SECURITIES
      AND EXCHANGE COMMISSION





Washington,
      D.C. 20549





FORM
      10 -
      Q


(Mark
      One)


[X]
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHANGE ACT OF 1934For
                the quarterly period ended July 23, 2005OR[
                ]
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIES
                EXCHANGE ACT OF 1934





For
      the
      transition period from ______ to _______.





Commission
      file number 1-13740





BORDERS
      GROUP, INC.


(Exact
      name of registrant as specified in its charter)





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





100
      Phoenix Drive, Ann Arbor, Michigan 48108


(Address
      of principal executive offices)


(zip
      code)





(734)
      477-1100


(Registrant's
      telephone number, including area code)





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


Yes X No
      _____





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


Yes X No
      _____





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


Yes _ No
      _ X ___





The
      number of shares of common stock outstanding at August 19, 2005 was
      70,250,153.














**BORDERS
      GROUP, INC.**





**INDEX**


Part
                I - Financial Information**Page**Item
                1. Financial Statements
            
            
            1Item
                2. Management's Discussion and Analysis ofFinancial
                Condition and Results ofOperations
            
            
            11Item
                3. Quantitative and Qualitative Disclosures aboutMarket
                Risk
            
            
            26Item
                4. Controls and Procedures
            
            
            26Part
                II - Other informationItem
                1. Legal Proceedings
            
            
            26Item
                2. Unregistered Sales of Equity Securities and Use of
            
            
            27ProceedsItem
                3. Defaults Upon Senior Securities
            
            
            N/AItem
                4. Submission of Matters to a vote of
            
            
            27SecurityholdersItem
                5. Other Information
            
            
            N/AItem
                6. Exhibits and Reports on Form 8-K
            
            
            28Signatures
            
            
            29





i


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(UNAUDITED)**





**13****Weeks
                Ended****(Restated)****July
                23,**
              **2005**
            
            **July
                25,**
              **2004**Sales
            
            $
            891.6
            
            $
            847.1Other
                revenue
            
            
            4.2
            
            
            6.3Total
                revenue
            
            
            895.8
            
            
            853.4Cost
                of merchandise sold, including occupancy costs
            
            
            669.1
            
            
            630.1Gross
                margin
            
            
            226.7
            
            
            223.3Selling,
                general and administrative expenses
            
            
            219.5
            
            
            207.1Pre-opening
                expense
            
            
            1.5
            
            
            1.0Asset
                impairments and other writedowns
            
            
            0.3
            
            
            0.2Operating
                income
            
            
            5.4
            
            
            15.0Interest
                expense
            
            
            3.3
            
            
            2.4Income
                before income tax
            
            
            2.1
            
            
            12.6Income
                tax provision
            
            
            0.8
            
            
            4.7Net
                income
            
            $
            1.3
            
            $
            7.9Earnings
                per common share data*Diluted:*Income
                per common share
            
            $
            0.02
            
            $
            0.10Weighted
                average common shares outstanding (in millions)
            
            
            72.3
            
            
            78.4*Basic:*Income
                per common share
            
            $
            0.02
            
            $
            0.10Weighted
                average common shares outstanding (in millions)
            
            
            70.7
            
            
            77.1Dividends
                declared per common share
            
            $
            0.09
            
            $
            0.08








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





1


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(UNAUDITED)**





**26****Weeks
                Ended****(Restated)****July
                23,**
              **2005**
            
            **July
                25,**
              **2004**Sales
            
            $
            1,738.8
            
            $
            1,677.9Other
                revenue
            
            
            10.0
            
            
            13.6Total
                revenue
            
            
            1,748.8
            
            
            1,691.5Cost
                of merchandise sold, including occupancy costs
            
            
            1,308.3
            
            
            1,257.9Gross
                margin
            
            
            440.5
            
            
            433.6Selling,
                general and administrative expenses
            
            
            438.0
            
            
            410.7Pre-opening
                expense
            
            
            2.7
            
            
            1.7Asset
                impairments and other writedowns
            
            
            0.6
            
            
            0.6Operating
                income (loss)
            
            
            (0.8
            )
            
            20.6Interest
                expense
            
            
            5.5
            
            
            4.3Income
                (loss) before income tax
            
            
            (6.3
            )
            
            16.3Income
                tax provision (benefit)
            
            
            (2.3
            )
            
            6.1Net
                income (loss)
            
            $
            (4.0
            )
            $
            10.2Earnings
                (loss) per common share data*Diluted:*Income
                (loss) per common share
            
            $
            (0.06
            )
            $
            0.13Weighted
                average common shares outstanding (in millions)
            
            
            71.9
            
            
            79.1*Basic:*Income
                (loss) per common share
            
            $
            (0.06
            )
            $
            0.13Weighted
                average common shares outstanding (in millions)
            
            
            71.9
            
            
            77.6Dividends
                declared per common share
            
            $
            0.18
            
            $
            0.16








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.


2


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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


**(UNAUDITED)**








**(Restated)********July
                23,**
              **2005**
            
            ******July
                25,**
              **2004**
            
            ******January
                25,**
              **2005****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            77.2
            
            $
            180.8
            
            $
            244.8Investments
            
            
            -
            
            
            -
            
            
            95.4Merchandise
                inventories
            
            
            1,346.6
            
            
            1,229.7
            
            
            1,306.9Accounts
                receivable and other current assets
            
            
            117.4
            
            
            110.5
            
            
            118.3Total
                current assets
            
            
            1,541.2
            
            
            1,521.0
            
            
            1,765.4Property
                and equipment, net of accumulated depreciation of$954.4,
                $858.5 and $912.2 at July 23, 2005, July 25,2004
                and January 23, 2005, respectively
            
            
            652.8
            
            
            622.0
            
            
            635.6Other
                assets
            
            
            85.3
            
            
            79.4
            
            
            84.8Deferred
                income taxes
            
            
            13.9
            
            
            29.2
            
            
            14.4Goodwill
            
            
            122.7
            
            
            132.6
            
            
            128.6Total
                assets
            
            $
            2,415.9
            
            $
            2,384.2
            
            $
            2,628.8**Liabilities,
                Minority Interest and Stockholders’ Equity**Current
                liabilities:Short-term
                borrowings and current portion of long-term debt
            
