SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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## FORM 10 - Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 27, 2002
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Fot the transition period from  to

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Commission file number 1-13740

## BORDERS GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Yes X
        No

|               | Shares Outstanding As of
|-------------- | ------------------------
|Title of Class | December 5, 2002        
|Common Stock   | 79,163,577              

# BORDERS
GROUP, INC.

# INDEX

|                               |                                                |     
|------------------------------ | ---------------------------------------------- | ----
|Part I - Financial Information |                                                |     
|                               |                                                |     
|                               |                                                | Page
|                               |                                                |     
|Item 1.                        | Financial Statements                           | 1   
|                               |                                                |     
|Item 2.                        | Management's Discussion and Analysis of        |     
|                               | Financial Condition and Results of             |     
|                               | Operations                                     | 12  
|                               |                                                |     
|Item 3.                        | Quantitative and Qualitative Disclosures about |     
|                               | Market Risk                                    | N/A 
|                               |                                                |     
|Item 4.                        | Controls and Procedures                        | 25  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Part II - Other information    |                                                |     
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Item 1.                        | Legal Proceedings                              | 25  
|                               |                                                |     
|Item 2.                        | Changes in Securities and Use of Proceeds      | N/A 
|                               |                                                |     
|Item 3.                        | Defaults Upon Senior Securities                | N/A 
|                               |                                                |     
|Item 4.                        | Submission of Matters to a vote of             | N/A 
|                               | Securityholders                                |     
|                               |                                                |     
|Item 5.                        | Other Information                              | N/A 
|                               |                                                |     
|Item 6.                        | Exhibits and Reports on Form 8-K               | 26  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Signatures                     |                                                | 27  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Certifications                 |                                                | 28  

# BORDERS GROUP,INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)(Unaudited)

| |                                                     |                                                                   |       |        |   |   |       |        |   | 
| | --------------------------------------------------- | ----------------------------------------------------------------- | ----- | ------ | - | - | ----- | ------ | - | 
|
|
|
| |                                                     |                                                                   |       |        |   |   |       |        |   | 
| | Sales                                               |                                                                   | $     | 749.8  |   |   | $     | 713.7  |   | 
| | Cost of merchandise sold, including occupancy costs |                                                                   | 565.5 |        |   |   | 534.0 |        |  
| |                                                     |                                                                   |       |        |   |  
| | Gross margin                                        |                                                                   | 184.3 |        |   |   | 179.7 |        |  
| | Selling, general and administrative expenses        |                                                                   | 180.6 |        |   |   | 177.9 |        |  
| | Pre-opening expense                                 |                                                                   | 2.9   |        |   |   | 2.5   |        |  
| | Goodwill amortization                               |                                                                   | -     |        |   |   | 0.7   |        |  
| |                                                     |                                                                   |       |        |   |  
| | Operating income (loss)                             |                                                                   | 0.8   |        |   |   | (1.4  | )      |  
| | Interest expense                                    |                                                                   | 3.8   |        |   |   | 3.5   |        |  
| |                                                     |                                                                   |       |        |   |  
| | Loss before income tax                              |                                                                   | (3.0  | )      |   |   | (4.9  | )      |  
| | Income tax benefit                                  |                                                                   | (1.2  | )      |   |   | (1.8  | )      |  
| |                                                     |                                                                   |       |        |   |  
| | Net loss                                            | $                                                                 | (1.8  | )      |   | $ | (3.1  | )      |  
| |                                                     |                                                                   |       |        |   |  
| | LOSS PER COMMON SHARE DATA --                       |                                                                   |       |        |   |   |       |        |  
| |                                                     | Diluted loss per common share                                     | $     | (0.02  | ) |   | $     | (0.04  | ) | 
| |                                                     |                                                                   |       |        |   |  
| |                                                     | Diluted weighted average common shares outstanding (in thousands) |       | 79,284 |   |   |       | 81,184 |   | 
| |                                                     |                                                                   |       |        |   |  
| |                                                     | Basic loss per common share                                       | $     | (0.02  | ) |   | $     | (0.04  | ) | 
| |                                                     |                                                                   |       |        |   |  
| |                                                     | Basic weighted average common shares outstanding (in thousands)   |       | 79,284 |   |   |       | 81,184 |   | 
| |                                                     |                                                                   |       |        |   |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

# BORDERS GROUP,INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions except common share data)(Unaudited)

| |                                                     |                                                                   |         |         |  |   |         |         |   | 
| | --------------------------------------------------- | ----------------------------------------------------------------- | ------- | ------- |  | - | ------- | ------- | - | 
|
|
|
| |                                                     |                                                                   |         |         |  |   |         |         |   | 
| | Sales                                               |                                                                   | $       | 2,265.1 |  |   | $       | 2,183.4 |   | 
| | Cost of merchandise sold, including occupancy costs |                                                                   | 1,697.4 |         |  |   | 1,632.8 |         |  
| | Fulfillment center inventory writedowns             |                                                                   | -       |         |  |   | 12.7    |         |  
| |                                                     |                                                                   |         |         |  |  
| | Gross margin                                        |                                                                   | 567.7   |         |  |   | 537.9   |         |  
| | Selling, general and administrative expenses        |                                                                   | 545.5   |         |  |   | 536.2   |         |  
| | Legal settlement expense                            |                                                                   | -       |         |  |   | 2.4     |         |  
| | Pre-opening expense                                 |                                                                   | 4.7     |         |  |   | 4.8     |         |  
| | Asset impairments and other writedowns              |                                                                   | -       |         |  |   | 15.8    |         |  
| | Goodwill amortization                               |                                                                   | -       |         |  |   | 2.0     |         |  
| |                                                     |                                                                   |         |         |  |  
| | Operating income (loss)                             |                                                                   | 17.5    |         |  |   | (23.3   | )       |  
| | Interest expense                                    |                                                                   | 8.7     |         |  |   | 11.5    |         |  
| |                                                     |                                                                   |         |         |  |  
| | Income (loss) before income tax                     |                                                                   | 8.8     |         |  |   | (34.8   | )       |  
| | Income tax provision (benefit)                      |                                                                   | 3.3     |         |  |   | (12.9   | )       |  
| |                                                     |                                                                   |         |         |  |  
| | Net income (loss)                                   | $                                                                 | 5.5     |         |  | $ | (21.9   | )       |  
| |                                                     |                                                                   |         |         |  |  
| | EARNINGS (LOSS) PER COMMON SHARE DATA --            |                                                                   |         |         |  |   |         |         |  
| |                                                     | Diluted earnings (loss) per common share                          | $       | 0.07    |  |   | $       | (0.27   | ) | 
| |                                                     |                                                                   |         |         |  |  
| |                                                     | Diluted weighted average common shares outstanding (in thousands) |         | 82,621  |  |   |         | 80,489  |   | 
| |                                                     |                                                                   |         |         |  |  
| |                                                     | Basic earnings (loss) per common share                            | $       | 0.07    |  |   | $       | (0.27   | ) | 
| |                                                     |                                                                   |         |         |  |  
| |                                                     | Basic weighted average common shares outstanding (in thousands)   |         | 80,671  |  |   |         | 80,489  |   | 
| |                                                     |                                                                   |         |         |  |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

# BORDERS GROUP,INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)(Unaudited)

| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  |  | 
| | ------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  |  | 
|
|
| | ASSETS                               |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| | Current Assets:                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| |                                      | Cash and cash equivalents                                         | $                                                    | 68.3    |         |  | $ | 62.1    |         |  | $ | 190.2   |         | 
| |                                      | Merchandise inventories                                           |                                                      | 1,437.6 |         |  |   | 1,405.0 |         |  |   | 1,178.8 |         | 
| |                                      | Accounts receivable and other current assets                      |                                                      | 72.2    |         |  |   | 75.2    |         |  |   | 73.1    |         | 
| |                                      |                                                                   | Total Current Assets                                 |         | 1,578.1 |  |   |         | 1,542.3 |  |   |         | 1,442.1 |  | 
| |                                      | Property and equipment, net of accumulated depreciation           |                                                      |         |         |  |   |         |         |  |   |         |         | 
| |                                      |                                                                   | of $630.4, $561.3 and $596.2 at October 27, 2002,    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | October 28, 2001, and January 27, 2002, respectively |         | 555.3   |  |   |         | 533.8   |  |   |         | 529.4   |  | 
| |                                      | Other assets and deferred charges                                 |                                                      | 107.5   |         |  |   | 57.2    |         |  |   | 119.1   |         | 
| |                                      | Goodwill                                                          |                                                      | 93.7    |         |  |   | 90.3    |         |  |   | 88.7    |         | 
| |                                      |                                                                   | Total Assets                                         | $       | 2,334.6 |  |   | $       | 2,223.6 |  |   | $       | 2,179.3 |  | 
|
| | LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| | Current Liabilities:                 |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| |                                      | Short-term debt and capital lease obligations due within one year | $                                                    | 171.8   |         |  | $ | 279.4   |         |  | $ | 83.3    |         | 
| |                                      | Trade accounts payable                                            |                                                      | 785.7   |         |  |   | 789.1   |         |  |   | 638.2   |         | 
| |                                      | Accrued payroll and other liabilities                             |                                                      | 225.7   |         |  |   | 188.2   |         |  |   | 288.9   |         | 
| |                                      | Taxes, including income taxes                                     |                                                      | 48.4    |         |  |   | 36.2    |         |  |   | 93.0    |         | 
| |                                      | Deferred income taxes                                             |                                                      | -       |         |  |   | -       |         |  |   | 3.3     |         | 
| |                                      |                                                                   | Total Current Liabilities                            |         | 1,231.6 |  |   |         | 1,292.9 |  |   |         | 1,106.7 |  | 
| |                                      | Long-term debt                                                    |                                                      | 50.0    |         |  |   | -       |         |  |   | -       |         | 
| |                                      | Long-term capital lease and financing obligations                 |                                                      | 48.7    |         |  |   | 13.8    |         |  |   | 49.7    |         | 
| |                                      | Other long-term liabilities                                       |                                                      | 79.2    |         |  |   | 73.1    |         |  |   | 73.0    |         | 
| |                                      |                                                                   | Total Liabilities                                    |         | 1,409.5 |  |   |         | 1,379.8 |  |   |         | 1,229.4 |  | 
| |                                      | Stockholders' Equity:                                             |                                                      |         |         |  |   |         |         |  |   |         |         | 
| |                                      | Common stock; 200,000,000 shares authorized;                      |                                                      |         |         |  |   |         |         |  |   |         |         | 
| |                                      |                                                                   | 79,048,273, 81,307,005 and 81,202,967 issued and     |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | outstanding at October 27, 2002, October 28, 2001,   |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | and January 27, 2002, respectively                   |         | 665.6   |  |   |         | 711.2   |  |   |         | 707.9   |  | 
| |                                      | Officers receivable and deferred compensation                     |                                                      | (0.2    | )       |  |   | (0.5    | )       |  |   | (0.2    | )       | 
| |                                      | Accumulated other comprehensive loss                              |                                                      | (3.5    | )       |  |   | (15.3   | )       |  |   | (15.5   | )       | 
| |                                      | Retained earnings                                                 |                                                      | 263.2   |         |  |   | 148.4   |         |  |   | 257.7   |         | 
| |                                      |                                                                   | Total Stockholders' Equity                           |         | 925.1   |  |   |         | 843.8   |  |   |         | 949.9   |  | 
| |                                      |                                                                   | Total Liabilities & Stockholders' Equity             | $       | 2,334.6 |  |   | $       | 2,223.6 |  |   | $       | 2,179.3 |  | 
|

