of the Waldenbooks’ store base in order to improve sales, net
      income and free cash flow. This plan could result in further store closing
      costs
      or asset impairments over the next few years, but at a lesser anticipated rate
      going forward. In addition, Waldenbooks manages the Company’s seasonal
      businesses and small format stores, including those in airports and outlet
      malls. The Company has opened 18 new stores in airports and outlet malls in
      2005. The Company has also updated and re-branded approximately 100 Waldenbooks
      stores as Borders Express, an extension of a market test that began in 2004
      with
      similar conversions of 37 existing Waldenbooks stores. The Company’s objectives
      with respect to these initiatives are to continue to grow consolidated sales
      and
      earnings over the long term and earn an acceptable return on its
      investment.





Subject
      to Board approval and debt covenant limitations, 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 February 2005, the
      Board of Directors authorized an increase in the amount of potential share
      repurchases to $250.0 million (plus any proceeds and tax benefits resulting
      from
      stock option exercises and tax benefits resulting from restricted shares
      purchased by employees from the Company). In December 2004, the Board of
      Directors voted to increase the quarterly cash dividend by 12.5% to $0.09 per
      share on the Company’s common stock.





The
      Company, through its subsidiaries, has agreements with Amazon.com, Inc.
      (“Amazon”) to operate Web sites utilizing the Borders.com, Waldenbooks.com,
      Borders.co.uk and Booksetc.co.uk URLs (the “Mirror Sites”). 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 define between the parties the 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.





In
      addition, Borders has 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 the 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


12


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. The Company also pays referral fees to Amazon pursuant
      to this agreement.





On
      December 10, 2004, the Board of Directors of the Company approved a change
      in
      the Company’s fiscal year-end. Effective with respect to fiscal 2005, the
      Company elected to change its fiscal year to a 52/53-week fiscal year ending
      on
      the Saturday closest to the last day of January. The Company implemented this
      change in order to conform to industry standards and for certain administrative
      purposes. As a result of the change, the Company’s 2005 fiscal year will consist
      of 53 weeks, and will end on January 28, 2006. The Company’s fiscal years had
      ended on the Sunday immediately preceding the last Wednesday in January. Fiscal
      2004 consisted of 52 weeks and ended January 23, 2005. The Company's third
      quarters of 2005 and 2004 consisted of the 13 weeks ended October 22, 2005
      and
      October 24, 2004, respectively.





**Restatement
      of Prior Year Financial Statements**





In
      light
      of announcements made by a number of public companies regarding lease accounting
      and a SEC clarification on the subject, the Company reevaluated its lease
      accounting practices near the end of 2004. As a result, the Company corrected
      its computation of straight-line rent expense, depreciation of leasehold
      improvements and the classification of landlord allowances related to leasehold
      improvements (the “Restatement”), as further discussed in the Company’s most
      recent Annual Report on Form 10-K and in “Note 2 - Restatement of Prior Period
      Financial Statements”. For the quarter ended October 24, 2004, the Restatement
      increased net income by $0.4 million, or $0.01 per share, and for the nine
      months ended October 24, 2004, the Restatement reduced net income by $0.9
      million, or $0.01 per share, increased total assets by $120.7 million and
      decreased cash used for operations by $6.8 million.





Throughout
      “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” all referenced amounts for prior periods and prior period
      comparisons reflect the balances and amounts on a restated basis.





**Correction
      of Prior Years’ Lease Accounting**





As
      a
      result of the Company’s continuing review of its internal controls over the
      selection and monitoring of appropriate assumptions and factors affecting lease
      accounting practices, the Company is correcting accounting for international
      leases and mortgage note receivables in the quarter ended October 22,
      2005.





The
      Company’s accounting policies require that rent expense pursuant to operating
      lease agreements be recognized on a straight-line basis over the term of the
      lease agreement. During the quarter ended October 22, 2005, the Company
      concluded that rent payments required by several of the International segment’s
      lease agreements were not being recognized on the required straight-line basis.
      Specifically, certain lease agreements contained provisions that increased
      rent
      payments over time, and the Company had recognized the effect of these rent
      escalations in the period the escalations occurred, rather than on a
      straight-line basis over the lease term. In fiscal 2004, as part of the year-end
      restatement pertaining to various lease accounting matters discussed in Note
      2,
      straight-line rent liabilities were recorded for the International segment’s
      store lease agreements; however, these recorded liabilities resulted from
      recognizing pre-opening rent on a straight-line basis, not from post-opening
      rent escalation provisions. As a result, the Company has increased other
      long-term liabilities (which includes straight-line rent liabilities) for its
      International segment by $4.9 million, and has increased the segment’s occupancy
      expense by the same amount. The after-tax impact of this non-cash adjustment
      was
      $3.4 million.




In
      addition, the Company is correcting its accounting for four mortgage note
      receivables held by the Borders segment. The principal amounts due to Borders
      under the mortgage note agreements, which relate to stores and a distribution
      facility occupied by Borders, exceeded the amounts the Company had recorded
      on
      its balance sheet. As a result, the Company has increased other (non-current)
      assets for its Borders segment by $2.9 million, and has decreased the segment’s
      occupancy expense by the same amount. The after-tax impact of this non-cash
      adjustment was $1.8 million.





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.





**13
                Weeks Ended**
            
            **39
                Weeks Ended****October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Other
                revenue
            
            
            0.4
            
            
            0.6
            
            
            0.5
            
            
            0.8Total
                revenue
            
            
            100.4
            
            
            100.6
            
            
            100.5
            
            
            100.8Cost
                of merchandise sold (includes occupancy)
            
            
            76.6
            
            
            75.0
            
            
            75.7
            
            
            75.0Gross
                margin
            
            
            23.8
            
            
            25.6
            
            
            24.8
            
            
            25.8Selling,
                general and administrative expenses
            
            
            25.9
            
            
            25.3
            
            
            25.4
            
            
            24.8Pre-opening
                expense
            
            
            0.3
            
            
            0.2
            
            
            0.2
            
            
            0.1Asset
                impairments and other writedowns
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                income (loss)
            
            
            (2.4
            )
            
            0.1
            
            
            (0.8
            )
            
            0.9Interest
                expense
            
            
            0.4
            
            
            0.3
            
            
            0.3
            
            
            0.3Income
                (loss) before income tax
            
            
            (2.8
            )
            
            (0.2
            )
            
            (1.1
            )
            
            0.6Income
                tax provision (benefit)
            