            $
            147.5
            
            $
            129.8
            
            $
            141.2Trade
                accounts payable
            
            
            612.1
            
            
            547.2
            
            
            615.1Accrued
                payroll and other liabilities
            
            
            255.7
            
            
            270.6
            
            
            306.4Taxes,
                including income taxes
            
            
            64.8
            
            
            57.0
            
            
            118.3Deferred
                income taxes
            
            
            15.0
            
            
            12.1
            
            
            15.0Total
                current liabilities
            
            
            1,095.1
            
            
            1,016.7
            
            
            1,196.0Long-term
                debt
            
            
            55.0
            
            
            56.1
            
            
            55.8Other
                long-term liabilities
            
            
            300.6
            
            
            274.8
            
            
            286.7Total
                liabilities
            
            
            1,450.7
            
            
            1,347.6
            
            
            1,538.5Minority
                interest
            
            
            1.3
            
            
            1.4
            
            
            1.4Total
                liabilities and minority interest
            
            
            1,452.0
            
            
            1,349.0
            
            
            1,539.9Stockholders'
                equity:Common
                stock; 200,000,000 shares authorized;70,171,671,
                76,195,396 and 73,875,627 shares issuedand
                outstanding at July 23, 2005, July 25, 2004 andJanuary
                23, 2005, respectively
            
            
            424.8
            
            
            586.0
            
            
            525.1Deferred
                compensation
            
            
            (0.6
            )
            
            (0.7
            )
            
            (0.5
            )Accumulated
                other comprehensive income
            
            
            17.6
            
            
            19.8
            
            
            25.3Retained
                earnings
            
            
            522.1
            
            
            430.1
            
            
            539.0Total
                stockholders' equity
            
            
            963.9
            
            
            1,035.2
            
            
            1,088.9Total
                liabilities, minority interest and stockholders' equity
            
            $
            2,415.9
            
            $
            2,384.2
            
            $
            2,628.8








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





3


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE 26 WEEKS ENDED JULY 23, 2005**


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


**(UNAUDITED)**








**Common
                Stock**
            
            **Deferred**
            
            **Accumulated**
              **Other**
              **Comprehensive**
            
            **Retained****Shares**
            
            **Amount**
            
            **Compensation**
            
            **Income**
            
            **Earnings**
            
            **Total**Balance
                at January 23, 2005
            
            
            73,875,627
            
            $
            525.1
            
            $
            (0.5
            )
            $
            25.3
            
            $
            539.0
            
            $
            1,088.9Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4.0
            )
            
            (4.0
            )Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            -
            
            
            (7.7
            )
            
            -
            
            
            (7.7
            )Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (11.7
            )Cash
                dividends declared ($0.18 per
              common
                share)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (12.9
            )
            
            (12.9
            )Issuance
                of common stock
            
            
            912,191
            
            
            14.3
            
            
            -
            
            
            -
            
            
            -
            
            
            14.3Repurchase
                and retirement ofcommon
                stock
            
            
            (4,616,147
            )
            
            (117.5
            )
            
            -
            
            
            -
            
            
            -
            
            
            (117.5
            )Change
                in deferredcompensation
            
            
            -
            
            
            -
            
            
            (0.1
            )
            
            -
            
            
            -
            
            
            (0.1
            )Tax
                benefit of equitycompensation
            
            
            -
            
            
            2.9
            
            
            -
            
            
            -
            
            
            -
            
            
            2.9Balance
                at July 23, 2005
            
            
            70,171,671
            
            $
            424.8
            
            $
            (0.6
            )
            $
            17.6
            
            $
            522.1
            
            $
            963.9








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.





4


**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(dollars
      in millions)**


**(UNAUDITED)**








**26
                Weeks Ended****(Restated)****July
                23,**
              **2005**
            
            **July
                25,**
              **2004**Cash
                provided by (used for):OperationsNet
                income (loss)
            
            $
            (4.0
            )
            $
            10.2Adjustments
                to reconcile net income (loss) to operating cash flows:Depreciation
            
            
            59.1
            
            
            53.0Gain
                on deconsolidation of variable interest entity
            
            
            -
            
            
            (2.9
            )Loss
                on disposal of assets
            
            
            2.4
            
            
            -Decrease
                in deferred income taxes
            
            
            -
            
            
            (3.9
            )Increase
                in other long-term assets
            
            
            (1.0
            )
            
            (9.2
            )Increase
                in other long-term liabilities
            
            
            10.3
            
            
            2.6Cash
                provided by (used for) current assets and current
                liabilities:(Increase)
                decrease in inventories
            
            
            (46.5
            )
            
            10.3Decrease
                in accounts receivable
            
            
            12.9
            
            
            16.7Increase
                in prepaid expenses
            
            
            (14.6
            )
            
            (25.6
            )Decrease
                in accounts payable
            
            
            (0.3
            )
            
            (51.9
            )Decrease
                in taxes payable
            
            
            (49.6
            )
            
            (61.6
            )Decrease
                in expenses payable and accrued liabilities
            
            
            (44.4
            )
            
            (14.7
            )Net
                cash used for operations
            
            
            (75.7
            )
            
            (77.0
            )InvestingCapital
                expenditures
            
            
            (85.2
            )
            
            (40.2
            )Proceeds
                from sale of investments
            
            
            95.4
            
            
            118.0Proceeds
                from sale-leaseback of assets
            
            
            -
            
            
            32.3Acquisition
            
            
            -
            
            
            (31.4
            )Net
                cash provided by investing
            
            
            10.2
            
            
            78.7FinancingNet
                repayment of long-term capital lease obligations
            
            
            -
            
            
            (0.4
            )Net
                funding from (repayment of) credit facility
            
            
            15.8
            
            
            (0.7
            )Issuance
                of common stock
            
            
            14.3
            
            
            24.3Payment
                of cash dividends
            
            
            (12.9
            )
            
            (12.3
            )Repurchase
                of common stock
            
            
            (117.5
            )
            
            (91.7
            )Net
                cash used for financing
            
            
            (100.3
            )
            
            (80.8
            )Effect
                of exchange rates on cash and equivalents
            
            
            (1.8
            )
            
            (0.9
            )Net
                decrease in cash and equivalents
            
            
            (167.6
            )
            
            (80.0
            )Cash
                and equivalents at beginning of year
            
            
            244.8
            
            
            260.8Cash
                and equivalents at end of period
            
            $
            77.2
            
            $
            180.8








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








5


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements of Borders
      Group, Inc. (“the Company”) have been prepared in accordance with Rule 10-01 of
      Regulation S-X and do not include all the information and notes required by
      accounting principles generally accepted in the United States for complete
      financial statements. All adjustments, consisting only of normal recurring
      adjustments, have been made which, in the opinion of management, are necessary
      for a fair presentation of the results of the interim periods. The results
      of
      operations for such interim periods are not necessarily indicative of results
      of
      operations for a full year. The unaudited condensed consolidated financial
      statements should be read in conjunction with the Company's consolidated
      financial statements and notes thereto, included in its Annual Report on Form
      10-K for the fiscal year ended January 23, 2005.