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 27, 2002
(Dollars in millions)(Unaudited)

| |                                 |                                 |            |   |   |       |       |   |   |      |   |  |   |       |     |  |   |       |   |  |   |       |       |   | 
| | ------------------------------- | ------------------------------- | ---------- | - | - | ----- | ----- | - | - | ---- | - |  | - | ----- | --- |  | - | ----- | - |  | - | ----- | ----- | - | 
|
|
|
|
| | BALANCE AT JANUARY 27, 2002     | 81,202,967                      |            |   | $ | 707.9 |       |   | $ | (0.2 | ) |  | $ | (15.5 | )   |  | $ | 257.7 |   |  | $ | 949.9 |       |  
| |                                 |                                 |            |   |   |       |       |   |   |      |   |  |   |      
| | Net income                      | -                               |            |   |   | -     |       |   |   | -    |   |  |   | -     |     |  |   | 5.5   |   |  |   | 5.5   |       |  
| | Currency translation adjustment | -                               |            |   |   | -     |       |   |   | -    |   |  |   | 10.4  |     |  |   | -     |   |  |   | 10.4  |       |  
| | Change in fair value of         |                                 |            |   |   |       |       |   |   |      |   |  |   |       |     |  |   |       |   |  |   |       |       |  
| |                                 | derivatives, net of tax of $1.0 | -          |   |   |       | -     |   |   |      | - |  |   |       | 1.6 |  |   |       | - |  |   |       | 1.6   |   | 
| |                                 |                                 |            |   |   |       |       |   |   |      |   |  |   |       |     |  |   |       |   |  |   |       |       |  
| | Comprehensive income (loss)     |                                 |            |   |   |       |       |   |   |      |   |  |   |       |     |  |   |       |   |  |   | 17.5  |       |  
| | Issuance of common stock        | 1,337,006                       |            |   |   | 16.9  |       |   |   | -    |   |  |   | -     |     |  |   | -     |   |  |   | 16.9  |       |  
| | Repurchase and retirement of    |                                 |            |   |   |       |       |   |   |      |   |  |   |       |     |  |   |       |   |  |   |       |       |  
| |                                 | common stock                    | (3,491,700 | ) |   |       | (64.0 | ) |   |      | - |  |   |       | -   |  |   |       | - |  |   |       | (64.0 | ) | 
| | Tax benefit of equity           |                                 |            |   |   |       |       |   |   |      |   |  |   |       |     |  |   |       |   |  |   |       |       |  
| |                                 | compensation                    | -          |   |   |       | 4.8   |   |   |      | - |  |   |       | -   |  |   |       | - |  |   |       | 4.8   |   | 
| |                                 |                                 |            |   |   |       |       |   |   |      |   |  |  
| | BALANCE AT OCTOBER 27, 2002     | 79,048,273                      |            |   | $ | 665.6 |       |   | $ | (0.2 | ) |  | $ | (3.5  | )   |  | $ | 263.2 |   |  | $ | 925.1 |       |  
| |                                 |                                 |            |   |   |       |       |   |   |      |   |  |   |      

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

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

| |                                                                     |                                                                     |                                                      |                                |        |        |       |      |        |        |   | 
| | ------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------ | ------ | ------ | ----- | ---- | ------ | ------ | - | 
|
|
|
|
| | CASH PROVIDED BY (USED FOR):                                        |                                                                     |                                                      |                                |        |        |       |      |       
| | OPERATIONS                                                          |                                                                     |                                                      |                                |        |        |       |      |       
| | Net income / (loss)                                                 | $                                                                   | 5.5                                                  |                                |        | $      | (21.9 | )    |       
| | Adjustments to reconcile net income (loss) to operating cash flows: |                                                                     |                                                      |                                |        |        |       |      |       
| |                                                                     | Depreciation and goodwill amortization                              |                                                      | 69.7                           |        |        |       | 69.1 |        |       
| |                                                                     | Decrease in deferred income taxes                                   |                                                      | 21.1                           |        |        |       | -    |        |       
| |                                                                     | Change in other long-term assets and liabilities                    |                                                      | 13.9                           |        |        |       | 4.5  |        |       
| |                                                                     | Asset impairments and other writedowns                              |                                                      | -                              |        |        |       | 10.0 |        |       
| |                                                                     | Cash provided by (used for) current assets and current liabilities: |                                                      |                                |        |        |       |      |        |       
| |                                                                     |                                                                     | Increase in inventories                              |                                | (251.0 | )      |       |      | (204.5 | )      |  
| |                                                                     |                                                                     | Decrease in accounts receivable                      |                                | 8.3    |        |       |      | 2.5    |        |  
| |                                                                     |                                                                     | Increase in prepaid expenses                         |                                | (5.1   | )      |       |      | (3.2   | )      |  
| |                                                                     |                                                                     | Increase in accounts payable                         |                                | 143.2  |        |       |      | 166.5  |        |  
| |                                                                     |                                                                     | Decrease in taxes payable                            |                                | (59.9  | )      |       |      | (52.6  | )      |  
| |                                                                     |                                                                     | Decrease in expenses payable and accrued liabilities |                                | (63.5  | )      |       |      | (73.0  | )      |  
| |                                                                     |                                                                     |                                                      |                                |        |       
| |                                                                     |                                                                     | Net cash used for continuing operations              |                                | (117.8 | )      |       |      | (102.6 | )      |  
| |                                                                     |                                                                     | Net cash provided by discontinued operations         |                                | -      |        |       |      | 1.9    |        |  
| |                                                                     |                                                                     |                                                      |                                |        |       
| |                                                                     |                                                                     |                                                      | Net cash used for operations   |        | (117.8 | )     |      |        | (100.7 | ) | 
| | INVESTING                                                           |                                                                     |                                                      |                                |        |        |       |      |       
| | Capital expenditures                                                |                                                                     | (85.7                                                | )                              |        |        | (56.9 | )    |       
| | Disposition of property and equipment                               |                                                                     | -                                                    |                                |        |        | 5.6   |      |       
| |                                                                     |                                                                     |                                                      |                                |        |       
| |                                                                     |                                                                     |                                                      | Net cash used for investing    |        | (85.7  | )     |      |        | (51.3  | ) | 
| | FINANCING                                                           |                                                                     |                                                      |                                |        |        |       |      |       
| | Net funding from credit facility                                    |                                                                     | 128.9                                                |                                |        |        | 137.2 |      |       
| | Issuance of common stock                                            |                                                                     | 16.9                                                 |                                |        |        | 27.5  |      |       
| | Repurchase of common stock                                          |                                                                     | (64.0                                                | )                              |        |        | (7.0  | )    |       
| | Other                                                               |                                                                     | (1.3                                                 | )                              |        |        | (2.1  | )    |       
| |                                                                     |                                                                     |                                                      |                                |        |       
| |                                                                     |                                                                     |                                                      | Net cash provided by financing |        | 80.5   |       |      |        | 155.6  |   | 
| |                                                                     |                                                                     |                                                      |                                |        |       
| | Effect of exchange rates on cash and equivalents                    |                                                                     | 1.1                                                  |                                |        |        | (0.6  | )    |       
| | NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS                     |                                                                     | (121.9                                               | )                              |        |        | 3.0   |      |       
| |                                                                     |                                                                     |                                                      |                                |        |       
| | Cash and equivalents at beginning of year                           |                                                                     | 190.2                                                |                                |        |        | 59.1  |      |       
| |                                                                     |                                                                     |                                                      |                                |        |       
| | Cash and equivalents at end of period                               | $                                                                   | 68.3                                                 |                                |        | $      | 62.1  |      |       
| |                                                                     |                                                                     |                                                      |                                |        |        |       |     

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 common share data)

## NOTE 1 
BASIS OF PRESENTATION

The accompanying unaudited
condensed consolidated financial statements of Borders Group, Inc. (the Company)
have been prepared in accordance with Rule 10-01 of Regulation S-X and do not
include all the information and notes required by accounting principles
generally accepted in the United States for complete financial statements. All
adjustments, consisting only of normal recurring adjustments, have been made
which, in the opinion of management, are necessary for a fair presentation of
the results of the interim periods. The results of operations for such interim
periods are not necessarily indicative of results of operations for a full year.
The unaudited condensed consolidated financial statements should be read in
conjunction with the Companys consolidated financial statements and notes
thereto for the fiscal year ended January 27, 2002.

The Companys fiscal
year ends on the Sunday immediately preceding the last Wednesday in January. At
October 27, 2002, the Company operated 420 superstores primarily under the
Borders name, including 17 in the United Kingdom, eight in Australia, two in
Puerto Rico, and one each in Singapore and New Zealand. The Company also
operated 809 mall-based and other bookstores primarily under the Waldenbooks
name, and 37 bookstores under the Books etc. name in the United Kingdom.

## NOTE 2 
COMMITMENTS AND CONTINGENCIES

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

Two former employees,
individually and on behalf of a purported class consisting of all current and
former employees who worked as assistant managers in Borders stores in the state
of California at any time between April 10, 1996, and the present, have filed an
action against the Company in the Superior Court of California for the County of
San Francisco. The action alleges that the individual plaintiffs and the
purported class members worked hours for which they were entitled to receive,
but did not receive, overtime compensation under California law, and that they
were classified as exempt store management employees but were forced to work
more than 50% of their time in non-exempt tasks. The Amended Complaint, which
names two additional plaintiffs, alleges violations of the California Labor Code
and the California Business and Professions Code. The relief sought includes
compensatory and punitive damages, penalties, preliminary and permanent
injunctions requiring Borders to pay overtime compensation as required under
California and Federal law, prejudgment interest, costs, and attorneys
fees and such other relief as the court deems proper. On July 29, 2002, the
Superior Court of California granted the plaintiffs motion for class
certification in the action. The class certified consists of all individuals who
worked as Assistant Managers in a Borders superstore in California at any time
between April 10, 1996 and March 18, 2001. The class was further certified by
the Court into the following subclasses: Assistant Manager-Merchandising;
Assistant Manager-Inventory; Assistant Manager-Human Resources; Assistant
Manager-Music; Assistant Manager-Training; Assistant Manager-Cafe. The
Companys request for an immediate appeal of the class certification ruling
has been denied, and the Company is considering pursuing mediation of the
matter. Unless mediation is pursued and is successful, the Company will continue
to vigorously defend the action.

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 violates federal
anti-trust laws, California statutory law and the common law of

6

# BORDERS
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)

unjust
enrichment. The Complaint seeks injunctive relief, damages, including treble
damages or statutory damages where applicable, attorneys fees,
costs and disbursements, disgorgement of all sums
obtained by allegedly wrongful acts, interest and declaratory relief. The
Company intends to file an answer or other responsive pleading denying any
liability and to vigorously defend the action.

The Company has not
included any liability in its consolidated financial statements in connection
with the lawsuits described above and has expensed as incurred all legal costs
to date. Although an adverse resolution of these lawsuits could have a material
adverse effect on the result of the operations of the Company for the applicable
period or periods, the Company does not believe that any such litigation 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.