            
            (1.1
            )
            
            (0.1
            )
            
            (0.4
            )
            
            0.2Net
                income (loss)
            
            
            (1.7
            )%
            
            (0.1
            )%
            
            (0.7
            )%
            
            0.4
            %





**Consolidated
      Results -- Comparison of the 13 weeks ended October 22, 2005 to the 13 weeks
      ended October 24, 2004**





***Sales***





Consolidated
      sales increased $3.9 million, or 0.5%, to $837.2 million in 2005 from $833.3
      million in 2004. 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 0.2% in the 13 weeks ended
      October 22, 2005. 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 2005 was due primarily to decreases in comparable
      store
      sales in the music category. Music sales on a comparable store basis have
      declined over the last several years, and are expected to decline further in
      the
      foreseeable future. Also contributing to the decrease in comparable store sales
      was the slow sales environment in the United Kingdom. Partially offsetting
      these
      decreases in comparable store sales were positive comparable store sales of
      books, primarily due to strength in adult fiction, young adult fiction and
      health titles. In addition, sales of movies increased 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 5.2% in the 13 weeks ended October 22, 2005.
      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 2005
      was primarily due to the sluggish mall environment. The impact of price changes
      on comparable store sales was not significant.





***Other
      revenue***





Other
      revenue for the Borders and International segments primarily consists of
      wholesale revenue earned through sales of merchandise to Berjaya Group Berhad
      (“Berjaya”), as part of a franchise agreement under which Berjaya opened a
      Borders superstore in Malaysia in April 2005. Other revenue for the Borders
      segment also includes referral fees received from Amazon as part of the Mirror
      Site agreements, and other revenue for the International segment also includes
      license fees received from Starbucks Coffee Company (U.K.) Limited. Other
      revenue in the Waldenbooks segment primarily consists of membership income
      from
      the Preferered Reader Program.





Until
      October 2004, Waldenbooks sold memberships in its Preferred Reader Program,
      which offered members discounts on purchases and other benefits. Waldenbooks
      has
      phased out its Preferred Reader Program and is replacing it with other
      promotional programs in


14


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 Preferred Reader
      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.





Other
      revenue has decreased $1.6 million, or 30.2%, to $3.7 million in 2005 from
      $5.3
      million in 2004. The decrease is mainly due to the change in the Preferred
      Reader Program, partially offset by an increase in the Borders and International
      segments, due primarily to wholesale revenue earned through the franchise
      agreement with Berjaya in 2005.





***Gross
      margin***





Consolidated
      gross margin decreased $13.1 million, or 6.2%, to $200.0 million in 2005 from
      $213.1 million in 2004. As a percentage of sales, consolidated gross margin
      decreased 1.8%, to 23.8% in 2005 from 25.6% in 2004. The decrease is due to
      the
      Borders, Waldenbooks and International segments’ gross margin as a percentage of
      sales decreasing. The decrease in the Borders segment was due to increased
      distribution and freight costs and increased promotional discounts as a
      percentage of sales, partially offset by lower store occupancy costs primarily
      due to the correction of prior years’ lease accounting. The decrease in the
      Waldenbooks segment was primarily due to a decrease in other revenue as a
      percentage of sales, due to the change in the Preferred Reader Program, and
      increased occupancy costs as a percentage of sales, driven by the decrease
      in
      comparable store sales, partially offset by decreased product costs as a
      percentage of sales. The decrease in the International segment was primarily
      the
      result of increased occupancy costs due to the correction of prior years’ lease
      accounting, as well as increased product costs and increased freight costs
      as a
      percentage of sales. Partially offsetting these items as a percentage of sales
      was increased other revenue due to the franchise agreement with Berjaya in
      2005,
      and decreased shrink expense due to favorable inventory counts.





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
      and
      store occupancy from cost of sales and include those costs in other financial
      statement lines.





***Selling,
      general and administrative expenses***





Consolidated
      selling, general and administrative expenses (SG&A) increased $5.7 million,
      or 2.7%, to $216.5 million in 2005 from $210.8 million in 2004. As a percentage
      of sales, SG&A increased 0.6%, to 25.9% in 2005 from 25.3% in 2004. This
      increase resulted from increased SG&A expenses as a percentage of sales for
      the Borders, Waldenbooks and International segments. Borders SG&A expenses
      as a percentage of sales increased primarily due to increased store operating
      expenses and increased corporate payroll expenses, due to cost increases to
      support strategic initiatives, partially offset by decreases in store payroll
      and corporate operating expenses. The Waldenbooks increase was primarily due
      to
      increased corporate payroll expense as a percentage of sales, due to the
      de-leveraging of fixed costs resulting from comparable store sales declines
      and
      cost increases to support strategic initiatives. International SG&A expenses
      as a percentage of sales increased primarily as a result of increases in store
      payroll and operating expenses due to the de-leveraging of fixed costs resulting
      from comparable store sales declines in the United Kingdom, as well as increased
      corporate payroll expenses and increased advertising expense.





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 increased $1.3 million, or 59.1%, to $3.5 million in 2005
      from
      $2.2 million in 2004. This was primarily a result of increased borrowings to
      fund corporate stock repurchases and capital expenditures in 2005.





***Taxes***





The
      Company's effective tax rate was 37.8% in 2005 compared to 37.0% in 2004. This
      increase was primarily due to lower projected income from international
      operations.





15


***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      1.7%
      in 2005 from 0.1% in 2004, and net loss dollars increased to $14.1 million
      in
      2005 from $1.1 million in 2004.





**Consolidated
      Results -- Comparison of the 39 weeks ended October 22, 2005 to the 39 weeks
      ended October 24, 2004**





***Sales***





Consolidated
      sales increased $64.8 million, or 2.6%, to $2,576.0 million in 2005 from
      $2,511.2 million in 2004. 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 0.3% in the 39 weeks ended
      October 22, 2005. 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 2005 was due primarily to the book category, driven
      by
      release of the sixth title in the Harry Potter series, along with strong sales
      of other titles, especially in adult fiction, young adult fiction, religion
      and
      business and money management titles, as well as increased sales of movies
      on a
      comparable store basis, primarily as the result of increased sales of digital
      videodiscs (DVDs). Partially offsetting the increase in comparable store sales
      of books and movies were comparable store sales decreases in the music category
      and the slow sales environment in the United Kingdom. The impact of price
      changes on comparable store sales was not significant.