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





At
      July
      23, 2005, the Company operated 511 superstores under the Borders name, including
      464 in the United States, 30 in the United Kingdom, 11 in Australia, three
      in
      Puerto Rico, two in New Zealand and one in Singapore. The Company also operated
      704 mall-based and other bookstores, including stores operated under the
      Waldenbooks, Borders Express and Borders Outlet names, as well as
      Borders-branded airport stores, and 33 bookstores under the Books etc. name
      in
      the United Kingdom. In addition, the Company owned and operated United
      Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and
      retailer of stationery, cards and gifts, with 80 locations, including 33 located
      inside Borders International superstores, at July 23, 2005.





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





In
      light
      of announcements made by a number of public companies regarding lease accounting
      and a SEC clarification on the subject, the Company reevaluated its lease
      accounting practices near the end of 2004. As a result, the Company corrected
      its computation of straight-line rent expense, depreciation of leasehold
      improvements and the classification of landlord allowances related to leasehold
      improvements (the “Restatement”), as further discussed in the Company’s most
      recent Annual Report on Form 10-K. For the quarter ended July 25, 2004, the
      Restatement reduced net income by $0.6, or $0.01 per share, and for
      the
      six months ended July 25, 2004 ,
      the
      Restatement reduced net income by $1.3, or $0.02 per share, increased total
      assets by $119.8 and decreased cash used for operations by $4.0.





**NOTE
      3 - COMMITMENTS AND CONTINGENCIES**





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


6


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





Certain
      states and private litigants have sought to impose sales or other tax collection
      efforts on out-of-jurisdiction companies that engage in e-commerce. On May
      31,
      2005, an appellate court in California upheld a lower court ruling that the
      Company was not entitled to recover taxes that it had previously paid on certain
      Borders.com sales in California prior to implementation of the Company’s Mirror
      Site agreement with Amazon. The Company did not appeal this decision. Also,
      the
      Company and Amazon have been named as defendants in actions filed by a private
      litigant on behalf of the states of Nevada and Illinois under the applicable
      state’s False Claims Act relating to the failure to collect use taxes on
      Internet sales in Nevada and Illinois for periods both before and after the
      implementation of the Mirror Site Agreement. The Complaints seek judgments,
      jointly and severally, against the defendants for, among other things,
      injunctive relief, treble the amount of damages suffered by the states of Nevada
      and Illinois as a result of the alleged violations of the defendants, penalties,
      costs and expenses, including legal fees. A similar action previously filed
      against the Company in Tennessee has been dismissed and the appeal period has
      expired. Various motions to dismiss the Nevada and Illinois actions have been
      made by the Company and other retailers and by the respective attorney generals
      of those states. Certain of these motions have been denied and others remain
      pending.





Although
      an adverse resolution of claims relating to the failure of the Company or Amazon
      to collect sales or other taxes relating to Internet sales could have a material
      effect on the results of the operations of the Company for the applicable period
      or periods, the Company does not believe that any such claims will have a
      material adverse effect on its liquidity or financial position.





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





**NOTE
      4 - FINANCING**





*Credit
      Facility:* The
      Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
      which was amended in July 2004 and will expire in July 2009. The Credit
      Agreement provides for borrowings of up to $500.0 (which may be increased to
      $700.0 under certain circumstances) secured by eligible inventory and accounts
      receivable and related assets. Borrowings under the Credit Agreement are limited
      to a specified percentage of eligible inventories and accounts receivable and
      bear interest at a variable base rate plus an increment or LIBOR plus an
      increment at the Company’s option. The Credit Agreement (i) includes a fixed
      charge coverage ratio requirement of 1.1 to 1 that is applicable only if
      outstanding borrowings under the facility exceed 90% of permitted borrowings
      thereunder, (ii) contains covenants that limit, among other things, the
      Company’s ability to incur indebtedness, grant liens, make investments,
      consolidate or merge or dispose of assets, (iii) prohibits dividend payments
      and
      share repurchases that would result in borrowings under the facility exceeding
      90% of permitted borrowings thereunder, and (iv) contains default provisions
      that are typical for this type of financing, including a cross default provision
      relating to other indebtedness of more than $25.0. The Company had borrowings
      outstanding under the Credit Agreement (or a prior agreement) of $138.6 at
      July
      23, 2005, $122.0 at July 25, 2004 and $131.7 at January 23, 2005.





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





*Lease
      Financing Facilities:* The
      Company had two lease financing facilities (collectively, the “Lease Financing
      Facilities”) to finance new stores and other property owned by unaffiliated
      entities and leased to the Company or its subsidiaries. In July 2004, the
      Company repaid all amounts outstanding under the Lease Financing Facilities
      (totaling $13.8) on behalf of the two borrowing variable interest entities
      (“VIEs”), both of which had been previously consolidated. The Company recorded
      this debt repayment as a prepayment of a portion of the rent expense for
      occupancy through


7


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





2024,
      and
      has classified the current portion as a component of “Accounts receivable and
      other current assets,” and the non-current portion as a component of “Other
      assets” on the consolidated balance sheets. As a result of the repayment of
      borrowings under the Lease Financing Facilities, the Company deconsolidated
      the
      two borrowing VIEs in July 2004. Also, in conjunction with this transaction,
      the
      Lease Financing Facilities were terminated.





*Consolidated
      VIEs:* At July
      23, 2005, the Company is the primary beneficiary of two VIEs (unrelated to
      the
      two VIEs previously discussed), due to the Company’s guarantee of the debt of
      these entities. As a result, the Company consolidates these VIEs and has
      recorded property and equipment, net of accumulated depreciation, of
      $5.3,
      long-term debt (including current portion) of $5.6 and minority interest of
      $0.3
      at July 23, 2005 .
      The
      Company leased two store locations from these VIEs at July 23,
      2005.





As
      of
      July 23, 2005 the Company was in compliance with its debt
      covenants.