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

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

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

Lease Guaranty
Agreement. Borders leases for 13 of its retail stores and its
distribution center in Harrisburg, Pennsylvania have been guaranteed by Kmart.
Under the terms of a lease guaranty, indemnification and reimbursement agreement
entered into upon completion of the IPO, as amended, (Lease Guaranty Agreement),
the underlying leases will be transferable by Borders, subject to a right of
first refusal in favor of Kmart with respect to sites within a three-mile radius
of a Kmart store and, with respect to all other sites, a right of first offer in
favor of Kmart. The Company and Borders are required to indemnify Kmart with
respect to (i) any liabilities Kmart may incur under the lease guarantees,
except those liabilities arising from the gross negligence or willful misconduct
of Kmart, and (ii) any losses incurred by Kmart after taking possession of any
particular premises, except to the extent such losses arise solely from the acts
or omissions of Kmart. Under the terms of the Lease Guaranty Agreement, in the
event of (i) the Companys or Borders failure to provide any required
indemnity, (ii) a knowing and material violation of the limitations on transfers
of guaranteed leases set forth in the agreement, or (iii) certain events of
bankruptcy, Kmart will have the right to assume any or all of the guaranteed
leases and to take possession of all of the premises underlying such
guaranteed leases; provided, that in the event of a failure or failures to provide
required indemnities, the remedy of taking possession of all of the premises
underlying the guaranteed

7

# BORDERS
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)

leases may be exercised
only if such failures relate to an aggregate liability of $10.0 or more and only
if Kmart has provided 100 days prior written notice. In the event of a
failure to provide required indemnities resulting in losses of more than the
equivalent of two months rent under a particular lease but less than $10.0,
Kmart may exercise such remedy of possession as to the premises underlying the
guaranteed lease or leases to which the failure to provide the indemnity relates
and one additional premise for each such premises to which the failure relates,
up to a maximum, in any event, of five additional premises, and thereafter, with
respect to such additional premises, Kmart remedies and indemnification rights
shall terminate. In the event of a failure to provide required indemnities
resulting in liabilities of less than the equivalent of two months rent under a
particular lease, Kmart may exercise such remedy of possession only as to the
premises underlying the guaranteed lease or leases to which the failure to
provide the indemnity relates. The Lease Guaranty Agreement will remain in
effect until the expiration of all lease guarantees, which the Company believes
will be in January 2020.

## NOTE 3 -
FINANCING

Credit Facility. The
Company has a Multicurrency Revolving Credit Agreement (the Credit
Agreement), which will expire in June 2005. The Credit Agreement provides
for borrowings of up to $375.0, which will be increased to $400.0 upon the
reduction of the amounts outstanding under the Original Lease Facility described
below to $75.0 or less. Borrowings under the Credit Agreement bear interest at a
variable base rate plus an increment or LIBOR plus an increment at the
Companys option. The Credit Agreement contains covenants which limit,
among other things, the Companys ability to incur indebtedness, grant
liens, make investments, consolidate or merge, declare dividends, dispose of
assets, repurchase its common stock in excess of $100.0 over the term of the
Agreement or $50.0 in any fiscal year (plus any proceeds and tax benefits
resulting from stock option exercises and tax benefits resulting from restricted
shares purchased by employees from the Company), and requires the Company to
meet certain financial measures regarding fixed coverage, leverage, tangible net
worth and capital expenditures. The Company had borrowings outstanding under the
Credit Agreement (or a prior agreement) of $170.5 at October 27, 2002, $278.3 at
October 28, 2001 and $81.6 at January 27, 2002.

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

Lease Financing
Facilities. The Company has 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. The original facility (the Original Lease Facility)
will expire in June 2004 (2005 if certain conditions are satisfied). In June of
2002, the Company established a new facility (the New Lease
Facility), which will expire in 2007. The aggregate amount available under
the Lease Financing Facilities is $100.0 until December 1, 2002 and $75.0
thereafter. Properties to be financed after the effective date of the New Lease
Facility will be financed under that Facility, and no additional properties will
be financed under the Original Lease Facility. By December 1, 2002, the Company
is required to reduce the amount financed under the Original Lease Facility to
$75.0 or less, and expects to do so by permanently financing certain properties
currently financed under the Original Lease Facility. The Lease Financing
Facilities provide financing to lessors of properties leased to the Company or
its subsidiaries through loans from lenders for up to 95% of a projects
cost. Additionally, under the New Lease Facility, the unaffiliated lessor will
make equity contributions approximating 5% of the cost of each project. The
lessors under the Original Lease Facility have made similar contributions.
Independent of the Companys obligations relating to the leases, the
Company and certain of its subsidiaries guarantee payment when due of all
amounts required to be paid to the third-party lenders. The agreements relating
to both of the Lease Financing Facilities contain covenants and events of
default that are similar to those contained in the Credit Agreement described
above.

There was $93.8, $132.1 and
$121.8 outstanding under the Original Lease Facility at October 27, 2002,
October 28, 2001 and January 27, 2002, respectively. The Company has recorded
$48.7, $13.8 and $49.7 of the amounts under the Original Lease Facility as
capitalized lease and financing obligations at October 27, 2002, October 28,
2001 and January 27, 2002, respectively. These amounts have been treated as
non-cash items on the consolidated statements of cash flows.

8

# BORDERS
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)

There were no
borrowings under the New Lease Facility as of October 27, 2002.

Also see Note 7 - Subsequent Event
for further information pertaining to the Lease Financing Facilities and the Credit Facility.

The Company is in
compliance with all debt covenants contained within the Credit Agreement, Notes
and Lease Financing Facilities described above.

## NOTE 4 
CHANGE IN ACCOUNTING PRINCIPLE

Effective January 28, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (FAS 142). As required by FAS
142, the Company is no longer amortizing goodwill, but will be reviewing
annually (or more frequently if impairment indicators arise) for impairment.
Upon initial application of FAS 142, the Company determined that there was no
impairment of goodwill for any of its reporting units. The following earnings
and earnings per share data have been presented on a pro forma basis to
eliminate goodwill amortization, as required by FAS 142.

| |                                    |                       |                            |       |       |   |   |       |       |   |   |      |      |  |   |       |       |   | 
| | ---------------------------------- | --------------------- | -------------------------- | ----- | ----- | - | - | ----- | ----- | - | - | ---- | ---- |  | - | ----- | ----- | - | 
|
|
|
| | ADJUSTED NET INCOME/(LOSS):        |                       |                            |       |       |   |   |       |       |   |   |      |      |  |   |       |      
| |                                    | Net income/(loss)     | $                          | (1.8  | )     |   | $ | (3.1  | )     |   | $ | 5.5  |      |  | $ | (21.9 | )     |  
| |                                    | Goodwill amortization |                            | -     |       |   |   | 0.7   |       |   |   | -    |      |  |   | 2.0   |       |  
| |                                    |                       |                            |       |       |   |  
| |                                    |                       | Adjusted net income/(loss) | $     | (1.8  | ) |   | $     | (2.4  | ) |   | $    | 5.5  |  |   | $     | (19.9 | ) | 
| |                                    |                       |                            |       |       |   |   |       |       |   |  
| | DILUTED EARNINGS (LOSS) PER SHARE: |                       |                            |       |       |   |   |       |       |   |   |      |      |  |   |       |      
| |                                    | Net income/(loss)     | $                          | (0.02 | )     |   | $ | (0.04 | )     |   | $ | 0.07 |      |  | $ | (0.27 | )     |  
| |                                    | Goodwill amortization |                            | -     |       |   |   | 0.01  |       |   |   | -    |      |  |   | 0.02  |       |  
| |                                    |                       |                            |       |       |   |   |       |       |   |  
| |                                    |                       | Adjusted net income/(loss) | $     | (0.02 | ) |   | $     | (0.03 | ) |   | $    | 0.07 |  |   | $     | (0.25 | ) | 
| |                                    |                       |                            |       |       |   |   |       |       |   |  
| | BASIC EARNINGS (LOSS) PER SHARE:   |                       |                            |       |       |   |   |       |       |   |   |      |      |  |   |       |      
| |                                    | Net income/(loss)     | $                          | (0.02 | )     |   | $ | (0.04 | )     |   | $ | 0.07 |      |  | $ | (0.27 | )     |  
| |                                    | Goodwill amortization |                            | -     |       |   |   | 0.01  |       |   |   | -    |      |  |   | 0.02  |       |  
| |                                    |                       |                            |       |       |   |   |       |       |   |  
| |                                    |                       | Adjusted net income/(loss) | $     | (0.02 | ) |   | $     | (0.03 | ) |   | $    | 0.07 |  |   | $     | (0.25 | ) | 
| |                                    |                       |                            |       |       |   |   |       |       |   |  

## NOTE 5 
ASSET IMPAIRMENTS AND OTHER WRITEDOWNS

On
March 15, 2001, the Company announced an agreement with Ingram Book Group
(Ingram), a wholesaler of books, spoken audio and magazines,
pursuant to which Ingram provides fulfillment services for the Companys
special order sales.This agreement resulted in a pre-tax charge of $15.8 in the
first quarter of 2001. This charge primarily related to the writedown of assets
used by the Company-owned facility to fulfill
special order sales, including warehouse equipment, hardware and software, and
is categorized as Asset impairments and other writedowns on the
Condensed Consolidated Statements of Operations.

9

# BORDERS
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)

The agreement with Ingram
also resulted in a $12.7 pre-tax charge in the first quarter of 2001 for the
writedown of Fulfillment center inventory. This charge is categorized as
Fulfillment center inventory writedowns on the Condensed
Consolidated Statements of Operations.

## NOTE 6 
SEGMENT INFORMATION

The Company is organized
based upon the following operating segments: domestic Borders stores,
International Borders and Books etc. stores, Walden stores, and Other
(consisting of the unallocated portion of interest expense and certain corporate
governance costs). Segment data includes
charges allocating certain corporate headquarters costs to each segment.
Transactions between segments, consisting principally of inventory transfers,
are recorded primarily at cost. The Company evaluates the performance of its
segments and allocates resources to them based on anticipated future
contribution.

Total assets for the Other
segment include certain corporate headquarters property and equipment, net of
accumulated depreciation, of $74.1 and $59.2 at October 27, 2002 and October 28,
2001, respectively, whose related depreciation expense has been allocated to the
Borders and Waldenbooks segments. Depreciation expense allocated to the Borders
segment totaled $2.5 and $2.1 for the 13 weeks ended October 27, 2002 and
October 28, 2001, respectively, and $7.1 and $6.1 for the 39 weeks ended October
27, 2002 and October 28, 2001, respectively. Depreciation expense allocated to
the Waldenbooks segment totaled $1.3 and $1.0 for the 13 weeks ended October 27,
2002 and October 28, 2001, respectively, and $3.9 and $2.8 for the 39 weeks
ended October 27, 2002 and October 28, 2001, respectively.

| |                             |                         |       |       |   |   |       |       |   |   |         |         |   |   |         |         |   |  | 
| | --------------------------- | ----------------------- | ----- | ----- | - | - | ----- | ----- | - | - | ------- | ------- | - | - | ------- | ------- | - |  | 
|
|
|
| | Sales                       |                         |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                             | Borders                 | $     | 511.8 |   |   | $     | 480.6 |   |   | $       | 1,559.9 |   |   | $       | 1,492.3 |   | 
| |                             | Walden                  |       | 164.6 |   |   |       | 173.8 |   |   |         | 502.9   |   |   |         | 526.2   |   | 
| |                             | International           |       | 73.4  |   |   |       | 59.3  |   |   |         | 202.3   |   |   |         | 164.9   |   | 
| |                             |                         |       |       |   |   |       |       |   |   |        
| | Total sales                 | $                       | 749.8 |       |   | $ | 713.7 |       |   | $ | 2,265.1 |         |   | $ | 2,183.4 |         |  
| |                             |                         |       |       |   |   |       |       |   |   |        
| | Net income (loss)           |                         |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                             | Borders                 | $     | 6.3   |   |   | $     | 4.1   |   |   | $       | 29.3    |   |   | $       | 3.0     |   | 
| |                             | Walden                  |       | (0.8  | ) |   |       | (1.3  | ) |   |         | (0.2    | ) |   |         | (3.5    | ) | 
| |                             | International           |       | (3.6  | ) |   |       | (3.1  | ) |   |         | (13.5   | ) |   |         | (11.0   | ) | 
| |                             | Other                   |       | (3.7  | ) |   |       | (2.8  | ) |   |         | (10.1   | ) |   |         | (10.4   | ) | 
| |                             |                         |       |       |   |   |       |       |   |   |        
| | Total net income (loss)     | $                       | (1.8  | )     |   | $ | (3.1  | )     |   | $ | 5.5     |         |   | $ | (21.9   | )       |  
| |                             |                         |       |       |   |   |       |       |   |   |        
| | Total assets                |                         |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                             | Borders                 |       |       |   |   |       |       |   |   | $       | 1,468.8 |   |   | $       | 1,396.1 |   | 
| |                             | Walden                  |       |       |   |   |       |       |   |   |         | 447.1   |   |   |         | 492.8   |   | 
| |                             | International           |       |       |   |   |       |       |   |   |         | 320.9   |   |   |         | 233.7   |   | 
| |                             | Other                   |       |       |   |   |       |       |   |   |         | 97.8    |   |   |         | 88.8    |   | 
| |                             |                         |       |       |   |   |       |       |   |   |        
| | Total continuing operations |                         |       |       |   |   |       |       |   |   | 2,334.6 |         |   |   | 2,211.4 |         |  
| |                             | Discontinued operations |       |       |   |   |       |       |   |   |         | -       |   |   |         | 12.2    |   | 
| | Total assets                |                         |       |       |   |   |       |       |   | $ | 2,334.6 |         |   | $ | 2,223.6 |         |  
| |                             |                         |       |       |   |   |       |       |   |   |        

10

# BORDERS
GROUP, INC.
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions except per common share data)

## NOTE 7 
SUBSEQUENT EVENT

In the fourth quarter of
2002, the Company permanently financed, through long-term leases, 12 properties
that had been financed through the Original Lease Facility with a total value of
approximately $51.0, 10 of which had been capitalized. As a result of this
activity, the Company has complied with the requirement to reduce the amount
outstanding under the Original Lease Facility below the $75.0 allowable by
December 1, 2002, which has caused the Credit Agreements provision for
borrowings to be increased to a maximum of $400.0 as of December 1, 2002.