Waldenbooks’
      comparable store sales decreased 2.1% in the 39 weeks ended October 22, 2005.
      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 2005
      was primarily due to the sluggish mall environment. The impact of price changes
      on comparable store sales was not significant.





***Other
      revenue***





Other
      revenue for the Borders and International segments primarily consists of
      wholesale revenue earned through sales of merchandise to Berjaya, as part of
      a
      franchise agreement under which Berjaya opened a Borders superstore in Malaysia
      in April 2005. Other revenue for the Borders segment also includes referral
      fees
      received from Amazon as part of the Mirror Site agreements, and other revenue
      for the International segment also includes license fees received from Starbucks
      Coffee Company (U.K.) Limited. Other revenue in the Waldenbooks segment
      primarily consists of membership income from the Preferered Reader Program.





Until
      October 2004, Waldenbooks sold memberships in its Preferred Reader Program,
      which offered members discounts on purchases and other benefits. Waldenbooks
      has
      phased out 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 Preferred Reader 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.





Other
      revenue has decreased $5.2 million, or 27.5%, to $13.7 million in 2005 from
      $18.9 million in 2004. The decrease is mainly due to the change in the Preferred
      Reader Program, partially offset by an increase in the Borders and International
      segments, due primarily to wholesale revenue earned through the franchise
      agreement with Berjaya in 2005.





***Gross
      margin***





Consolidated
      gross margin decreased $6.2 million, or 1.0%, to $640.5 million in 2005 from
      $646.7 million in 2004. As a percentage of sales, consolidated gross margin
      decreased 1.0%, to 24.8% in 2005 from 25.8% in 2004. The decrease is due to
      the
      Borders, Waldenbooks and International segments’ gross margin as a percentage of
      sales decreasing. The decrease in the Borders segment was due to increased
      product costs as a percentage of sales, primarily due to increased bestseller
      discounts in 2005, driven by the release of the sixth book in the Harry Potter
      series, along with increased distribution costs, partially offset by increased
      other revenue as a percentage of sales due to the franchise agreement with
      Berjaya in 2005. The decrease in the Waldenbooks segment was primarily due
      to a
      decrease in other revenue as a percentage of sales, due to the change in the
      Preferred Reader Program, partially offset by decreased store occupancy expenses
      due to favorable lease renewal rates, and decreased distribution costs as a
      percentage of sales.


16


The
      decrease in the International segment was primarily the result of increased
      occupancy costs as a percentage of sales, due to the correction of prior years’
lease accounting, and increased distribution costs as a percentage of sales,
      due
      largely to the higher supply chain costs of Paperchase. Partially offsetting
      these items was a decrease in product costs as a percentage of sales, primarily
      due to the acquisition of Paperchase, and increased other revenue as a
      percentage of sales due to the franchise agreement with Berjaya.





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
      and
      store occupancy from cost of sales and include those costs in other financial
      statement lines.





***Selling,
      general and administrative expenses***





Consolidated
      selling, general and administrative expenses (SG&A) increased $33.0 million,
      or 5.3%, to $654.5 million in 2005 from $621.5 million in 2004. As a percentage
      of sales, SG&A increased 0.6%, to 25.4% in 2005 from 24.8% in 2004. This
      increase primarily resulted from increases in SG&A expenses as a percentage
      of sales for the Borders, Waldenbooks and International segments. Borders
      SG&A expenses as percentage of sales increased primarily due to increased
      corporate payroll and store and corporate operating expenses due to cost
      increases to support strategic initiatives, partially offset by decreased
      advertising expense and decreased store payroll. The Waldenbooks increase was
      primarily due to increased corporate payroll expense as a percentage of sales
      due to the de-leveraging of fixed costs resulting from comparable store sales
      declines and cost increases to support strategic initiatives, partially offset
      by decreased corporate and store operating expenses as a percentage of sales.
      The International increase in SG&A expenses was primarily the result of
      increases as a percentage of sales in store payroll, corporate operating
      expenses, store operating expenses, and corporate payroll, all of which are
      due
      primarily to the acquisition of Paperchase, partially offset by decreased
      advertising costs.





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 increased $2.5 million, or 38.5%, to $9.0 million in 2005
      from
      $6.5 million in 2004. This was primarily a result of increased borrowings to
      fund corporate stock repurchases and capital expenditures in 2005.





***Taxes***





The
      Company's effective tax rate used was 37.8% in 2005 compared to 37.0% in 2004.
      This increase was primarily due to lower income from international
      operations.





***Net
      income (loss)***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to a
      net loss of 0.7% in 2005 from net income of 0.4% in 2004, and net income dollars
      decreased to a net loss of $18.1 million in 2005 from net income of $9.1 million
      in 2004.





**Segment
      Results**





The
      Company is organized based upon the following operating segments: domestic
      Borders stores, Waldenbooks Specialty Retail stores (“Waldenbooks”),
      International stores (including 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 6 -
      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.





17


**Borders**





**13
                Weeks Ended**
            
            **39
                Weeks Ended******(dollar
                amounts in millions)
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Sales
            
            $
            572.9
            
            $
            564.1
            
            $
            1,770.8
            
            $
            1,734.2Other
                revenue
            
            $
            1.1
            
            $
            0.7
            
            $
            4.9
            
            $
            2.0Net
                income
            
            $
            7.6
            
            $
            9.1
            
            $
            30.3
            
            $
            34.9Net
                income as % of sales
            
            
            1.3
            %
            
            1.6
            %
            
            1.7
            %
            
            2.0
            %Depreciation
                expense
            
            $
            20.6
            
            $
            19.3
            
            $
            63.6
            
            $
            58.0Interest
                income
            
            $
            3.7
            
            $
            1.1
            
            $
            9.4
            
            $
            4.0Store
                openings
            
            
            2
            
            
            9
            
            
            6
            
            
            15Store
                closings
            
            
            -
            
            
            -
            
            
            2
            
            
            1Store
                count
            
            
            466
            
            
            459
            
            
            466
            
            
            459





**Borders
      - Comparison of the 13 weeks ended October 22, 2005 to the 13 weeks ended
      October 24, 2004**





***Sales***





Borders'
      sales increased $8.8 million, or 1.6%, to $572.9 million in 2005 from $564.1
      million in 2004. This increase was comprised of non-comparable sales primarily
      associated with 2005 and 2004 store openings.