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





The
      Company accounts for equity-based compensation under the guidance of APB No.
      25,
“Accounting for Stock Issued to Employees” (“APB No. 25”). As permitted, the
      Company has adopted the disclosure-only option of Statement of Financial
      Accounting Standards No. 123, "Accounting for Stock Based Compensation" (“FAS
      123”). The following table illustrates the effect on net income and earnings per
      share if the Company had applied the fair value recognition provisions of FAS
      123 to stock-based employee compensation:





**13
                Weeks Ended**
            
            **26
                Weeks Ended****(Restated)**
            
            
            
            **(Restated)****July
                23,****2005**
            
            **July
                25,****2004**
            
            **July
                23,****2005**
            
            **July
                25,****2004**Net
                income (loss), as reported
            
            $
            1.3
            
            $
            7.9
            
            $
            (4.0
            )
            $
            10.2Add:
                Stock-based employee expense included in reported net income, net
                of
                related tax effects
            
            
            -
            
            
            -
            
            
            0.1
            
            
            0.1Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value method for all awards, net of tax
            
            
            1.5
            
            
            1.2
            
            
            2.4
            
            
            2.5Pro
                forma net income (loss)
            
            $
            (0.2
            )
            $
            6.7
            
            $
            (6.3
            )
            $
            7.8Earnings
                (loss) per share:Basic
                -- as reported
            
            $
            0.02
            
            $
            0.10
            
            $
            (0.06
            )
            $
            0.13Basic
                -- pro forma
            
            $
            -
            
            $
            0.09
            
            $
            (0.09
            )
            $
            0.10Diluted
                -- as reported
            
            $
            0.02
            
            $
            0.10
            
            $
            (0.06
            )
            $
            0.13Diluted
                -- pro forma
            
            $
            -
            
            $
            0.09
            
            $
            (0.09
            )
            $
            0.10





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payment” (“FAS 123(R)”), which is a revision of FAS 123. FAS 123(R) supersedes
      APB No. 25, amends FAS No. 95, “Statement of Cash Flows,” and requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair values. The Company
      will adopt FAS 123 (R) in the first quarter of 2006 using the
      modified-prospective method in which compensation cost is recognized beginning
      with the adoption date based on (a) the requirements of FAS 123(R) for all
      share-based payments granted after the effective date and (b) based on the
      requirements of Statement 123 for all awards granted to employees prior to
      the
      effective date of Statement 123(R) that remain unvested on the effective date.
      As of July 23, 2005, there were approximately 2.5 million stock option awards
      granted to employees that remain unvested. Based on the adoption of FAS 123(R)
      in the first quarter of 2006, the Company estimates the impact to not exceed
      an
      after-tax charge of approximately $0.6. FAS 123(R) also requires the benefits
      of
      tax deductions in excess of recognized compensation cost to be reported as
      a
      financing cash flow, rather than as an operating cash flow as required under
      current literature.


8


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





This
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in periods after adoption. While the Company cannot estimate what those
      amounts will be in the future (because they depend on, among other things,
      when
      employees exercise stock options), the amount of operating cash flows recognized
      in prior periods for such excess tax deductions were $2.9 and $7.1 for the
      six
      months ended July 23, 2005 and July 25, 2004, respectively.





**NOTE
      6- SEGMENT INFORMATION**





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





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





**13
                Weeks Ended**
            
            **26
                Weeks Ended****(Restated)**
            
            
            
            **(Restated)********July
                23,**
              **2005**
            
            ******July
                25,**
              **2004**
            
            ******July
                23,**
              **2005**
            
            ******July
                25,**
              **2004**SalesBorders
            
            $
            618.5
            
            $
            592.8
            
            $
            1,197.9
            
            $
            1,170.1Waldenbooks
            
            
            151.0
            
            
            150.0
            
            
            294.1
            
            
            300.8International
            
            
            122.1
            
            
            104.3
            
            
            246.8
            
            
            207.0Total
                sales
            
            $
            891.6
            
            $
            847.1
            
            $
            1,738.8
            
            $
            1,677.9Net
                income (loss)Borders
            
            $
            14.7
            
            $
            15.7
            
            $
            22.7
            
            $
            25.8Waldenbooks
            
            
            0.5
            
            
            1.5
            
            
            1.0
            
            
            4.4International
            
            
            (5.2
            )
            
            (2.8
            )
            
            (11.0
            )
            
            (6.3
            )Corporate
            
            
            (8.7
            )
            
            (6.5
            )
            
            (16.7
            )
            
            (13.7
            )Total
                net income (loss)
            
            $
            1.3
            
            $
            7.9
            
            $
            (4.0
            )
            $
            10.2Total
                assetsBorders
            
            
            
            
            
            
            
            $
            1,507.2
            
            $
            1,468.3Waldenbooks
            
            
            
            
            
            
            
            
            338.8
            
            
            314.7International
            
            
            
            
            
            
            
            
            443.0
            
            
            395.9Corporate
            
            
            
            
            
            
            
            
            126.9
            
            
            205.3Total
                assets
            
            
            
            
            
            
            
            $
            2,415.9
            
            $
            2,384.2





Total
      assets for the Corporate segment include certain corporate headquarters property
      and equipment, net of accumulated depreciation, of $79.3 and $66.5 at July
      23,
      2005 and July 25, 2004, respectively, which have not been allocated to the
      other
      segments; however, depreciation expense associated with such assets has been
      allocated to the other segments as follows:





**13
                Weeks Ended**
            
            **26
                Weeks Ended****(Restated)**
            
            
            
            **(Restated)********July
                23,**
              **2005**
            
            ******July
                25,**
              **2004**
            
            ******July
                23,**
              **2005**
            
            ******July
                25,**
              **2004**Borders
            
            $
            2.5
            
            $
            2.5
            
            $
            5.0
            
            $
            5.0Waldenbooks
            
            
            1.2
            
            
            1.1
            
            
            2.3
            
            
            2.3International
            
            
            0.1
            
            
            0.1
            
            
            0.1
            
            
            0.1Total
            
            $
            3.8
            
            $
            3.7
            
            $
            7.4
            
            $
            7.4


9


**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





**NOTE
      7 - SALE-LEASEBACK TRANSACTION**





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





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





**NOTE
      8 — ACQUISITION OF PAPERCHASE PRODUCTS, LTD.**





In
      July
      2004, the Company invested cash of $24.1, including debt repayment of $4.1,
      in
      connection with an increase in its 15% equity stake in Paperchase Products,
      Ltd.
      (“Paperchase”), a leading stationery retailer in the United Kingdom, to 97%,
      which was allocated primarily to fixed assets, inventory and $22.4 of goodwill.
      The Company also recorded minority interest of $1.0. The acquisition has been
      accounted for as a purchase in the Company’s International segment. The
      acquisition was not material to the consolidated statements of operations,
      the
      consolidated balance sheets, or the consolidated statements of cash flows of
      the
      Company.