## NOTE 8 
NEW ACCOUNTING GUIDANCE

In July 2002, the Financial
Accounting Standards Board (FASB) issued Statement No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (FAS 146). This
Statement addresses financial accounting and reporting for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). This Statement requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value only when the liability is incurred. FAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.

The Company expects to
adopt FAS 146 beginning in the fourth quarter of fiscal 2002, and does not
expect that the adoption of the Statement will have a significant impact on the
Companys financial position and results of operations.

## NOTE 9 
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 results
for the 13 and 39 weeks ended October 28, 2001.

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. Inventory of $3.5,
fixed assets of $5.6, and accounts receivable and other of $0.9 were removed
from the accounts in the third quarter of 2001, offset by an insurance recovery
of $10.0 through the end of the third quarter of fiscal 2001. In addition, the
Company expects to recover additional amounts, which will be recognized when
collection of such recoveries is assured.

11

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

## GENERAL

Borders Group, Inc., (the
Company), through its subsidiaries, is the second largest operator of book and
music superstores and the largest operator of mall-based bookstores in the world
based upon both sales and number of stores. As of October 27, 2002, the Company
operated 420 superstores primarily under the Borders name, including 17 in the
United Kingdom, eight in Australia, two in Puerto Rico and one each in Singapore
and New Zealand. The Company also operated 809 mall-based and other bookstores
primarily under the Waldenbooks name, and 37 bookstores under the Books etc.
name in the United Kingdom.

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

In fiscal 2001, the Company
entered into an agreement with Amazon.com, Inc. (Amazon) for Amazon
to develop and operate a co-branded web site utilizing the Borders.com URL (the
Mirror Site). Operation of the Mirror Site began August 1, 2001. As
of this date, the Company stopped selling merchandise via its Company-owned and
-operated Borders.com web site (and the Internet). Under this agreement, Amazon
is the merchant of record for all sales made through the Mirror Site, and
determines all prices and other terms and conditions applicable to such sales.
Amazon or one of its affiliates fulfills, packages and ships to customers all
products sold through the Mirror Site. In addition, Amazon assumes all risk,
cost and responsibility related to the sale and fulfillment of all products sold
through the Mirror Site and retains all payments from customers. The Company
receives referral fees for products purchased through the Mirror Site.

In fiscal 2002, the Company
entered into an additional agreement with Amazon for Amazon to develop and
operate a co-branded web site utilizing the Waldenbooks.com URL (the
Second Mirror Site). Operation of the Second Mirror Site began
November 11, 2002. Under this agreement, Amazon is the merchant of record for
all sales made through the Second Mirror Site, and determines all prices and
other terms and conditions applicable to such sales. Amazon or one of its
affiliates fulfills, packages and ships to customers all products sold through
the Second Mirror Site. In addition, Amazon assumes all risk, cost and
responsibility related to the sale and fulfillment of all products sold through
the Second Mirror Site and retains all payments from customers. The Company
receives referral fees for products purchased through the Second Mirror Site.

Also in fiscal 2002, the
Company entered into an agreement with Amazon to allow Amazon and Borders.com
customers to pick-up certain book, music and movie products at Borders
Books and Music stores in the United States (In-Store Express
Pick-Up). Under this agreement, the Company is the merchant of record for
all sales made through this service, and determines all prices and other terms
and conditions applicable to such sales. The Company fulfills all products sold
through In-Store Express Pick Up. In addition, the Company assumes all risk,
cost and responsibility related to the sale and fulfillment of all products
sold. Amazon receives referral fees from the Company for products purchased
through In-Store Express Pick Up. This service has been offered to customers
beginning November 27, 2002.

The Company's third quarters
of 2002 and 2001 consisted of the 13 weeks ended October 27, 2002 and October 28,
2001, respectively.

12

## RESULTS OF
OPERATIONS

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

| |                                                |       |    |  |       |    |  |       |   |  |       |    | 
| | ---------------------------------------------- | ----- | -- |  | ----- | -- |  | ----- | - |  | ----- | -- | 
|
|
|
|
| | Sales                                          | 100.0 | %  |  | 100.0 | %  |  | 100.0 | % |  | 100.0 | %  | 
| | Cost of merchandise sold (including occupancy) | 75.4  |    |  | 74.8  |    |  | 74.9  |   |  | 74.8  |    | 
| | Fulfillment center inventory writedowns        | -     |    |  | -     |    |  | -     |   |  | 0.6   |    | 
| |                                                |       |    |  |       |    |  |       |  
| | Gross margin                                   | 24.6  |    |  | 25.2  |    |  | 25.1  |   |  | 24.6  |    | 
| | Selling, general and administrative expenses   | 24.1  |    |  | 24.9  |    |  | 24.1  |   |  | 24.6  |    | 
| | Legal settlement expense                       | -     |    |  | -     |    |  | -     |   |  | 0.1   |    | 
| | Pre-opening expense                            | 0.4   |    |  | 0.4   |    |  | 0.2   |   |  | 0.2   |    | 
| | Goodwill amortization                          | -     |    |  | 0.1   |    |  | -     |   |  | 0.1   |    | 
| | Asset impairments and other writedowns         | -     |    |  | -     |    |  | -     |   |  | 0.7   |    | 
| |                                                |       |    |  |       |    |  |       |  
| | Operating income (loss)                        | 0.1   |    |  | (0.2  | )  |  | 0.8   |   |  | (1.1  | )  | 
| | Interest expense                               | 0.5   |    |  | 0.5   |    |  | 0.4   |   |  | 0.5   |    | 
| |                                                |       |    |  |       |    |  |       |  
| | Income (loss) before income tax                | (0.4  | )  |  | (0.7  | )  |  | 0.4   |   |  | (1.6  | )  | 
| | Income tax                                     | (0.2  | )  |  | (0.3  | )  |  | 0.2   |   |  | (0.6  | )  | 
| |                                                |       |    |  |       |    |  |       |  
| | Net income (loss)                              | (0.2  | )% |  | (0.4  | )% |  | 0.2   | % |  | (1.0  | )% | 
| |                                                |       |    |  |       |    |  |       |  

## CONSOLIDATED RESULTS

## COMPARISON OF THE 13
WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESConsolidated
sales increased $36.1 million, or 5.0%, to $749.8 million in 2002 from $713.7
million in 2001. This resulted primarily from increased sales in the Borders and
International segments due to the opening of new superstores and an increase in
Borders comparable store sales. A decrease in sales of the Waldenbooks
segment partially offset the increase in consolidated sales, due primarily to
store closures and a decrease in comparable store sales. Please see
Segment Results for a detailed discussion of the changes in sales.

GROSS MARGINConsolidated
gross margin increased $4.6 million, or 2.6%, to $184.3 million in 2002 from
$179.7 million in 2001. As a percentage of sales, however, it decreased to 24.6%
in 2002 from 25.2% in 2001. This primarily resulted from a decrease in gross
margin as a percentage of sales for the Borders segment, partially offset by an
increase in the Waldenbooks segment (and to a lesser extent, an increase in the
International segment). The decline at Borders was primarily due to increased
promotional markdowns along with increased occupancy costs as a percentage of
sales.

The
Company classifies the following items as Cost of merchandise sold
(including occupancy costs) on its consolidated statements of operations:
product costs and related discounts, markdowns, freight, shrinkage, preferred
reader club income, 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,
since some retailers exclude the costs related to their distribution network
from cost of sales and include them in other financial statement lines.

13

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESConsolidated
selling, general and administrative expenses (SG&A) increased $2.7 million,
or 1.5%, to $180.6 million in 2002 from $177.9 million in 2001. As a percentage
of sales, however, it decreased to 24.1% in 2002 from 24.9% in 2001. This
decrease primarily resulted from decreases in SG&A expenses as a percentage
of sales for the Borders and International segments, partially offset by an
increase at the Waldenbooks segment. Borders decrease was primarily
due to a decrease in store operating expenses as a percentage of sales as a
result of disciplined cost controls, increased advertising income, and decreased
administrative expenses in conjunction with the Mirror Site agreement with
Amazon. International SG&A expenses as a percentage of sales improved as the
result of store payroll expenses and other administrative expenses increasing at
rates less than sales growth.

Waldenbooks experienced
higher store payroll and overhead expenses as a percentage of sales due to these
costs remaining relatively fixed while sales declined.

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,
advertising, referral fee income and others.

The
Company participates in various types of vendor incentive programs, and receives
payments and credits from vendors pursuant to co-operative advertising programs,
shared markdown programs, purchase volume incentive programs and magazine
slotting programs. These programs continue to be beneficial for both the Company
and vendors, and the Company expects continued participation in these types of
programs. Changes in vendor participation levels, as well as changes in the
volume of merchandise purchased, among other factors, could adversely impact the
Companys results of operations and liquidity.

GOODWILL AMORTIZATION
In the first quarter of 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (FAS 142).
Adoption had the impact of eliminating the Companys goodwill amortization
and increasing net income by approximately $0.7 million in the third quarter of
2002. Upon initial application of FAS 142, the Company determined no goodwill
impairment existed.

ASSET IMPAIRMENTS AND OTHER WRITEDOWNS
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 results for the 13 weeks ended October 28, 2001.

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.
Inventory of $3.5 million, fixed assets of $5.6 million, and accounts receivable
and other of $0.9 million were removed from the accounts in the third quarter of
2001, offset by an insurance recovery of $10.0 million through the end of the third
quarter of fiscal 2001. In addition, the Company expects to recover additional amounts,
which will be recognized when collection of such additional recoveries is
assured.

ANTICIPATED FOURTH QUARTER
ASSET IMPAIRMENTS AND OTHER ITEMS
During the fourth quarter of fiscal 2002, the Company anticipates potential asset
impairments, primarily of certain underperforming mall stores, as well as potential
insurance recoveries related to the loss of the Borders store at the World Trade
Center. The Company anticipates that the net impact of these items could result in
an after-tax charge within the range of $3 million to $5 million.

INTEREST EXPENSE
Consolidated
interest expense increased $0.3 million, or 8.6%, to $3.8 million in 2002 from
$3.5 million in 2001. This was primarily due to the issuance of $50.0 million
senior guaranteed notes at a fixed 6.31% interest rate. Also affecting the
increase are higher International debt levels, due to the opening of new
superstores.

TAXESThe
effective tax rate for the years presented differed from the federal statutory
rate primarily as a result of state income taxes. The Companys estimated
effective tax rate used was 38.0% in 2002 compared to 37.0% in 2001. The
increase is primarily due to changes in the mix of income subject to tax in the
various taxing jurisdictions.