***Other
      revenue***





Other
      revenue increased $0.4 million, or 57.1%, to $1.1 million in 2005 from $0.7
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.3%, to 27.0% in 2005 from 27.3%
      in
      2004, due to increased promotional discounts, distribution and freight costs
      of
      0.5% as a percentage of sales, partially offset by lower store occupancy costs
      of 0.2% as a percentage of sales, primarily due to the correction of prior
      years’ lease accounting.





Gross
      margin dollars increased $0.4 million, or 0.3%, to $154.4 million in 2005 from
      $154.0 million in 2004, which was primarily due to increased sales and the
      correction of prior years’ lease accounting, partially offset by the decrease in
      gross margin as a percentage of sales.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.5%, to 25.2% in 2005 from 24.7% in 2004,
      primarily due to increased store operating expenses of 0.6% as a percentage
      of
      sales and increased corporate payroll expenses of 0.3% as a percentage of sales,
      also due to cost increases to support strategic initiatives. Partially
      offsetting these increases are decreases in store payroll of 0.2% as a
      percentage of sales, due to disciplined cost controls at the store level, and
      decreased corporate operating expenses of 0.2% as a percentage of
      sales.





SG&A
      dollars increased $5.3 million, or 3.8%, to $144.4 million in 2005 from $139.1
      million in 2004, primarily due to cost increases to support strategic
      initiatives and increased store payroll expenses resulting from new store
      openings, partially offset by decreased corporate operating
      expenses.





***Depreciation
      expense***





Depreciation
      expense increased $1.3 million, or 6.7%, to $20.6 million in 2005 from $19.3
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new and remodeled stores’ capital expenditures, as well as
      accelerated depreciation related to store remodels.





***Interest
      income***





Borders’
      interest income increased $2.6 million, or 236.4%, to $3.7 million in 2005
      from
      $1.1 million in 2004. This was the result of Borders’ continued positive cash
      flow at fixed internal interest rates.


18




***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      1.3% in 2005 from 1.6% in 2004, and net income dollars decreased $1.5 million,
      or 16.5%, to $7.6 million in 2005 from $9.1 million in 2004.





**Borders
      - Comparison of the 39 weeks ended October 22, 2005 to the 39 weeks ended
      October 24, 2004**





***Sales***





Borders'
      sales increased $36.6 million, or 2.1%, to $1,770.8 million in 2005 from
      $1,734.2 million in 2004. This increase was comprised of non-comparable sales
      primarily associated with 2005 and 2004 store openings of $37.2 million and
      comparable store sales increases of $5.6 million, partially offset by a sales
      decrease of $6.2 million due to the change in fiscal year, which resulted in
      one
      less day in the first quarter of 2005 as compared to 2004.





***Other
      revenue***





Other
      revenue increased $2.9 million, or 145.0%, to $4.9 million in 2005 from $2.0
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.4%, to 27.0% in 2005 from 27.4%
      in
      2004. This decrease was due to increased product costs of 0.5% as a percentage
      of sales, primarily due to increased bestseller discounts in 2005, driven by
      the
      release of the sixth book in the Harry Potter series, along with increased
      distribution costs of 0.1% as a percentage of sales, partially offset by
      increased other revenue as a percentage of sales of 0.2%, due to the franchise
      agreement with Berjaya in 2005.





Gross
      margin dollars increased $3.2 million, or 0.7%, to $478.8 million in 2005 from
      $475.6 million in 2004, which was primarily due to increased sales, partially
      offset by the decrease in gross margin as a percentage of sales.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.4%, to 24.6% in 2005 from 24.2% in 2004,
      primarily due to increased corporate payroll and store and corporate operating
      expenses of 0.8% as a percentage of sales, due to cost increases to support
      strategic initiatives. Partially offsetting these increases were decreased
      advertising expense of 0.3% as a percentage of sales, primarily due to reduced
      newsprint advertising, and decreased store payroll of 0.1% as a percentage
      of
      sales, resulting from the increase in comparable store sales and disciplined
      cost controls at the store level.





SG&A
      dollars increased $16.1 million, or 3.8%, to $436.0 million in 2005 from $419.9
      million in 2004, primarily due to cost increases to support strategic
      initiatives and increased store payroll expenses resulting from new store
      openings, partially offset by decreased advertising expense.





***Effect
      of terrorist attacks on September 11, 2001***





As
      a
      result of the terrorist attacks on September 11, 2001, a Borders store that
      operated in the World Trade Center in New York City was destroyed. The loss
      of
      that store’s sales and net income was not material to the Company’s consolidated
      2005 or 2004 results as a whole. The Company was insured for the replacement
      value of the assets destroyed at the store and up to 24 months of lost income
      from business interruption coverage and has recognized a total recovery of
      $19.9
      million. The Company does not expect to recover additional insurance amounts
      related to this incident.





In
      the
      first quarter of 2004, Borders recognized as income its final insurance
      reimbursement of $1.2 million related to the September 11, 2001 loss. Of this,
      $0.9 million was categorized as an offset to “Selling, general and
      administrative expenses”. This amount primarily represented the excess of lost
      assets’ replacement value over their net book value. It is the Company’s policy
      to record gains and losses on asset disposals as a part of “Selling, general and
      administrative expenses”. The remaining $0.3 million was related to pre-opening
      expenses incurred in the opening of replacement stores in New York City. This
      was categorized as an offset to “Pre-opening expense” on the consolidated
      statements of operations.


19




***Depreciation
      expense***





Depreciation
      expense increased $5.6 million, or 9.7%, to $63.6 million in 2005 from $58.0
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new and remodeled stores’ capital expenditures, as well as
      accelerated depreciation related to store remodels.





***Interest
      income***





Borders
      interest income increased $5.4 million, or 135.0%, to $9.4 million in 2005
      from
      $4.0 million in 2004. This was the result of Borders’ continued positive cash
      flow at fixed internal interest rates.





***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      1.7% in 2005 from 2.0% in 2004, and net income dollars decreased $4.6 million,
      or 13.2%, to $30.3 million in 2005 from $34.9 million in 2004.