10


**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





**General**





Borders
      Group, Inc., through its subsidiaries, Borders, Inc. (“Borders”), Walden Book
      Company, Inc. (“Waldenbooks”), Borders (UK) Limited, Borders Australia Pty
      Limited and others (individually and collectively, "the Company"), is the second
      largest operator of book, music and movie superstores and the largest operator
      of mall-based bookstores in the world based upon both sales and number of
      stores. At July 23, 2005, the Company operated 511 superstores under the Borders
      name, including 464 in the United States, 30 in the United Kingdom, 11 in
      Australia, three in Puerto Rico, two in New Zealand and one in Singapore. The
      Company also operated 704 mall-based and other bookstores, including stores
      operated under the Waldenbooks, Borders Express and Borders Outlet names, as
      well as Borders-branded airport stores, and 33 bookstores under the Books etc.
      name in the United Kingdom. In addition, the Company owned and operated United
      Kingdom-based Paperchase Products Limited (“Paperchase”), a designer and
      retailer of stationery, cards and gifts, with 80 locations, including 33 located
      inside Borders International superstores, at July 23, 2005.





The
      Company’s business strategy is to continue its growth and increase its
      profitability through (i) expanding and refining its core domestic superstore
      business, (ii) driving International growth by expanding established markets
      and
      leveraging infrastructure investments, (iii) leveraging strategic alliances
      and
      in-store technologies which enhance the customer experience, and (iv) maximizing
      cash flow and profitability at Waldenbooks through a combination of selective
      growth and profit initiatives. Specifically, the Company has been engaged in
      an
      aggressive expansion and remodel program, pursuant to which it opened 19
      domestic Borders superstores and completed major remodels of 33 existing
      domestic superstores in 2004. In 2005, the Company expects to open 18 to 20
      domestic superstores and complete major remodels of approximately 100 existing
      domestic superstores. New stores opened in 2005, and the majority of stores
      remodeled in 2005, will feature cafe offerings by Seattle’s Best Coffee and
      gifts and stationery merchandise by Paperchase. The Company also opened five
      International superstores in 2004. International store growth over the next
      several years will focus on existing markets, primarily in the United Kingdom
      and Australia, with approximately 14 International store openings planned in
      2005, including the first Borders franchise store, which opened in Malaysia
      in
      April 2005. The International segment achieved full year profitability in 2004,
      and continued profit ability is expected going forward. The Waldenbooks segment
      has experienced negative comparable store sales percentages for the past several
      years, primarily due to the overall decrease in mall traffic and the impact
      of
      superstore openings. The Company is continuing to implement its plan for the
      optimization of the Waldenbooks’ store base in order to improve sales, net
      income and free cash flow. This plan could result in further store closing
      costs
      or asset impairments over the next few years, but at a lesser anticipated rate
      going forward. In addition, Waldenbooks manages the Company’s seasonal
      businesses and small format stores, including those in airports and outlet
      malls. The Company plans to open approximately 15 new stores in airports and
      outlet malls in 2005. The Company also plans to selectively update and re-brand
      approximately 100 Waldenbooks stores as Borders Express, an extension of a
      market test that began in 2004 with similar conversions of 37 existing
      Waldenbooks stores. The Company’s objectives with respect to these initiatives
      are to continue to grow consolidated sales and earnings over the long term
      and
      earn an acceptable return on its investment.





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





The
      Company, through its subsidiaries, has agreements with Amazon.com, Inc.
      (“Amazon”) to operate Web sites utilizing the Borders.com, Waldenbooks.com,
      Borders.co.uk and Booksetc.co.uk URLs (the “Mirror Sites”). Under these
      agreements, Amazon is the merchant of record for all sales made through the
      Mirror Sites, and determines all prices and other terms and conditions
      applicable to such sales. Amazon is responsible for the fulfillment of all
      products sold through the Mirror Sites and retains all payments from customers.
      The Company receives referral fees for products purchased through the Mirror
      Sites. The agreements contain mutual indemnification provisions, including
      provisions that define between the parties the responsibilities with respect
      to
      any liabilities for sales, use and similar taxes, including penalties and
      interest, associated with products sold on the Mirror Sites. Currently, taxes
      are not collected with respect to products sold on the Mirror Sites except
      in
      certain states.





In
      addition, Borders has an agreement with Amazon to allow customers ordering
      certain book, music and movie products through certain of Amazon’s Web sites to
      purchase and pick up the merchandise at Borders stores in the United States
      (“Express In-Store Pick Up”). Under this agreement, the Company is the merchant
      of record for all sales made through this service, and determines all prices
      and
      other terms and conditions applicable to such sales. The Company fulfills all
      products sold through Express In-Store Pick Up. In addition, the Company assumes
      all risk, cost and responsibility related to the sale and fulfillment of all
      products sold. The Company


11


recognizes
      revenue upon customers’ pick up of the merchandise at the store. The Company
      also pays referral fees to Amazon pursuant to this agreement.





On
      December 10, 2004, the Board of Directors of the Company approved a change
      in
      the Company’s fiscal year-end. Effective with respect to fiscal 2005, the
      Company elected to change its fiscal year to a 52/53-week fiscal year ending
      on
      the Saturday closest to the last day of January. The Company implemented this
      change in order to conform to industry standards and for certain administrative
      purposes. As a result of the change, the Company’s 2005 fiscal year will consist
      of 53 weeks, and will end on January 28, 2006. The Company’s fiscal years had
      ended on the Sunday immediately preceding the last Wednesday in January. Fiscal
      2004 consisted of 52 weeks and ended January 23, 2005. The Company's second
      quarters of 2005 and 2004 consisted of the 13 weeks ended July 23, 2005 and
      July
      25, 2004, respectively.