14

## COMPARISON OF
THE 39 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESConsolidated
sales increased $81.7 million, or 3.7%, to $2,265.1 million in 2002 from
$2,183.4 million in 2001. This resulted primarily from increased sales in the
Borders and International segments due to the opening of new superstores,
partially offset by a decrease in Borders comparable store sales. A
decrease in sales of the Waldenbooks segment also partially offset the increase
in consolidated sales, due primarily to store closures and a decrease in
comparable store sales. Please see Segment Results for a detailed
discussion of the changes in sales.

GROSS MARGINConsolidated
gross margin increased $29.8 million, or 5.5%, to $567.7 million in 2002 from
$537.9 million in 2001. As a percentage of sales, it increased to 25.1% in 2002
from 24.6% in 2001. This increase primarily resulted from a $12.7 million
pre-tax charge taken in the first quarter of 2001 for the writedown of inventory
affected by the Companys agreement with Ingram Book Company (Ingram). On
March 15, 2001, the Company announced an agreement with Ingram, a wholesaler of
books, spoken audio and magazines, pursuant to which Ingram provides fulfillment
services for the Companys special order book sales. The agreement included
the sale to Ingram of a large percentage of the book inventory housed in the
Companys fulfillment center in

LaVergne, Tennessee, which handled the
function assumed by Ingram. Excluding this charge, gross margin as a percentage
of sales decreased to 25.1% in 2002 from 25.2% in 2001. This was primarily the
result of decreases in the Borders and International segments, partially offset
by an increase in the Waldenbooks segment. Borders decrease was primarily
due to an increase in store occupancy costs as a percentage of sales. The
decrease in International gross margin as a percentage of sales was primarily
due to the Companys obtaining merchandise from a wholesaler to address
internal capacity limits in the United Kingdom for a portion of 2002. The
improvement at Waldenbooks was primarily due to decreased distribution costs as
a percentage of sales, resulting primarily from Borders increased usage of
Waldenbooks distribution facilities (coupled with a corresponding decrease
in Waldenbooks usage).

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESConsolidated
selling, general and administrative expenses (SG&A) increased $9.3 million,
or 1.7%, to $545.5 million in 2002 from $536.2 million in 2001. As a percentage
of sales, however, it decreased to 24.1% in 2002 from 24.6% in 2001. This
decrease primarily resulted from a decrease in SG&A expenses as a percentage
of sales for the Borders and International segments. Waldenbooks SG&A
remained flat from 2001 to 2002. The improvement at Borders was primarily the
result of a reduction in Borders.com operating expenses in conjunction with the
Mirror Site agreement with Amazon. The improvement at International was
primarily the result of store payroll costs, store operating expenses, and
general and administrative payroll increasing at rates less than sales growth.

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

GOODWILL AMORTIZATIONIn
the first quarter of 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (FAS 142).
Adoption had the impact of eliminating the Companys goodwill amortization
and increasing net income by approximately $2.0 million in the 39 weeks ended
October 27, 2002. Upon initial application of FAS 142, the Company determined no
goodwill impairment existed.

ASSET IMPAIRMENTS AND
OTHER WRITEDOWNSIn
addition to the writedown of inventory discussed above, the Companys
agreement with Ingram in March 2001 resulted in a first quarter 2001 pre-tax
charge of approximately $15.8 million. This charge was primarily related to the
writedown of assets used by the Company-owned facility to fulfill special order
sales, including computer hardware and software, leasehold improvements, and
warehouse equipment.

15

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 results for the 39 weeks ended October 28, 2001.

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.
Inventory of $3.5 million, fixed assets of $5.6 million, and accounts receivable
and other of $0.9 million were removed from the accounts in the third quarter of
2001, offset by an insurance recovery of $10.0 million through the end of the third
quarter of fiscal 2001. In addition, the Company expects to recover additional amounts,
which will be recognized when collection of such additional recoveries is
assured.

ANTICIPATED FOURTH QUARTER
ASSET IMPAIRMENTS AND OTHER ITEMS
During the fourth quarter of fiscal 2002, the Company anticipates potential asset
impairments, primarily of certain underperforming mall stores, as well as potential
insurance recoveries related to the loss of the Borders store at the World Trade
Center. The Company anticipates that the net impact of these items could result in
an after-tax charge within the range of $3 million to $5 million.

INTEREST EXPENSEConsolidated
interest expense decreased $2.8 million, or 24.3%, to $8.7 million in 2002 from
$11.5 million in 2001. This was primarily due to lower average debt levels in
the first half of 2002 as compared to the first half of 2001, which primarily
resulted from increased cash flow generated by the Borders segment.

TAXESThe
effective tax rate for the years presented differed from the federal statutory
rate primarily as a result of state income taxes. The Companys estimated
effective tax rate used was 38.0% in 2002 compared to 37.0% in 2001. The
increase is primarily due to changes in the mix of income subject to tax in the
various taxing jurisdictions.

## SEGMENT RESULTS

The Company is organized
based upon the following operating segments: domestic Borders stores,
Waldenbooks stores, International Borders and Books etc. stores, and Other
(consisting of the unallocated portion of interest expense and certain corporate
governance costs). Amounts relating to Borders.com, other than intercompany
interest expense (net of related taxes), have been reclassified into the Borders
segment for all periods presented. Intercompany interest charges (net of related
taxes) relating to Borders.com have been included in the other segment. See Note
6 in the notes to unaudited condensed consolidated financial statements for
further information relating to these segments.

| |                          |                      |       |      |  |   |       |      |  |   |         |      |  |   |         |      |  |  | 
| | ------------------------ | -------------------- | ----- | ---- |  | - | ----- | ---- |  | - | ------- | ---- |  | - | ------- | ---- |  |  | 
|
|
|
|
| | Sales                    | $                    | 511.8 |      |  | $ | 480.6 |      |  | $ | 1,559.9 |      |  | $ | 1,492.3 |      | 
| | Net income               | $                    | 6.3   |      |  | $ | 4.1   |      |  | $ | 29.3    |      |  | $ | 3.0     |      | 
| | Net income as % of sales |                      | 1.2   | %    |  |   | 0.9   | %    |  |   | 1.9     | %    |  |   | 0.2     | %    | 
| | Depreciation and         |                      |       |      |  |   |       |      |  |   |         |      |  |   |         |      | 
| |                          | amortization expense | $     | 16.6 |  |   | $     | 16.3 |  |   | $       | 49.2 |  |   | $       | 48.2 |  | 
| | Interest expense         | $                    | 1.4   |      |  | $ | 2.7   |      |  | $ | 2.0     |      |  | $ | 8.5     |      | 
| | Store Openings           |                      | 15    |      |  |   | 11    |      |  |   | 28      |      |  |   | 21      |      | 
| | Store Closings           |                      | -     |      |  |   | 1     |      |  |   | -       |      |  |   | 1       |      | 
| | Store Count              |                      | 391   |      |  |   | 355   |      |  |   | 391     |      |  |   | 355     |      | 

16

## COMPARISON OF THE 13
WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESBorders
sales increased $31.2 million, or 6.5%, to $511.8 million in 2002 from $480.6
million in 2001. This increase was comprised of non-comparable sales primarily
associated with 2002 and 2001 store openings of $30.9 million and comparable
store sales increases of $0.3 million.

Comparable
store sales increased 0.6% in 2002. Borders comparable store sales
measures, 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 fourteen,
representing approximately 3% 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 2002 was due primarily to the video and
gifts and stationery categories, which experienced strong positive comparable
store sales, partially offset by negative comparable store sales in the music
category. Sales of video improved on a comparable store basis primarily as the
result of increased sales of digital videodiscs (DVDs). This increase, which was
slightly offset by a decrease in videotape sales, resulted from the increasing
popularity of the DVD format. Sales of the gifts and stationery category also
increased, principally the result of category management initiatives resulting
in product enhancements, improved placements, and a slight increase in space
allocation. The decrease in the music category was primarily the result of fewer
popular releases in the current year as compared to the prior year. However, the
overall mix of book, music, cafe, and gifts and stationery merchandise sold by
Borders stores did not change significantly in 2002 as compared to 2001. The
impact of price changes on comparable store sales was not significant.

GROSS MARGINGross
margin as a percentage of sales decreased approximately 1.0% in 2002 compared to
2001. The largest contributor to this decrease was a 0.8% increase in planned
promotional discounts and markdowns. Also affecting the decline in gross margin
as a percentage of sales was a 0.2% increase in store occupancy costs as a
percentage of sales primarily as a result of the stores rent, common area
maintenance, property taxes, and insurance expenses representing a higher
percentage of sales. This was primarily due to new stores rent costs
representing a higher percentage of sales than older stores and the increased
lease costs related to the permanent refinancing of certain stores previously
financed through the Original Lease Facility.

Gross
margin dollars increased approximately 2.5% in 2002 primarily due to new store
openings, partially offset by the decrease in gross margin percentage noted
above.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESSelling,
general and administrative expenses (SG&A) as a percentage of sales
decreased 1.3% in 2002 compared to 2001. The improvement was primarily the
result of a decrease of 0.7% in store operating expenses resulting from
disciplined cost controls at the store level. Also affecting the decrease of
SG&A as a percentage of sales was a 0.4% increase in advertising income and
a

0.3% decrease in other administrative expenses. The improvement in
administrative expenses was primarily due to a reduction in Borders.com
operating expenses in 2002 in conjunction with the Mirror Site agreement with
Amazon. These decreases in costs were offset by a slight increase of 0.1% in
store payroll as a percentage of sales.

SG&A
dollars increased approximately 0.9% in 2002 primarily due to new store openings
and the increased store payroll and operating expenses required.

ASSET IMPAIRMENTS AND OTHER WRITEDOWNS
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 segments
results for the 13 weeks ended October 28, 2001.

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.
Inventory of $3.5 million, fixed assets of $5.6 million, and accounts receivable
and other of $0.9 million were removed from the accounts in the third quarter of
2001, offset by an insurance recovery of $10.0 million through the end of the third
quarter of fiscal 2001. In addition, the Company expects to recover additional amounts,
which will be recognized when collection of such additional recoveries is
assured.

17

NET INCOMENet
income as a percentage of sales increased to 1.2% in 2002 from 0.9% in 2001. The
primary contributors to this increase were the decrease in SG&A expenses as
a percentage of sales and a reduction of interest expense. These factors were
partially offset by the decrease in gross margin as a percentage of sales.

Borders' net income dollars
increased $2.2 million, or 53.7%, to $6.3 million in 2002 from $4.1 million in
2001.

OTHERDepreciation
and amortization expense increased $0.3 million, or 1.8%, to $16.6 million in
2002 from $16.3 million in 2001. This was primarily the result of increased
depreciation expense due to assets put into service upon the opening of new
superstores.

Interest
expense decreased $1.3 million, or 48.1%, to $1.4 million in 2002 from $2.7
million in 2001. This was due to the increased generation of cash flow, which
reduced average borrowing levels at fixed internal interest rates.

## COMPARISON OF
THE 39 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESBorders
sales increased $67.6 million, or 4.5%, to $1,559.9 million in 2002 from
$1,492.3 million in 2001. This increase was comprised of non-comparable sales
primarily associated with 2002 and 2001 store openings of $87.7 million,
comparable store sales decreases of $11.2 million and decreased Borders.com sales
of $8.9 million (due to the Mirror Site agreement with Amazon).