**Waldenbooks**





**13
                Weeks Ended**
            
            **39
                Weeks Ended**(dollar
                amounts in millions)
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **October
                22,**
              **2005**
            
            ******October
                24,**
              **2004**Sales
            
            $
            138.4
            
            $
            150.6
            
            $
            432.5
            
            $
            451.4Other
                revenue
            
            $
            0.3
            
            $
            3.4
            
            $
            1.9
            
            $
            13.3Net
                income (loss)
            
            $
            (3.4
            )
            $
            (1.1
            )
            $
            (2.4
            )
            $
            3.3Net
                income (loss) as % of sales
            
            
            (2.5
            )%
            
            (0.7
            )%
            
            (0.6
            )%
            
            0.7
            %Depreciation
                expense
            
            $
            3.8
            
            $
            3.7
            
            $
            10.8
            
            $
            10.6Interest
                income
            
            $
            10.6
            
            $
            10.2
            
            $
            32.5
            
            $
            31.0Store
                Openings
            
            
            7
            
            
            4
            
            
            18
            
            
            9Store
                Closings
            
            
            11
            
            
            2
            
            
            23
            
            
            13Store
                Count
            
            
            700
            
            
            729
            
            
            700
            
            
            729





**Waldenbooks
      - Comparison of the 13 weeks ended October 22, 2005 to the 13 weeks ended
      October 24, 2004**





***Sales***





Waldenbooks'
      sales decreased $12.2 million, or 8.1%, to $138.4 million in 2005 from $150.6
      million in 2004. This decrease was comprised of decreased comparable store
      sales
      of $7.7 million and decreased non-comparable sales associated with 2005 and
      2004
      store closings of $4.5 million.





***Other
      revenue***





Waldenbooks'
      other revenue, which consists of membership income from the Preferred Reader
      Program, decreased $3.1 million, or 91.2%, to $0.3 million in 2005 from $3.4
      million in 2004. This was due to the change in the Preferred Reader
      Program.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 3.0%, to 18.7% in 2005 from 21.7%
      in
      2004. This was primarily due to a 2.1% decrease in other revenue as a percentage
      of sales, due to the change in the Preferred Reader Program, and increased
      occupancy costs as a percentage of sales of 1.3%, due to the decrease in
      comparable store sales. Partially offsetting these items were decreased product
      costs of 0.4% as a percentage of sales.





Gross
      margin dollars decreased $6.6 million, or 20.2%, to $26.0 million in 2005 from
      $32.6 million in 2004, primarily due to store closures, decreased comparable
      store sales and the decrease in gross margin percentage noted above.




20


***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.5%, to 30.0% in 2005 from 29.5% in
      2004. This was
      primarily due to increased corporate payroll expense of 0.9% as a percentage
      of
      sales due to the de-leveraging of fixed costs resulting from comparable store
      sales declines and cost increases to support strategic initiatives. In addition,
      store payroll and store operating expenses increased 0.2% as a percentage of
      sales. Partially offsetting these increases were decreased corporate operating
      expenses of 0.4% as a percentage of sales, and decreased advertising expense
      of
      0.2% as a percentage of sales, primarily due to reduced newsprint
      advertising.





SG&A
      dollars decreased $2.9 million, or 6.5%, to $41.6 million in 2005 from $44.5
      million in 2004, primarily due to store closings, partially offset by increased
      corporate payroll costs.





***Depreciation
      expense***





Depreciation
      expense increased $0.1 million, or 2.7%, to $3.8 million in 2005 from $3.7
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new airport and outlet stores, as well as on capital additions
      related to the conversion of select Waldenbooks stores to Borders Express
      stores.





***Interest
      income***





Interest
      income increased $0.4 million, or 3.9%, to $10.6 million in 2005 from $10.2
      million in 2004. This was the result of Waldenbooks' continued positive cash
      flow at fixed internal interest rates.





***Net
      income***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      2.5%
      in 2005 from 0.7% in 2004, and net loss dollars increased $2.3 million, or
      209.1%, to $3.4 million in 2005 from $1.1 million in 2004.




**Waldenbooks
      - Comparison of the 39 weeks ended October 22, 2005 to the 39 weeks ended
      October 24, 2004**





***Sales***





Waldenbooks'
      sales decreased $18.9 million, or 4.2%, to $432.5 million in 2005 from $451.4
      million in 2004. This decrease was comprised of decreased comparable store
      sales
      of $9.7 million and decreased non-comparable sales associated with 2005 and
      2004
      store closings of $9.2 million.





***Other
      revenue***





Waldenbooks'
      other revenue, which consists of membership income from the Preferred Reader
      Program, decreased $11.4 million, or 85.7%, to $1.9 million in 2005 from $13.3
      million in 2004. This was due to the change in the Preferred Reader
      Program.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 2.2%, to 20.7% in 2005 from 22.9%
      in
      2004. This was primarily due to a 2.5% decrease in other revenue as a percentage
      of sales, due to the change in the Preferred Reader Program, partially offset
      by
      decreased store occupancy expenses of 0.2% as a percentage of sales due to
      favorable lease renewal rates, and decreased distribution costs of 0.1% as
      a
      percentage of sales.





Gross
      margin dollars decreased $13.4 million, or 13.0%, to $89.9 million in 2005
      from
      $103.3 million in 2004, primarily due to store closings, decreased comparable
      store sales and the decrease in gross margin percentage.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 0.6 %, to 28.9 % in 2005 from 28.3% in 2004.
      This was primarily due to increased corporate payroll expense of 0.8% as a
      percentage of sales, due to the de-leveraging of fixed costs resulting from
      comparable store sales declines


21


and
      cost
      increases to support strategic initiatives. Partially offsetting the increase
      in
      these costs were decreased corporate and store operating expenses of 0.2% as
      a
      percentage of sales.





SG&A
      dollars decreased $2.9 million, or 2.3%, to $125.0 million in 2005 from $127.9
      million in 2004, primarily due to store closings, partially offset by increased
      corporate payroll costs.





***Depreciation
      expense***





Depreciation
      expense increased $0.2 million, or 1.9%, to $10.8 million in 2005 from $10.6
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new airport and outlet stores, as well as on capital additions
      related to the conversion of select Waldenbooks stores to Borders Express
      stores.





***Interest
      income***





Interest
      income increased $1.5 million, or 4.8%, to $32.5 million in 2005 from $31.0
      million in 2004. 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 decreased
      to a
      loss of 0.6% in 2005 from income of 0.7% in 2004, and net income dollars
      decreased $5.7 million, or 172.7%, to a loss of $2.4 million in 2005 from income
      of $3.3 million in 2004.