**Restatement
      of Prior Year Financial Statements**





In
      light
      of announcements made by a number of public companies regarding lease accounting
      and a SEC clarification on the subject, the Company reevaluated its lease
      accounting practices near the end of 2004. As a result, the Company corrected
      its computation of straight-line rent expense, depreciation of leasehold
      improvements and the classification of landlord allowances related to leasehold
      improvements (the “Restatement”), as further discussed in the Company’s most
      recent Annual Report on Form 10-K and in “Note 2 - Restatement of Prior Period
      Financial Statements”. For the quarter ended July 25, 2004, the Restatement
      reduced net income by $0.6 million, or $0.01 per share, and for the six months
      ended July 25, 2004, the Restatement reduced net income by $1.3 million, or
      $0.02 per share, increased total assets by $119.8 million and decreased cash
      used for operations by $4.0 million.





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





**Results
      of Operations**





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





**13
                  Weeks Ended**
              
              **26
                  Weeks Ended****July
                  23, 2005**
              
              **July
                  25, 2004**
              
              **July
                  23, 2005**
              
              **July
                  25, 2004**Sales
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Other
                  revenue
              
              
              0.5
              
              
              0.7
              
              
              0.6
              
              
              0.8Total
                  revenue
              
              
              100.5
              
              
              100.7
              
              
              100.6
              
              
              100.8Cost
                  of merchandise sold (includes occupancy)
              
              
              75.0
              
              
              74.4
              
              
              75.2
              
              
              75.0Gross
                  margin
              
              
              25.5
              
              
              26.3
              
              
              25.4
              
              
              25.8Selling,
                  general and administrative expenses
              
              
              24.7
              
              
              24.4
              
              
              25.2
              
              
              24.5Pre-opening
                  expense
              
              
              0.2
              
              
              0.1
              
              
              0.2
              
              
              0.1Asset
                  impairments and other writedowns
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  income (loss)
              
              
              0.6
              
              
              1.8
              
              
              -
              
              
              1.2Interest
                  expense
              
              
              0.4
              
              
              0.3
              
              
              0.3
              
              
              0.2Income
                  (loss) before income tax
              
              
              0.2
              
              
              1.5
              
              
              (0.3
              )
              
              1.0Income
                  tax provision (benefit)
              
              
              0.1
              
              
              0.6
              
              
              (0.1
              )
              
              0.4Net
                  income (loss)
              
              
              0.1
              %
              
              0.9
              %
              
              (0.2
              )%
              
              0.6
              %





**Consolidated
      Results -- Comparison of the 13 weeks ended July 23, 2005 to the 13 weeks ended
      July 25, 2004**





***Sales***





Consolidated
      sales increased $44.5 million, or 5.3%, to $891.6 million in 2005 from $847.1
      million in 2004. This resulted primarily from increased sales in the Borders,
      Waldenbooks and International segments.





Comparable
      store sales for all Borders superstores increased 1.8% in the 13 weeks ended
      July 23, 2005. Comparable store sales measures for all Borders superstores,
      which are based upon a 52-week year, include all stores open more than one
      year
      except those not offering music (of which there are 10, representing
      approximately 2% of total sales). New stores are included in the calculation
      of
      comparable store sales measures upon the 13th month of operation. The comparable
      store sales increase for 2005 was due primarily to


12


the
      book
      category, driven by release of the sixth title in the Harry Potter series,
      and
      strength in adult fiction, science fiction and fantasy, romance, and business
      and money management titles. In addition, sales of movies increased on a
      comparable store basis, primarily as the result of increased sales of digital
      videodiscs (DVDs). Partially offsetting the increase in comparable store sales
      of books and movies were comparable store sales decreases in the music category.
      Also negatively impacting comparable store sales was the slow sales environment
      in the U.K. The impact of price changes on comparable store sales was not
      significant.





Waldenbooks’
      comparable store sales increased 1.9% in the 13 weeks ended July 23, 2005.
      Waldenbooks’ comparable store sales measures, which are based upon a 52-week
      year, include all stores open more than one year. New stores are included in
      the
      calculation of comparable store sales measures upon the 13th month of operation.
      The Company’s seasonal mall-based kiosks are also included in Waldenbooks’
      comparable store sales measures. The comparable store sales increase for 2005
      was primarily driven by release of the sixth title in the Harry Potter series,
      as well and comparable store sales increases resulting from the re-branding
      of
      select Waldenbooks stores to Borders Express. The impact of price changes on
      comparable store sales was not significant.





***Other
      revenue***





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





Until
      October 2004, Waldenbooks sold memberships in its Preferred Reader Program,
      which offered members discounts on purchases and other benefits. Waldenbooks
      has
      phased out its Preferred Reader Program and is replacing it with other
      promotional programs in order to maximize long-term sales and earnings. The
      Company recognizes membership income on a straight-line basis over the 12-month
      term of the Preferred Reader membership, and categorizes the income as "Other
      revenue" in the Company's consolidated statements of operations. Discounts
      on
      purchases are netted against "Sales" in the Company's consolidated statements
      of
      operations.





Other
      revenue has decreased $2.1 million, or 33.3%, to $4.2 million in 2005 from
      $6.3
      million in 2004. The decrease is mainly due to the Waldenbooks segment, due
      primarily to the change in the Preferred Reader Program, partially offset by
      an
      increase in the Borders and International segments, due primarily to wholesale
      revenue earned through the franchise agreement with Berjaya in
      2005.





***Gross
      margin***





Consolidated
      gross margin increased $3.4 million, or 1.5%, to $226.7 million in 2005 from
      $223.3 million in 2004. As a percentage of sales, consolidated gross margin
      decreased 0.8%, to 25.5% in 2005 from 26.3% in 2004. The decrease is mainly
      due
      to the Borders and Waldenbooks segments’ gross margin as a percentage of sales
      decreasing, partially offset by an increase in the International segment. The
      decrease in the Borders segment was due to higher product costs as a percentage
      of sales in 2005, primarily due to increased bestseller discounts driven by
      the
      release of the sixth book in the Harry Potter series, as well as increased
      distribution costs, partially offset by a decrease in occupancy as a percentage
      of sales. The decrease in the Waldenbooks segment was primarily due to decreased
      other revenue as a percentage of sales due to the change in the Preferred Reader
      Program, as previously discussed, as well as higher product costs as a
      percentage of sales in 2005, primarily due to increased bestseller discounts
      driven by the release of the sixth book in the Harry Potter series, partially
      offset by decreased occupancy and distribution costs as a percentage of sales.
      The increase in the International segment resulted from a decrease in
      merchandise costs, primarily due to the higher product margins generated by
      Paperchase and decreased product markdowns, partially offset by increased
      occupancy, freight and distribution costs as a percentage of sales.