Comparable
store sales decreased 0.3% in 2002. The comparable store sales decrease for 2002
was due primarily to the music category, which experienced negative comparable
store sales. Among other factors, this was primarily the result of fewer large
releases in the current year as compared to the prior year. Partially offsetting
the weakness in the music category, however, were increased comparable store
sales in the video and gifts and stationery categories. Sales of the video
category improved on a comparable store basis primarily as the result of
increased sales of digital video discs (DVDs). This increase, which was slightly
offset by a decrease in videotape sales, resulted from the increasing popularity
of the DVD format. Sales of the gifts and stationery category also increased,
principally the result of category management initiatives resulting in product
enhancements, improved placements, and a slight increase in space allocation.
However, the overall mix of book, music, cafe, and gifts and stationery
merchandise sold by Borders stores did not change significantly in 2002 as
compared to 2001. The impact of price changes on comparable store sales was not
significant.

GROSS MARGINGross
margin as a percentage of sales increased approximately 0.5% in 2002 compared to
2001. The largest contributor to this increase was a $12.7 million pre-tax
charge taken in the first quarter of 2001 for the writedown of inventory
affected by the Companys agreement with Ingram, as previously discussed.
Excluding this charge, gross margin as a percentage of sales decreased
approximately 0.4% due to an increase in store occupancy costs as a percentage
of sales. This primarily resulted from the stores rent, common area
maintenance, property taxes, and insurance expenses representing a higher
percentage of sales. This was primarily due to new stores rent costs
representing a higher percentage of sales than older stores and the increased
lease costs related to the permanent refinancing of certain stores previously
financed through the Original Lease Facility.

Gross
margin dollars increased approximately 6.4% in 2002 primarily due to the $12.7
million pre-tax charge taken in the first quarter of 2001 relating to the
agreement with Ingram. Excluding this charge, gross margin dollars increased
approximately 3.2%, primarily due to new store openings.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESSelling,
general and administrative expenses (SG&A) as a percentage of sales improved
1.6% in 2002 compared to 2001. Of this, 1.3% was primarily due to a reduction in
Borders.com operating expenses in 2002 in conjunction with the Mirror Site
agreement with Amazon. The remaining improvement was primarily due to a decrease
in store operating expenses as a percentage of sales due to disciplined cost
controls at the store level and an increase in advertising income as a
percentage of sales.

18

SG&A
dollars increased approximately 2.5% in 2002 primarily due to new store openings
and the increased store payroll and operating expenses required, partially
offset by a reduction in Borders.com operating expenses.

ASSET IMPAIRMENTS AND
OTHER WRITEDOWNSIn
addition to the writedown of inventory discussed above, the Companys
agreement with Ingram in March 2001 resulted in a first quarter 2001 pre-tax
charge of approximately $15.8 million. This charge was primarily related to the
writedown of assets used by the Company-owned facility to fulfill special order
sales, including computer hardware and software, leasehold improvements, and
warehouse equipment.

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
segmets results for the 39 weeks ended October 28, 2001.

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.
Inventory of $3.5 million, fixed assets of $5.6 million, and accounts receivable
and other of $0.9 million were removed from the accounts in the third quarter of
2001, offset by an insurance recovery of $10.0 million through the end of the third
quarter of fiscal 2001. In addition, the Company expects to recover additional amounts,
which will be recognized when collection of such additional recoveries is
assured.

NET INCOMENet
income as a percentage of sales increased to 1.9% in 2002 from 0.2% in 2001.
This was primarily due to the asset impairments and inventory markdowns recorded
in the first quarter of 2001 discussed above, coupled with decreased interest
costs.

Borders
net income dollars increased to $29.3 million in 2002 from $3.0 million in 2001.
This was primarily due to the asset impairments and inventory markdowns recorded
in the first quarter of 2001 discussed above, coupled with decreased interest
costs.

OTHERDepreciation
and amortization expense increased $1.0 million, or 2.1%, to $49.2 million in
2002 from $48.2 million in 2001. This was primarily the result of increased
depreciation expense recognized on new stores capital expenditures,
partially offset by the cessation of goodwill amortization pursuant to the
Companys adoption of FAS 142.

Interest
expense decreased $6.5 million, or 76.5%, to $2.0 million in 2002 from $8.5
million in 2001. This was due to the generation of increased cash flow, which
reduced average borrowing levels at fixed internal interest rates.

| |                        |   |       |    |  |   |       |    |  |   |       |    |  |   |       |    |  |  | 
| | ---------------------- | - | ----- | -- |  | - | ----- | -- |  | - | ----- | -- |  | - | ----- | -- |  |  | 
|
|
|
|
| | Sales                  | $ | 164.6 |    |  | $ | 173.8 |    |  | $ | 502.9 |    |  | $ | 526.2 |    | 
| | Net loss               | $ | (0.8  | )  |  | $ | (1.3  | )  |  | $ | (0.2  | )  |  | $ | (3.5  | )  | 
| | Net loss as % of sales |   | (0.5  | )% |  |   | (0.7  | )% |  |   | (0.0  | )% |  |   | (0.7  | )% | 
| | Depreciation expense   | $ | 4.5   |    |  | $ | 4.8   |    |  | $ | 13.6  |    |  | $ | 14.3  |    | 
| | Interest income        | $ | 8.2   |    |  | $ | 6.8   |    |  | $ | 24.6  |    |  | $ | 20.4  |    | 
| | Store Openings         |   | 3     |    |  |   | 7     |    |  |   | 3     |    |  |   | 11    |    | 
| | Store Closings         |   | 5     |    |  |   | 6     |    |  |   | 21    |    |  |   | 24    |    | 
| | Store Count            |   | 809   |    |  |   | 856   |    |  |   | 809   |    |  |   | 856   |    | 

19

## COMPARISON OF
THE 13 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALES
Waldenbooks
sales decreased $9.2 million, or 5.3%, to $164.6 million in 2002 from $173.8
million in 2001. This decrease was comprised of decreased comparable store sales
of $3.8 million and decreased non-comparable sales associated with 2002 and 2001
store closings of $5.4 million.

Comparable
store sales decreased 2.3% in 2002. 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 2002 was due primarily to
decreased mall traffic and the impact of superstore openings. Overall,
Waldenbooks merchandise mix did not change significantly in 2002 as
compared to 2001, nor was the impact of price changes on comparable store sales
significant.

GROSS MARGINGross
margin as a percentage of sales increased approximately 0.2% in 2002 as compared
to 2001, primarily due to a 0.7% decrease in product costs. In addition, gross
margin as a percentage of sales was positively impacted approximately 0.3% due
to a decrease in shrinkage costs. These factors were partially offset by an
increase in the stores rent expense as a percentage of sales of 0.8%, due
primarily to the decline in sales dollars resulting from declining comparable
store sales.

Gross
margin dollars decreased approximately 4.6% in 2002, primarily due to store
closings and the decrease in comparable store sales, partially offset by the
increase in gross margin percentage.

SELLING,
GENERAL AND ADMINISTRATIVE EXPENSESSelling,
general and administrative expenses (SG&A) as a percentage of sales
increased approximately 0.9% in 2002 compared to 2001. This increase was
primarily due to increased store payroll costs as a percentage of sales of 0.6%
and an increase in store expenses of 0.2%. Also contributing to this was an
increase of 0.3% of corporate overhead payroll and non-payroll costs as a
percentage of sales due to these costs remaining relatively fixed while sales
declined. Partially offsetting these factors was a 0.2% increase in vendor
advertising income as a percentage of sales.

SG&A
dollars decreased approximately 2.2% in 2002 primarily due to store closings,
partially offset by the increase in SG&A percentage discussed above.

NET LOSSNet
loss as a percentage of sales improved to 0.5% 2002 compared to 0.7% in 2001.
The improvement was primarily due to a lower fixed asset base resulting from
asset impairments and store closings.

Waldenbooks
net loss dollars decreased $0.5 million, or 38.5%, to $0.8 million in 2002 from
$1.3 million in 2001. This was primarily due to increased interest income.

OTHERDepreciation
expense decreased $0.3 million, or 6.3%, to $4.5 million in 2002 from $4.8
million in 2001, primarily due to a lower fixed asset base resulting from asset
impairments and store closings.

Interest
income increased $1.4 million, or 20.6%, to $8.2 million in 2002 from $6.8
million in 2001. This was the result of Waldenbooks continued positive
cash flow at fixed internal interest rates.

## COMPARISON OF
THE 39 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESWaldenbooks
sales decreased $23.3 million, or 4.4%, to $502.9 million in 2002 from $526.2
million in 2001. This decrease was comprised of decreased comparable store sales
of $5.4 million and decreased non-comparable sales associated with 2002 and 2001
store closings of $17.9 million.

Comparable
store sales decreased 1.0% in 2002. The comparable store sales decrease for 2002
was due primarily to decreased mall traffic and the impact of superstore
openings. Overall, Waldenbooks merchandise mix did not change
significantly in 2002 as compared to 2001, nor was the impact of price changes
on comparable store sales significant.

GROSS MARGINGross
margin as a percentage of sales increased approximately 0.4% in 2002 as compared
to 2001. Contributing to this improvement was a decrease in product costs as a
percentage of sales of 0.4%. Gross margin was also positively impacted by a
decrease of 0.3% in distribution costs, related to Borders increased usage
of Waldenbooks distribution facilities (coupled with a corresponding
decrease in Waldenbooks usage). These factors were partially offset by a
0.3% increase in store occupancy expenses as a percentage of sales, due
primarily to the decline in sales dollars resulting from declining comparable
store sales.

Gross
margin dollars decreased approximately 2.8% in 2002, primarily due to store
closings and the decrease in comparable store sales, partially offset by the
increase in gross margin percentage.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESSelling,
general and administrative expenses (SG&A) as a percentage of sales remained
flat in 2002 compared to 2001. This was primarily due to increased corporate
overhead payroll and non-payroll expenses as a percentage of sales offsetting
increased vendor advertising income as a percentage of sales.

SG&A dollars decreased
approximately 3.7% in 2002 primarily due to store closings.

NET LOSSWaldenbooks
generated a net loss of $0.2 million in 2002 as compared to a net loss of $3.5
million in 2001. This was primarily due to increased interest income.

OTHERDepreciation
expense decreased $0.7 million, or 4.9%, to $13.6 million in 2002 from $14.3
million in 2001. This was primarily due to a lower fixed asset base resulting
from asset impairments and store closings.

Interest
income increased $4.2 million, or 20.6% ,to $24.6 million in 2002 from $20.4
million in 2001. This was the result of Waldenbooks continued positive
cash flow at fixed internal interest rates.

| |                           |                      |      |     |  |   |      |     |  |   |       |     |  |   |       |     |  |  | 
| | ------------------------- | -------------------- | ---- | --- |  | - | ---- | --- |  | - | ----- | --- |  | - | ----- | --- |  |  | 
|
|
|
|
| | Sales                     | $                    | 73.4 |     |  | $ | 59.3 |     |  | $ | 202.3 |     |  | $ | 164.9 |     | 
| | Net loss                  | $                    | (3.6 | )   |  | $ | (3.1 | )   |  | $ | (13.5 | )   |  | $ | (11.0 | )   | 
| | Net loss as % of sales    |                      | (4.9 | )%  |  |   | (5.2 | )%  |  |   | (6.7  | )%  |  |   | (6.7  | )%  | 
| | Depreciation and          |                      |      |     |  |   |      |     |  |   |       |     |  |   |       |     | 
| |                           | amortization expense | $    | 2.3 |  |   | $    | 2.2 |  |   | $     | 6.9 |  |   | $     | 6.6 |  | 
| | Interest expense          | $                    | 4.5  |     |  | $ | 3.4  |     |  | $ | 12.5  |     |  | $ | 10.0  |     | 
| | Superstore Openings       |                      | 6    |     |  |   | 2    |     |  |   | 7     |     |  |   | 5     |     | 
| | Superstore Count          |                      | 29   |     |  |   | 19   |     |  |   | 29    |     |  |   | 19    |     | 
| | Books etc. Store Openings |                      | 1    |     |  |   | 2    |     |  |   | 1     |     |  |   | 3     |     | 
| | Books etc. Store Count    |                      | 37   |     |  |   | 34   |     |  |   | 37    |     |  |   | 34    |     | 

## COMPARISON OF
THE 13 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESInternational
sales increased $14.1 million, or 23.8%, to $73.4 million in 2002 from $59.3
million in 2001. This is primarily the result of new superstore openings, and to
a lesser extent, comparable store sales increases (which include all stores open
more than one year).