**International**





**13
                Weeks Ended**
            
            **39
                Weeks Ended******(dollar
                amounts in millions)
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Sales
            
            $
            125.9
            
            $
            118.6
            
            $
            372.7
            
            $
            325.6Other
                revenue
            
            $
            2.3
            
            $
            1.2
            
            $
            6.9
            
            $
            3.6Net
                loss
            
            $
            (10.4
            )
            $
            (2.5
            )
            $
            (21.4
            )
            $
            (8.8
            )Net
                loss as % of sales
            
            
            (8.3
            )%
            
            (2.1
            )%
            
            (5.7
            )%
            
            (2.7
            )%Depreciation
                expense
            
            $
            4.7
            
            $
            4.1
            
            $
            13.8
            
            $
            11.5Interest
                expense
            
            $
            5.2
            
            $
            4.9
            
            $
            15.6
            
            $
            13.9Superstore
                Store Openings
            
            
            3
            
            
            2
            
            
            8
            
            
            2Superstore
                Store Count
            
            
            50
            
            
            39
            
            
            50
            
            
            39Books
                etc. Store Openings
            
            
            -
            
            
            -
            
            
            -
            
            
            1Books
                etc. Store Closings
            
            
            -
            
            
            -
            
            
            2
            
            
            1Books
                etc. Store Count
            
            
            33
            
            
            36
            
            
            33
            
            
            36





**International
      - Comparison of the 13 weeks ended October 22, 2005 to the 13 weeks ended
      October 24, 2004**





***Sales***





International
      sales increased $7.3 million, or 6.2%, to $125.9 million in 2005 from $118.6
      million in 2004. Of this increase in sales, 0.2% was due to the translation
      of
      foreign currencies to U.S. dollars. The remaining 6.0% was the result of new
      superstore openings, partially offset by comparable store sales decreases
      resulting from the slow sales environment in the United Kingdom. The impact
      of
      price changes on comparable store sales was not significant.





***Other
      revenue***





Other
      revenue increased $1.1 million, or 91.7%, to $2.3 million in 2005 from $1.2
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 6.7%, to 15.6% in 2005 from 22.3%
      in
      2004, primarily the result of increased occupancy costs of 6.4% as a percentage
      of sales, due to the correction of prior years’ lease accounting, as previously
      discussed. Excluding this adjustment, occupancy costs would have increased
      by
      3.7% as a percentage of sales, due primarily to the decrease


22


in
      comparable store sales. Also contributing to the decrease in gross margin as
      a
      percentage of sales were increased product costs of 1.2% as a percentage of
      sales and increased freight costs of 0.2% as a percentage of sales. Partially
      offsetting these items was increased other revenue of 0.8% as a percentage
      of
      sales due to the franchise agreement with Berjaya in 2005, and decreased shrink
      expense of 0.3% as a percentage of sales.





Gross
      margin dollars decreased $6.9 million, or 26.0%, to $19.6 million in 2005 from
      $26.5 million in 2004. Of this decrease, $0.2 million is the result of
      translation of foreign currencies to U.S. dollars. The remainder of the decrease
      is due to the correction of prior years’ lease accounting, the decrease in
      comparable store sales and the decline in the gross margin rate.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 2.0%, to 23.7% in 2005 from 21.7% in 2004.
      This was primarily the result of increases as a percentage of sales in store
      payroll and operating expenses of 1.4%, due to the de-leveraging of fixed costs
      resulting from comparable store sales declines in the United Kingdom, as well
      as
      increased corporate payroll expenses of 0.4% as a percentage of sales and
      increased advertising expense of 0.2% as a percentage of sales.





SG&A
      dollars increased $4.1 million, or 16.0%, to $29.8 million in 2005 from $25.7
      million in 2004. Of this increase, $0.2 million is the result of translation
      of
      foreign currencies to U.S. dollars. The remainder of the increase is primarily
      due to new superstore openings and the increased store payroll and operating
      expenses required.





***Depreciation
      expense***





Depreciation
      expense increased $0.6 million, or 14.6%, to $4.7 million in 2005 from $4.1
      million in 2004. This was primarily due to depreciation expense recognized
      on
      new stores' capital expenditures.





***Interest
      expense***





Interest
      expense increased $0.3 million, or 6.1%, to $5.2 million in 2005 from $4.9
      million in 2004. This was primarily due to increased borrowings used to fund
      new
      stores’ capital expenditures.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      8.3%
      in 2005 as compared to 2.1% in 2004, and net loss dollars increased $7.9
      million, or 316.0%, to $10.4 million in 2005 from $2.5 million in
      2004.





**International
      - Comparison of the 39 weeks ended October 22, 2005 to the 39 weeks ended
      October 24, 2004**





***Sales***





International
      sales increased $47.1 million, or 14.5%, to $372.7 million in 2005 from $325.6
      million in 2004. Of this increase in sales, 1.7% was due to the translation
      of
      foreign currencies to U.S. dollars. The remaining 12.8% was the result of new
      superstore openings and comparable store sales decreases in the United Kingdom.
      The impact of price changes on comparable store sales was not
      significant.





***Other
      revenue***





Other
      revenue increased $3.3 million, or 91.7%, to $6.9 million in 2005 from $3.6
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.5%, to 19.3% in 2005 from 20.8%
      in
      2004, primarily the result of increased occupancy costs of 3.1% as a percentage
      of sales, due to the correction of prior years’ lease accounting, as previously
      discussed. Excluding the prior years’ adjustment for lease accounting, occupancy
      costs would have increased by 2.2% as a percentage of sales, due primarily
      to
      the decrease in comparable store sales. Also contributing to the decrease in
      gross margin as a percentage of sales was increased distribution costs of 0.2%
      as a percentage of sales, due largely to the higher supply chain costs of
      Paperchase. Partially


23


offsetting
      these items was a decrease of 1.1% in product costs as a percentage of sales.
      This was primarily due to the acquisition of Paperchase, which offers
      merchandise with higher margins than the International superstores’ core
      products. In addition, other revenue increased 0.7% as a percentage of sales
      due
      to the franchise agreement with Berjaya in 2005.





Gross
      margin dollars increased $4.0 million, or 5.9%, to $71.8 million in 2005 from
      $67.8 million in 2004. Of this increase, $1.7 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 acquisition of Paperchase, partially
      offset by the correction of prior years’ lease accounting and the decline in the
      gross margin rate.





***Selling,
      general and administrative expenses***





SG&A
      as a percentage of sales increased 2.9%, to 23.9% in 2004 from 21.0% in 2003.
      This was primarily the result of increases, as a percentage of sales, in store
      payroll of 1.1%, corporate operating expenses of 0.8% store operating expenses
      of 0.7%, and corporate payroll of 0.5%, all of which are due primarily to the
      acquisition of Paperchase, which occurred near the end of the second quarter
      of
      2004. These increases were partially offset by decreased advertising costs
      of
      0.2% as a percentage of sales.