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


13


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





Consolidated
      selling, general and administrative expenses (SG&A) increased $12.4 million,
      or 6.0%, to $219.5 million in 2005 from $207.1 million in 2004. As a percentage
      of sales, SG&A increased 0.3%, to 24.7% in 2005 from 24.4% in 2004. This
      increase primarily resulted from increased SG&A expenses as a percentage of
      sales for the International segment, partially offset by decreases in the
      Borders and Waldenbooks segments. International SG&A expenses as percentage
      of sales increased primarily as a result of increased corporate and store
      payroll and operating expenses, all of which are due to the acquisition of
      Paperchase, partially offset by decreased advertising expense. Borders SG&A
      expenses as a percentage of sales decreased primarily due to decreased
      advertising and store payroll expenses, partially offset by increased corporate
      payroll and store operating expenses, due to the de-leveraging of fixed costs
      resulting from cost increases to support strategic initiatives. The Waldenbooks
      decrease was primarily due to decreased advertising and store payroll expenses,
      partially offset by increased corporate payroll expenses, also due to the
      de-leveraging of fixed costs resulting from cost increases to support strategic
      initiatives.





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





***Interest
      expense***





Consolidated
      interest expense increased $0.9 million, or 37.5%, to $3.3 million in 2005
      from
      $2.4 million in 2004. This was primarily a result of increased borrowings to
      fund corporate stock repurchases and capital expenditures in 2005.





***Taxes***





The
      Company's effective tax rate was 37.0% in 2005 and 2004.





***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      0.1% in 2005 from 0.9% in 2004, and net income dollars decreased to $1.3 million
      in 2005 from $7.9 million in 2004.





**Consolidated
      Results -- Comparison of the 26 weeks ended July 23, 2005 to the 26 weeks ended
      July 25, 2004**





***Sales***





Consolidated
      sales increased increased $60.9 million, or 3.6%, to $1,738.8 million in 2005
      from $1,677.9 million in 2004. This resulted primarily from increased sales
      in
      the Borders and International segments, partially offset by a decrease in the
      Waldenbooks segment.





Comparable
      store sales for all Borders superstores increased 0.6% in the 26 weeks ended
      July 23, 2005. Comparable store sales measures for all Borders superstores,
      which are based upon a 52-week year, include all stores open more than one
      year
      except those not offering music (of which there are 10, representing
      approximately 2% of total sales). New stores are included in the calculation
      of
      comparable store sales measures upon the 13th month of operation. The comparable
      store sales increase for 2005 was due primarily to the book category, driven
      by
      release of the sixth title in the Harry Potter series, along with strong book
      sales, especially in adult fiction, romance and business and money management
      titles, as well as increased sales of movies on a comparable store basis,
      primarily as the result of increased sales of digital videodiscs (DVDs).
      Partially offsetting the increase in comparable store sales of books and movies
      were comparable store sales decreases in the music category. The impact of
      price
      changes on comparable store sales was not significant.





Waldenbooks’
      comparable store sales decreased 0.6% in the 26 weeks ended July 25, 2004.
      Waldenbooks’ comparable store sales measures, which are based upon a 52-week
      year, include all stores open more than one year. New stores are included in
      the
      calculation of comparable store sales measures upon the 13th month of operation.
      The Company’s seasonal mall-based kiosks are also included in Waldenbooks’
      comparable store sales measures. The comparable store sales decrease for 2004
      was primarily due to the sluggish mall environment. The impact of price changes
      on comparable store sales was not significant.





14


***Other
      revenue***





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





Until
      October 2004, Waldenbooks sold memberships in its Preferred Reader Program,
      which offered members discounts on purchases and other benefits. Waldenbooks
      has
      phased out its Preferred Reader Program and is replacing it with other
      promotional programs in order to maximize long-term sales and earnings. The
      Company recognizes membership income on a straight-line basis over the 12-month
      term of the Preferred Reader membership, and categorizes the income as "Other
      revenue" in the Company's consolidated statements of operations. Discounts
      on
      purchases are netted against "Sales" in the Company's consolidated statements
      of
      operations.





Other
      revenue has decreased $3.6 million, or 26.5%, to $10.0 million in 2005 from
      $13.6 million in 2004. The decrease is mainly due to the Waldenbooks segment,
      due primarily to the change in the Preferred Reader Program, partially offset
      by
      an increase in the Borders and International segments, due primarily to
      wholesale revenue earned through the franchise agreement with Berjaya in
      2005.





***Gross
      margin***





Consolidated
      gross margin increased $6.9 million, or 1.6%, to $440.5 million in 2005 from
      $433.6 million in 2004. As a percentage of sales, consolidated gross margin
      decreased 0.4%, to 25.4 % in 2005 from 25.8% in 2004. The decrease is mainly
      due
      to the Borders and Waldenbooks segments’ gross margin as a percentage of sales
      decreasing, partially offset by an increase in the International segment. The
      decrease in the Borders segment was due to higher product costs as a percentage
      of sales in 2005, primarily due to increased bestseller discounts driven by
      the
      release of the sixth book in the Harry Potter series. The decrease in the
      Waldenbooks segment was primarily due to decreased other revenue as a percentage
      of sales due to the change in the Preferred Reader Program, as previously
      discussed, partially offset by decreased occupancy and distribution costs as
      a
      percentage of sales. The increase in the International segment resulted from
      a
      decrease in merchandise costs, primarily due to the higher product margins
      generated by Paperchase and decreased product markdowns, partially offset by
      increased occupancy and distribution costs as a percentage of
      sales.





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





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





Consolidated
      selling, general and administrative expenses (SG&A) increased $27.3 million,
      or 6.6%, to $438.0 million in 2005 from $410.7 million in 2004. As a percentage
      of sales, SG&A increased 0.7%, to 25.2% in 2005 from 24.5 % in 2004. This
      increase primarily resulted from increases in SG&A expenses as a percentage
      of sales for the Borders, Waldenbooks and International segments. Borders
      SG&A expenses as percentage of sales increased primarily due to increased
      corporate payroll expenses and store payroll and operating expenses, all of
      which are due to the de-leveraging of fixed costs resulting from cost increases
      to support strategic initiatives, partially offset by decreased advertising
      expense and decreased store payroll expenses. The Waldenbooks increase was
      primarily due to increased corporate payroll and advertising expenses as a
      percentage of sales, partially offset by decreased store operating expenses.
      The
      International increase in SG&A expenses as a percentage of sales was
      primarily the result of increased corporate and store payroll and operating
      expenses, all of which are due to the acquisition of Paperchase, partially
      offset by decreased advertising expense.