The
overall mix of book, music, cafe, and sideline merchandise sold by International
superstores, and the mix of books and sidelines offered by Books etc. stores,
did not change significantly in 2002 as compared to 2001. The impact of price
changes on comparable store sales was also not significant.

GROSS MARGINGross
margin as a percentage of sales increased 0.2% in 2002 as compared to 2001, due
to a decrease in store occupancy costs as a percentage of sales. This was
primarily the result of rental fees received from a third-party café
operator to operate the United Kingdoms superstore cafés, an
arrangement which became effective in the second quarter of 2002.

Gross margin dollars
increased approximately 24.2% in 2002 primarily due to new store openings.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESSelling,
general and administrative expenses (SG&A) as a percentage of sales
decreased approximately 0.4% in 2002 compared to 2001. This improvement was
primarily the result of store payroll costs and general and administrative
payroll increasing at rates less than sales growth. Although store payroll and
general and administrative payroll increased in dollars, the increase in
comparable store sales reduced these expenses as a percentage of sales.

SG&A
dollars increased approximately 21.3% in 2002 primarily due to store openings
and the increased store payroll and operating expenses required.

NET LOSSNet
loss as a percentage of sales decreased to 4.9% in 2002 from 5.2% in 2001
primarily due to the improvements in gross margin percentage and SG&A
percentage previously discussed.

20

Net
loss dollars increased $0.5 million, or 16.1%, to $3.6 million in 2002 from $3.1
million in 2001. This was primarily due to the increase in interest expense on
borrowings to fund new store openings.

OTHERDepreciation
and amortization expense increased $0.1 million, or 4.5%, to $2.3 million in
2002 from $2.2 million in 2001. This was primarily due to depreciation expense
recognized on new stores capital expenditures, partially offset by the
cessation of goodwill amortization in 2002.

Interest
expense increased $1.1 million, or 32.4%, to $4.5 million in 2002 from $3.4
million in 2001. This was a result of higher average borrowing levels at fixed
internal interest rates.

## COMPARISON OF
THE 39 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

SALESInternational
sales increased $37.4 million, or 22.7%, to $202.3 million in 2002 from $164.9
million in 2001. This is primarily the result of new superstore openings. In
2002, the Company opened five international stores in the United Kingdom and two
stores in Australia.

The
overall mix of book, music, cafe, and sideline merchandise sold by International
superstores, and the mix of books and sidelines offered by Books etc. stores,
did not change significantly in 2002 as compared to 2001. The impact of price
changes on comparable store sales was also not significant.

GROSS MARGINGross
margin as a percentage of sales decreased 0.3% in 2002 as compared to 2001,
primarily the result of a 0.5% increase in merchandise costs as a percentage of
sales, partially offset by decreased distribution costs of 0.2%. The increased
merchandise costs as a percentage of sales were primarily the result of the
Company obtaining merchandise from a wholesaler to address internal distribution
capacity limits in the United Kingdom throughout a portion of 2002. A new
distribution facility was opened in the second quarter of 2002, and significant
amounts of merchandise are no longer being sourced from this wholesaler.

Gross margin dollars
increased approximately 23.7% in 2002 primarily due to new store openings.

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSESSelling,
general and administrative expenses (SG&A) as a percentage of sales
decreased approximately 0.4% in 2002 compared to 2001. This improvement was
primarily the result of general and administrative payroll costs, store payroll
costs and store operating expenses increasing at rates less than sales growth.
Although general and administrative payroll, store payroll and operating
expenses increased in dollars, the increase in sales reduced these expenses as
a percentage of sales.

SG&A
dollars increased approximately 23.2% in 2002 primarily due to store openings
and the increased store payroll and operating expenses required.

NET LOSSNet
loss as a percentage of sales remained flat at 6.7% in 2002 and 2001 primarily
due the decrease in gross margin percentage as previously discussed, offset by
the improvement in SG&A percentage.

Net
loss dollars increased $2.5 million, or 22.7%, to $13.5 million in 2002 from
$11.0 million in 2001. This was primarily due to the increase in interest
expense on borrowings to fund new store openings.

OTHERDepreciation
and amortization expense increased $0.3 million, or 4.5%, to $6.9 million in
2002 from $6.6 million in 2001. This was primarily due to depreciation expense
recognized on new stores capital expenditures, partially offset by the
cessation of goodwill amortization in 2002.

Interest
expense increased $2.5 million, or 25.0%, to $12.5 million in 2002 from $10.0
million in 2001. This was a result of higher average borrowing levels at fixed
internal interest rates.

21

| |                  |   |      |   |  |   |      |   |  |   |       |   |  |   |       |   |  |  | 
| | ---------------- | - | ---- | - |  | - | ---- | - |  | - | ----- | - |  | - | ----- | - |  |  | 
|
|
|
|
| | Net loss         | $ | (3.7 | ) |  | $ | (2.8 | ) |  | $ | (10.1 | ) |  | $ | (10.4 | ) | 
| | Interest expense | $ | 6.1  |   |  | $ | 4.2  |   |  | $ | 18.8  |   |  | $ | 13.4  |   | 

## COMPARISON OF
THE 13 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

Net
loss consists of various corporate governance costs and income. Net loss dollars
increased $0.9 million, or 32.1%, to $3.7 million in 2002 from $2.8 million in
2001. This was primarily due to increased interest expense for this segment.
Interest expense represents corporate-level interest costs not charged to the
Companys operating segments.

## COMPARISON OF
THE 39 WEEKS ENDED OCTOBER 27, 2002 AND OCTOBER 28, 2001

Net
loss consists of various corporate governance costs and income. Net loss dollars
decreased $0.3 million, or 2.9%, to $10.1 million in 2002 from $10.4 million in
2001. This was primarily due to a reduction in corporate general and
administrative payroll costs and a reduction in various governance costs as
compared to the prior year, partially offset by increased interest expense for
this segment. Interest expense represents corporate-level interest costs not
charged to the Companys operating segments.

## LIQUIDITY AND
CAPITAL RESOURCES

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

Net cash used for
continuing operations was $117.8 million and $102.6 million for the 39 weeks
ended October 27, 2002 and October 28, 2001, respectively. Operating cash
inflows for the period primarily reflects operating results net of non-cash
depreciation and amortization expense, as well as an increase in accounts
payable and decreases in accounts receivable and deferred income taxes.
Operating cash outflows for the
period primarily resulted from increases in inventory and prepaid expenses, as
well as decreases in expenses payable, accrued liabilities and taxes payable
during the period.

Net cash used for investing
was $85.7 million and $51.3 million for the 39 weeks ended October 27, 2002 and
October 28, 2001, respectively, which primarily funded capital expenditures for
new stores, the refurbishment of existing stores and technology investments.

Net cash provided by
financing was $80.5 million in the first 39 weeks of 2002 and $155.6 million in
the first 39 weels of 2001, respectively, resulting primarily
from borrowings on the Companys credit facility and proceeds from the
exercise of employee stock options, partially offset by the Companys
repurchase of stock.

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

The Company has a share
repurchase program in place with remaining authorization at October 27, 2002 to
repurchase $28.0 million; however, the covenants under the Companys Credit
Agreement and Lease Financing Facilities (as defined below) limited, as of
October 27, 2002, the amount available to repurchase in fiscal 2002 to $6.9
million.

The Company has a
Multicurrency Revolving Credit Agreement (the Credit Agreement),
which will expire in June 2005. The Credit Agreement provides for borrowings of
up to $375.0 million, which will be increased to $400.0 million upon the
reduction of the amounts outstanding under the Original Lease Facility described
below to $75.0 million or less. Borrowings under the Credit Agreement bear
interest at a variable base rate plus an increment or LIBOR plus an increment at
the Companys option. The Credit Agreement contains covenants which limit,
among other things, the Companys ability to incur indebtedness, grant
liens, make

22

investments,
consolidate or merge, declare dividends, dispose of
assets, repurchase its common stock in excess of $100.0 million over the term of
the Agreement or $50.0 million in any fiscal year (plus any proceeds and tax
benefits resulting from stock option exercises and tax benefits resulting from
restricted shares purchased by employees from the Company), and requires the
Company to meet certain financial measures regarding fixed coverage, leverage,
tangible net worth and capital expenditures. The Company had borrowings
outstanding under the Credit Agreement (or a prior agreement) of $170.5 million
at October 27, 2002, $278.3 million at October 28, 2001 and $81.6 million at
January 27, 2002.

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 are being used to refinance existing
indebtedness of the Company and its subsidiaries and for general corporate
purposes. The note purchase agreement relating to the Notes contains covenants
which limit, among other things, the Companys ability to incur
indebtedness, grant liens, make investments, engage in any merger or
consolidation, dispose of assets or change the nature of its business, and
requires the Company to meet certain financial measures regarding net worth,
total debt coverage and fixed charge coverage.

The Company has 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. The original facility (the
Original Lease Facility) will expire in June 2004 (2005 if certain
conditions are satisfied). In June of 2002, the Company established a new
facility (the New Lease Facility), which will expire in 2007. The
aggregate amount available under the Lease Financing Facilities is $100.0
million until December 1, 2002 and $75.0 million thereafter. Properties to be
financed after the effective date of the New Lease Facility will be financed
under that Facility, and no additional properties will be financed under the
Original Lease Facility. By December 1, 2002 (November 1, 2002 for purposes of
the Credit Agreement), the Company is required to reduce amount financed under
the Original Lease Facility to $75.0 million or less, and expects to do so by
permanently financing certain properties currently financed under the Original
Lease Facility. The Lease Financing Facilities provide financing to lessors of
properties leased to the Company or its subsidiaries through loans from lenders
for up to 95% of a projects cost. Additionally, under the New Lease
Facility, the unaffiliated lessor will make equity contributions approximating
5% of the cost of each project. The lessors under the Original Lease Facility
have made similar contributions. Independent of the Companys obligations
relating to the leases, the Company and certain of its subsidiaries guarantee
payment when due of all amounts required to be paid to the third-party lenders.
The agreements relating to both of the Lease Financing Facilities contain
covenants and events of default that are similar to those contained in the
Credit Agreement described above.

There were 21, 35 and 31
properties financed through the Original Lease Facility, with a financed value
of $93.8 million, $132.1 million and $121.8 million, as of October 27, 2002,
October 28, 2001 and January 27, 2002, respectively. Of these amounts, the
Company has recorded $48.7 million, $13.8 million and $49.7 million as capital
lease and financing obligations on the consolidated balance sheets, at October
27, 2002, October 28, 2001 and January 27, 2002, respectively. These amounts
have been treated as non-cash items on the consolidated statements of cash
flows. Properties to be financed under the New Lease Facility will be recorded
on the Companys consolidated balance sheets. There were no amounts
outstanding under the New Lease Facility at October 27, 2002.

In the fourth quarter of
2002, the Company permanently financed, through long-term leases, 12 properties
that had been financed through the Original Lease Facility with a total value of
approximately $51.0 million, 10 of which had been capitalized. As a result of
this activity, the Company has complied with the requirement to reduce the
amount outstanding under the Original Lease Facility below the $75.0 million
allowable by December 1, 2002, which has caused the Credit Agreements
provision for borrowings to be increased to a maximum of $400.0 million as of
December 1, 2002.

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

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

The Company is in
compliance with all debt covenants contained within the Credit Agreement, Notes
and Lease Financing Facilities described above.