SG&A
      dollars increased $20.6 million, or 30.1%, to $89.1 million in 2005 from $68.5
      million in 2004. Of this increase, $1.4 million is the result of translation
      of
      foreign currencies to U.S. dollars. The remainder of the increase is primarily
      due to new superstore openings, the acquisition of Paperchase and the increased
      store payroll and operating expenses required.





***Depreciation
      expense***





Depreciation
      expense increased $2.3 million, or 20.0%, to $13.8 million in 2005 from $11.5
      million in 2004. This was primarily due to depreciation expense recognized
      on
      new stores' capital expenditures.





***Interest
      expense***





Interest
      expense increased $1.7 million, or 12.2%, to $15.6 million in 2005 from $13.9
      million in 2004. This was primarily due to increased borrowings used to fund
      new
      stores’ capital expenditures.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      5.7%
      in 2005 as compared to 2.7% in 2004, and net loss dollars increased $12.6
      million, or 143.2%, to $21.4 million in 2005 from $8.8 million in
      2004.





**Corporate**





**13
                Weeks Ended**
            
            **39
                Weeks Ended**(dollar
                amounts in millions)
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**
            
            **October
                22,**
              **2005**
            
            **October
                24,**
              **2004**Net
                loss
            
            $
            (7.9
            )
            $
            (6.6
            )
            $
            (24.6
            )
            $
            (20.3
            )Interest
                expense
            
            $
            12.6
            
            $
            8.6
            
            $
            35.3
            
            $
            27.6





**Corporate
      - Comparison of the 13 weeks ended October 22, 2005 to the 13 weeks ended
      October 24, 2004**





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





Net
      loss
      dollars increased $1.3 million, or 19.7%, to $7.9 million in 2005 from $6.6
      million in 2004. This was primarily due to increased interest expense for this
      segment resulting from increased borrowings to fund corporate stock repurchases
      in 2005. Interest expense represents corporate-level interest costs not charged
      to the Company's other segments.





**Corporate
      - Comparison of the 39 weeks ended October 22, 2005 to the 39 weeks ended
      October 24, 2004**





Net
      loss
      dollars increased $4.3 million, or 21.2%, to $24.6 million in 2005 from $20.3
      million in 2004. This was primarily due to increased interest expense for this
      segment resulting from increased borrowings to fund corporate stock repurchases
      in 2005. Interest expense represents corporate-level interest costs not charged
      to the Company's other segments.





24


**Liquidity
      and Capital Resources**





The
      Company's principal capital requirements are to fund the opening of new stores,
      the refurbishment 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 $161.1 million and $69.1 million for the 39 weeks ended
      October 22, 2005 and October 24, 2004, respectively. Operating cash outflows
      for
      the period reflect operating results and a gain on the sale of investments,
      as
      well as decreases in taxes payable, expenses payable and accrued liabilities,
      along with increases in inventories, prepaid expenses, other long term assets
      and deferred taxes. The most significant of these was the increase in
      inventories, which resulted from the build up of inventory in preparation for
      the holiday season. The current year operating cash inflows primarily reflect
      non-cash charges for depreciation and a loss on the disposal of assets related
      to the remodel program, as well as increases in accounts payable and other
      long-term liabilities and a decrease in accounts receivable.





Net
      cash
      used for investing was $37.4 million in 2005, which included cash resulting
      from
      the sale of investments of $105.2 million. Net cash provided by investing was
      $39.4 million in 2004, which primarily resulted from the sale of auction rate
      securities of $118.0 million, as well as 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. Net cash provided by
      investing in 2004 was partially offset by cash used for the acquisition of
      Paperchase of $31.2 million.




In
      fiscal
      2005, capital expenditures were $142.6 million, which primarily funded the
      remodeling of 100 domestic Borders superstores and the conversion of
      approximately 100 Waldenbooks stores to Borders Express stores, as well as
      investments in new merchandising systems. Additional capital spending in 2005
      reflects the opening of six new Borders superstores, as well as four new airport
      stores and 14 new outlet stores operated by the Waldenbooks segment. In fiscal
      2004, capital expenditures were $79.7 million, which primarily funded new stores
      and the refurbishment of existing stores. Capital expenditures in 2004 reflect
      the opening of 17 new superstores and two new airport stores, operated by the
      Waldenbooks segment, as well as the remodel of 33 existing domestic superstores
      and the conversion of 37 Waldenbooks stores to Borders Express stores.





Net
      cash
      provided by financing in 2005 was $22.3 million, resulting from funding from
      the
      Company’s credit facility of $195.4 million and $18.6 million of proceeds from
      stock option exercises, partially offset by the repurchase of common stock
      totaling $172.7 million and the payment of the Company’s quarterly cash
      dividends of $19.0 million. Net cash used for financing in 2004 was $84.9
      million, resulting from the repurchase of common stock totaling $104.6 million,
      the payment of the Company’s quarterly cash dividends of $18.5 million and the
      repayment of capital lease obligations of $0.4 million, partially offset by
      $32.1 million of proceeds from stock option exercises and funding from the
      credit facility of $6.5 million.





The
      Company expects capital expenditures to approximate $175.0 million in 2005,
      resulting primarily from new superstore openings and a store remodel program,
      through which the Company completed major remodels of 100 domestic Borders
      superstore locations, most of which included conversion to Seattle’s Best cafes
      and Paperchase gifts and stationery shops, converted approximately 100
      Waldenbooks stores to Borders Express, and opened 18 new airport and outlet
      mall
      stores. In addition, capital expenditures will result from International store
      openings and continued investment in new buying and merchandising systems.
      The
      Company currently plans to open approximately 17 new domestic Borders
      superstores, including two relocations, and approximately 15 new International
      stores, including two franchise stores, in 2005. Average cash requirements
      for
      the opening of a prototype Borders Books and Music superstore are $2.4 million,
      representing capital expenditures of $1.2 million, inventory requirements (net
      of related accounts payable) of $1.0 million, and $0.2 million of pre-opening
      costs. Average cash requirements to open a new airport or outlet mall store
      range from $0.2 million to $0.7 million, depending on the size and format of
      the
      store. Average cash requirements for a major remodel of a Borders superstore
      are
      between $0.1 million to $0.4 million, and average cash requirements for a
      Borders Express conversion are less than $0.1 million. The Company plans to
      lease new store locations predominantly under operating leases.