23

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

The following table
summarizes the Company's significant financing and lease obligations at October
27, 2002:

| |                              |   |       |  |   |       |  |   |       |  |   |         |  |   |         | 
| | ---------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | ------- |  | - | ------- | 
|
|
|
| | Credit Facility borrowings   | $ | 170.5 |  | $ | --    |  | $ | --    |  | $ | --      |  | $ | 170.5   | 
| | Capital lease obligations    |   | 1.3   |  |   | --    |  |   | --    |  |   | 48.7    |  |   | 50.0    | 
| | Operating lease obligations  |   | 75.3  |  |   | 560.2 |  |   | 502.2 |  |   | 2,325.1 |  |   | 3,462.8 | 
| | Senior guaranteed notes      |   | --    |  |   | --    |  |   | 50.0  |  |   | --      |  |   | 50.0    | 
| |                              |   |       |  |   |       |  |   |       |  |   |         | 
| | Total                        | $ | 247.1 |  | $ | 560.2 |  | $ | 552.2 |  | $ | 2,373.8 |  | $ | 3,733.3 | 
| |                              |   |       |  |   |       |  |   |       |  |   |         | 
| | Lease Facility guarantees(1) | $ | 93.8  |  | $ | --    |  | $ | --    |  | $ | --      |  | $ | --      | 

(1) Includes $48.7 million
treated as capital lease and financing obligations.

## CRITICAL
ACCOUNTING ESTIMATES

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

ASSET IMPAIRMENTS
The
carrying value of long-lived assets is evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount and the estimated fair value. Expected
future cash flows, which are estimated over each stores remaining lease
term, contain estimates of sales and the impact those future sales will have
upon cash flows. Future sales are estimated based upon a projection of each
stores sales trend of the past several years. Additionally, each
stores future cash contribution is based upon the most recent years
actual cash contribution, but is adjusted based upon projected sales trends.
Fair value is estimated using expected discounted future cash flows, with the
discount rate approximating the Companys borrowing rate. Significant
deterioration in the performance of the Companys stores compared to
projections could result in significant additional asset impairments.

GOODWILL IMPAIRMENT
Upon
adoption of FAS 142 on January 28, 2002, the Companys goodwill was tested
for impairment, and no impairment existed. The carrying amounts of the net
assets of the applicable reporting units (including goodwill) were compared to
the estimated fair values of those reporting units. Fair value was estimated
using a discounted cash flow model which depended on, among other factors,
estimates of future sales and expense trends, liquidity, and capitalization. The
discount rate used approximated the borrowing rate estimated necessary to
finance the acquisition of the applicable reporting units by a third party.
Changes in any of the assumptions underlying these estimates may result in the
future impairment of goodwill. The Company anticipates that its future annual
tests of goodwill impairment will be based upon the methodology described above
and will be subject to the same risks and uncertainties.

LEASESAll
leases, including those for properties financed through the Lease Financing
Facilities, are reviewed for capital or operating classification at their
inception under the guidance of Financial Accounting Standards Board Statement
No. 13, Accounting for Leases (FAS 13), as amended. The leases of
certain properties financed through the Original Lease Facility were capitalized
based upon this and other guidance.

The
lessors of properties financed through the Original Lease Facility are not
consolidated in the consolidated financial statements of the Company, based upon
the applicable authoritative guidance.

24

INVENTORY The
carrying value of the Companys inventory is affected by reserves for
shrinkage and non-returnable inventory. Projections of shrinkage are based upon
the results of regular, periodic physical counts of the Companys
inventory. The Companys shrinkage reserve is adjusted as warranted based
upon the trends yielded by the physical counts. Reserves for non-returnable
inventory are based upon the Companys history of liquidating
non-returnable inventory. The markdown percentages utilized in developing the
reserve are evaluated against actual, ongoing markdowns of non-returnable
inventory to ensure that they remain consistent. Significant differences between
future experience and that which was projected (for either the shrinkage or
non-returnable inventory reserves) could affect the recorded amounts of
inventory and cost of sales.

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

## 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 4.
CONTROLS AND PROCEDURES

CONTROLS AND PROCEDURESThe Companys Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the Companys disclosure controls and procedures (as such term is
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of a date within 90 days
prior to the filing date of this quarterly report (the Evaluation
Date). Based on such evaluation, such officers have concluded that, as of
the Evaluation Date, the Companys disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
the Company (including its consolidated subsidiaries) required to be included in
the Companys periodic filings under the Exchange Act.

CHANGES IN INTERNAL
CONTROLSSince the Evaluation Date,
there have not been any significant changes in the Companys internal
controls or in other factors that could significantly affect such controls.

## PART II - OTHER
INFORMATION

## ITEM 1.  LEGAL
PROCEEDINGS

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 or the Company, instituted an
action against the Company and Amazon.com 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.com operates Borders.com
as a co-branded site violates federal anti-trust laws, California statutory law
and the common law of unjust enrichment. The Complaint seeks injunctive relief,
damages, including treble damages or statutory damages where applicable,
attorneys fees, costs and disbursements, disgorgement of all sums obtained by
allegedly wrongful acts, interest and declaratory relief. The Company intends to
file an answer or other responsive pleading denying any liability and to
vigorously defend the action.

The Companys Form
10-K Annual Report for the fiscal year ended January 27, 2002, describes other
pending lawsuits against the Company. The status of such litigation has not
changed in any significant respect except as follows:

The Companys request
for an immediate appeal of the class certification ruling of the Superior Court
of California in the overtime litigation case has been denied, and the Company
is considering pursuing mediation of the matter. Unless mediation is pursued and
is successful, the Company will continue to vigorously defend the action.

25

Although an adverse
resolution the lawsuits described or referred to above could have a material
adverse effect on the result of the operations of the Company for the applicable
period or periods, the Company does not believe that any such litigation will
have a material effect on its liquidity or financial position.

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

## ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K

| |     |                      |       |                                                                                                                                                                                 | 
| | --- | -------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |       |                                                                                                                                                                                
| |     |                      | 10.49 | Amendment No. 2 to the Credit Agreement dated as of August 12, 2002
among Borders Group Inc., certain of its subsidiaries and other Parties thereto.                            | 
| |     |                      | 10.50 | Amendment No. 1 to the Multicurrency Revolving Credit Agreement dated as of September 18, 2002
among Borders Group Inc., certain of its subsidiaries and other Parties thereto. | 
| |     |                      | 99.1  | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                                         | 
| |     |                      | 99.6  | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002            | 
| |     |                      | 99.7  | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002              | 
| |     |                      |       |                                                                                                                                                                                 | 
| | (b) | Reports on Form 8-K: |      
| |     |                      | None  |                                                                                                                                                                                 | 

26

# 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:        December 11, 2002 | By: /s/ Edward W. Wilhelm
|------------------------------ | -------------------------
|                               | Edward W. Wilhelm        
|                               | Senior Vice President and
|                               | Chief Financial Officer  
|                               | (Principal Financial and 
|                               | Accounting Officer)      

27

# CERTIFICATIONS

| |                                         |                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                   | 
| | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | I, Gregory P. Josefowicz, certify that: |                                                                                                                                                                                                                                                                                                                                                                                                         
| | 1)                                      | I have reviewed this quarterly report on Form 10-Q of Borders Group, Inc.;                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                  
| | 2)                                      | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
     material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
     misleading with respect to the period covered by this quarterly report;                                                                 |                                                                                                                                                                                                                                                                                                                  
| | 3)                                      | Based on my knowledge, the financial statements, and other financial information included in this quarterly report,
     fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
     and for, the periods presented in this quarterly report;                                                                                    |                                                                                                                                                                                                                                                                                                                  
| | 4)                                      | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                  
| |                                         | a)                                                                                                                                                                                                                                                                                                                                                                                                       | designed such disclosure controls and procedures to ensure that material information relating to the registrant,
         including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
         period in which this quarterly report is being prepared; | 
| |                                         | b)                                                                                                                                                                                                                                                                                                                                                                                                       | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
         the filing date of this quarterly report (the "Evaluation Date"); and                                                                                                            | 
| |                                         | c)                                                                                                                                                                                                                                                                                                                                                                                                       | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
         based on our evaluation as of the Evaluation Date;                                                                                                                                  | 
| | 5)                                      | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
     auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                  
| |                                         | a)                                                                                                                                                                                                                                                                                                                                                                                                       | all significant deficiencies in the design or operation of internal controls which could adversely affect the
         registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
         auditors any material weaknesses in internal controls; and  | 
| |                                         | b)                                                                                                                                                                                                                                                                                                                                                                                                       | any fraud, whether or not material, that involves management or other employees who have a significant role in the
         registrant's internal controls; and                                                                                                                                                   | 
| | 6)                                      | The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
     significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to
     the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
     weaknesses. |                                                                                                                                                                                                                                                                                                                  

| |                            |                                  | 
| | -------------------------- | -------------------------------- | 
| | Date:     December 9, 2002 | By:     /s/Gregory P. Josefowicz | 
| |                            | Gregory P. Josefowicz            | 
| |                            | Chairman, President and Chief    | 
| |                            | Executive Officer                | 

28

| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                   | 
| | ----------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | I, Edward W. Wilhelm, certify that: |                                                                                                                                                                                                                                                                                                                                                                                                         
| | 1)                                  | I have reviewed this quarterly report on Form 10-Q of Borders Group, Inc.;                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                  
| | 2)                                  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
     material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
     misleading with respect to the period covered by this quarterly report;                                                                 |                                                                                                                                                                                                                                                                                                                  
| | 3)                                  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report,
     fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
     and for, the periods presented in this quarterly report;                                                                                    |                                                                                                                                                                                                                                                                                                                  
| | 4)                                  | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                  
| |                                     | a)                                                                                                                                                                                                                                                                                                                                                                                                       | designed such disclosure controls and procedures to ensure that material information relating to the registrant,
         including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
         period in which this quarterly report is being prepared; | 
| |                                     | b)                                                                                                                                                                                                                                                                                                                                                                                                       | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
         the filing date of this quarterly report (the "Evaluation Date"); and                                                                                                            | 
| |                                     | c)                                                                                                                                                                                                                                                                                                                                                                                                       | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
         based on our evaluation as of the Evaluation Date;                                                                                                                                  | 
| | 5)                                  | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
     auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                  
| |                                     | a)                                                                                                                                                                                                                                                                                                                                                                                                       | all significant deficiencies in the design or operation of internal controls which could adversely affect the
         registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
         auditors any material weaknesses in internal controls; and  | 
| |                                     | b)                                                                                                                                                                                                                                                                                                                                                                                                       | any fraud, whether or not material, that involves management or other employees who have a significant role in the
         registrant's internal controls; and                                                                                                                                                   | 
| | 6)                                  | The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
     significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to
     the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
     weaknesses. |                                                                                                                                                                                                                                                                                                                  

| |                            |                               | 
| | -------------------------- | ----------------------------- | 
| | Date:     December 9, 2002 | By:     /s/ Edward W. Wilhelm | 
| |                            | Edward W. Wilhelm             | 
| |                            | Senior Vice President and     | 
| |                            | Chief Financial Officer       | 

29

## EXHIBIT INDEX

## DESCRIPTION OF EXHIBITS

| |     |                      |       |                                                                                                                                                                                 | 
| | --- | -------------------- | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |       |                                                                                                                                                                                
| |     |                      | 10.49 | Amendment No. 2 to the Credit Agreement dated as of August 12, 2002
among Borders Group Inc., certain of its subsidiaries and other Parties thereto.                            | 
| |     |                      | 10.50 | Amendment No. 1 to the Multicurrency Revolving Credit Agreement dated as of September 18, 2002
among Borders Group Inc., certain of its subsidiaries and other Parties thereto. | 
| |     |                      | 99.1  | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                                         | 
| |     |                      | 99.6  | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002            | 
| |     |                      | 99.7  | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002              | 
| |     |                      |       |                                                                                                                                                                                 | 
| | (b) | Reports on Form 8-K: |      
| |     |                      | None  |                                                                                                                                                                                 | 

30