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









25


The
      Company currently has a share repurchase program in place with remaining
      authorization as of November 11, 2005 to repurchase approximately $72.4 million.
      During the 39 weeks ended October 22, 2005 and October 24, 2004, $172.7 million
      and $104.6 million of common stock were repurchased, respectively. The Company
      plans to continue the repurchase of its common stock throughout fiscal 2005,
      subject to the Company's share price, capital needs and regulatory
      requirements.





During
      2004, the Company paid a regular quarterly dividend, and intends to pay regular
      quarterly cash dividends, subject to Board approval, going forward. In December
      2004, the Board of Directors increased the quarterly dividend by 12.5% to $0.09
      per share. The declaration and payment of dividends, if any, is subject to
      the
      discretion of the Board and to certain limitations under the Michigan Business
      Corporation Act. In addition, the Company’s ability to pay dividends is
      restricted by certain agreements to which the Company is a party.





The
      Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
      which was amended in July 2004 and October 2005 and will expire in October
      2010.
      The Credit Agreement provides for borrowings of up to $700.0 million secured
      by
      eligible inventory and accounts receivable and related assets. Borrowings under
      the Credit Agreement are limited to a specified percentage of eligible
      inventories and accounts receivable and bear interest at a variable base rate
      plus 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
      million. As of October 22, 2005 the Company was in compliance with all covenants
      contained within this agreement.





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. As of October
      22,
      2005 the Company was in compliance with all covenants contained within this
      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
      designated this swap agreement as a fair market value hedge. The notional amount
      of the swap agreement is $50.0 million, and the agreement is set to expire
      concurrently with the due date of the Notes.





The
      Company is the primary beneficiary of two variable interest entities (“VIEs”)
      due to the Company’s guarantee of the debt of these entities. As a result, the
      Company consolidates these VIEs and has recorded property and equipment, net
      of
      accumulated depreciation, of $5.3 million, long-term debt (including current
      portion) of $5.6 million and minority interest of $0.3 million at October 22,
      2005. These amounts have been treated as non-cash items on the consolidated
      statements of cash flows.





**Seasonality**





The
      Company’s business is highly seasonal, with significantly higher sales and
      substantially all operating income realized during the fourth quarter.




**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 23, 2005. There
      have been no significant changes in these estimates during the third quarter
      of
      fiscal 2005.





26


**New
      Accounting Guidance**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment” (“FAS 123(R)”), which is a revision of FAS 123. FAS 123(R) supersedes
      APB No. 25, and amends FAS No. 95, “Statement of Cash Flows.” Generally, the
      approach in FAS 123(R) is similar to the approach described in FAS 123. FAS
      123(R) requires all share-based payments to employees, including grants of
      employee stock options, to be recognized in the income statement based on their
      fair values.





On
      April 14, 2005 the U.S. Securities and Exchange Commission announced a
      deferral of the effective date of FAS 123(R) until the beginning of 2006.





**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 23, 2005.





**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-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended (the “Exchange Act”), as of October 22, 2005 (the “Evaluation
      Date”). Based on such evaluation, such officers have concluded that, as of the
      Evaluation Date, the Company’s disclosure controls and procedures were effective
      in alerting them on a timely basis to material information relating to the
      Company (including its consolidated subsidiaries) required to be included in
      the
      Company’s periodic filings under the Exchange Act.





*Changes
      in Internal Control:* During
      the quarter ended October 22, 2005, the Company began implementation of a new
      merchandising system in its Waldenbooks segment. The Company believes the
      controls over the processes affected by the implementation are functioning
      effectively as of October 22, 2005. Also during the quarter ended October 22,
      2005, the Company continued its review of its internal controls over the
      selection and monitoring of appropriate assumptions and factors affecting lease
      accounting practices. As a result, the Company implemented additional controls
      over international leases and mortgage note receivables during the quarter
      ending October 22, 2005. The Company believes these controls are functioning
      effectively as of October 22, 2005.





27


**Part
      II - Other Information**





**Item
      1. Legal Proceedings**





For
      a
      description of certain legal proceedings affecting the Company, please review
      “Note 3 - Commitments and Contingencies”, on page 6 of this Report, which is
      incorporated herein by reference.





**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 2005.





**Fiscal
                Period**
            
            **Total
                Number of Shares (1)**
            
            **Average
                Price Paid per Share**
              **(2)**
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
                (3)**
            
            **Approximate
                Dollar Value of Shares that May Yet Be Purchased Under the Plans
                or
                Programs**July
                24, 2005
              through
              August
                20, 2005
            
            
            -
            
            $
            -
            
            
            -
            
            $
            148,504,618August
                21, 2005
              through
              September
                17, 2005
            
            
            1,638,400
            
            $
            22.90
            
            
            1,638,400
            
            $
            113,464,795September
                18, 2005
              through
              October
                22, 2005
            
            
            856,000
            
            $
            20.65
            
            
            856,000
            
            $
            97,165,040Total
            
            
            2,494,400
            
            $
            22.13
            
            
            2,494,400
            
            $
            97,165,040





(1)
            During
                the third quarter of 2005, the Company retired no shares which were
                acquired pursuant to the Company’s employee benefit
                plans.





(2)
            Average
                price paid per share includes commissions and is rounded to the nearest
                two decimal places.





(3)
            On
                February 9, 2005, the Company announced that the Board of Directors
                authorized an increase in the amount of share repurchases to $250
                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).





28


**Item
      6. Exhibits**





Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.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 200231.2
            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
                200232.1
            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 200232.2
            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
                200299.1
            Cautionary
                Statement under the Private Securities Litigation Reform Act of 1995
                —“Safe Harbor” for Forward-Looking Statements(1)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                24, 1999 (File No. 1-13740).(2)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                27, 2002 (File No. 1-13740).








29


**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 23, 2005        By: /s/
      Edward W. Wilhelm


Edward
      W.
      Wilhelm


Senior
      Vice President and


Chief
      Financial Officer


(Principal
      Financial and


Accounting
      Officer)





30


**EXHIBIT
      INDEX**


**DESCRIPTION
      OF EXHIBITS**





Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.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 200231.2
            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
                200232.1
            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 200232.2
            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
                200299.1
            Cautionary
                Statement under the Private Securities Litigation Reform Act of 1995
                —“Safe Harbor” for Forward-Looking Statements(1)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                24, 1999 (File No. 1-13740).(2)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                27, 2002 (File No. 1-13740).