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





15


***Interest
      expense***





Consolidated
      interest expense increased $1.2 million, or 27.9%, to $5.5 million in 2005
      from
      $4.3 million in 2004. This was primarily a result of increased borrowings to
      fund corporate stock repurchases and capital expenditures in 2005.





***Taxes***





The
      Company's effective tax rate was 37.0% in 2005 and 2004.





***Net
      income (loss)***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to a
      net loss of 0.2% in 2005 from net income of 0.6% in 2004, and net income dollars
      decreased to a net loss of $4.0 million in 2005 from net income of $10.2 million
      in 2004.





**Segment
      Results**





The
      Company is organized based upon the following operating segments: domestic
      Borders stores, Waldenbooks Specialty Retail stores (“Waldenbooks”),
      International stores (including Borders, Books etc. and Paperchase stores),
      and
      Corporate (consisting of the unallocated portion of interest expense, certain
      corporate governance costs, and corporate incentive costs). See “Note 6 -
      Segment Information” in the notes to consolidated financial statements for
      further information relating to these segments.





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





**Borders**





**13
                Weeks Ended**
            
            **26
                Weeks Ended******(dollar
                amounts in millions)
            
            **July
                23, 2005**
            
            **July
                25, 2004**
            
            **July
                23, 2005**
            
            **July
                23, 2005**Sales
            
            $
            618.5
            
            $
            592.8
            
            $
            1,197.9
            
            $
            1,170.1Other
                revenue
            
            $
            1.4
            
            $
            0.6
            
            $
            3.8
            
            $
            1.3Net
                income
            
            $
            14.7
            
            $
            15.7
            
            $
            22.7
            
            $
            25.8Net
                income as % of sales
            
            
            2.4
            %
            
            2.6
            %
            
            1.9
            %
            
            2.2
            %Depreciation
                expense
            
            $
            21.3
            
            $
            19.0
            
            $
            43.0
            
            $
            38.7Interest
                income
            
            $
            2.8
            
            $
            1.1
            
            $
            5.7
            
            $
            2.9Store
                openings
            
            
            4
            
            
            2
            
            
            4
            
            
            6Store
                closings
            
            
            1
            
            
            -
            
            
            2
            
            
            1Store
                count
            
            
            464
            
            
            450
            
            
            464
            
            
            450





**Borders
      - Comparison of the 13 weeks ended July 23, 2005 to the 13 weeks ended July
      25,
      2004**





***Sales***





Borders'
      sales increased $25.7 million, or 4.3%, to $618.5 million in 2005 from $592.8
      million in 2004. This increase was comprised of non-comparable sales primarily
      associated with 2005 and 2004 store openings of $14.0 million and comparable
      store sales increases of $11.7 million.





***Other
      revenue***





Other
      revenue increased $0.8 million, or 133.3%, to $1.4 million in 2005 from $0.6
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005, as previously
      discussed.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.0%, to 27.5% in 2005 from 28.5%
      in
      2004, primarily due to increases as a percentage of sales of product costs
      of
      1.1%. This resulted from increased bestseller discounts in 2005, driven by
      the
      release of the


16


sixth
      book in the Harry Potter series. Also contributing to the decrease in gross
      margin percentage were increased distribution costs of 0.2%, partially offset
      by
      lower store occupancy and other costs of 0.3% as a percentage of sales.





Gross
      margin dollars increased $1.2 million, or 0.7%, to $169.9 million in 2005 from
      $168.7 million in 2004, which was primarily due to increased sales, partially
      offset by the decrease in gross margin as a percentage of sales.





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





SG&A
      as a percentage of sales decreased 0.3%, to 23.9% in 2005 from 24.2% in 2004,
      primarily due to decreased advertising expense of 0.7% as a percentage of sales,
      primarily due to reduced newsprint advertising, and decreased store payroll
      of
      0.3% as a percentage of sales, primarily due to the increase in comparable
      store
      sales. Partially offsetting these decreases were increased corporate payroll
      and
      store operating expenses of 0.7% as a percentage of sales, due to the
      de-leveraging of fixed costs resulting from cost increases to support strategic
      initiatives.





SG&A
      dollars increased $4.4 million, or 3.1%, to $147.6 million in 2005 from $143.2
      million in 2004, primarily due to cost increases to support strategic
      initiatives and increased store payroll expenses resulting from new store
      openings, partially offset by decreased advertising expense.





***Depreciation
      expense***





Depreciation
      expense increased $2.3 million, or 12.1%, to $21.3 million in 2005 from $19.0
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new and remodeled stores’ capital expenditures, as well as
      accelerated depreciation related to store remodels.





***Interest
      income***





Borders
      interest income increased $1.7 million, or 154.5%, to $2.8 million in 2005
      from
      $1.1 million in 2004. This was the result of Borders’ continued positive cash
      flow at fixed internal interest rates.





***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      2.4% in 2005 from 2.6% in 2004, and net income dollars decreased $1.0 million,
      or 6.4%, to $14.7 million in 2005 from $15.7 million in 2004.





**Borders
      - Comparison of the 26 weeks ended July 23, 2005 to the 26 weeks ended July
      25,
      2004**





***Sales***





Borders'
      sales increased $27.8 million, or 2.4%, to $1,197.9 million in 2005 from
      $1,170.1 million in 2004. This increase was comprised of non-comparable sales
      primarily associated with 2005 and 2004 store openings of $28.1 million and
      comparable store sales increases of $5.9 million, partially offset by a sales
      decrease of $6.2 million due to the change in fiscal year, which resulted in
      one
      less day in the first quarter of 2005 as compared to 2004.





***Other
      revenue***





Other
      revenue increased $2.5 million, or 192.3%, to $3.8 million in 2005 from $1.3
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005, as previously
      discussed.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.4%, to 27.1% in 2005 from 27.5%
      in
      2004, due to increased product costs as a percentage of sales, primarily due
      to
      increased bestseller discounts in 2005, driven by the release of the sixth
      book
      in the Harry Potter series.





Gross
      margin dollars increased $2.8 million, or 0.9%, to $324.4 million in 2005 from
      $321.6 million in 2004, which was primarily due to increased sales, partially
      offset by the decrease in gross margin as a percentage of
      sales.


17


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





SG&A
      as a percentage of sales increased 0.3%, to 24.3% in 2005 from 24.0% in 2004,
      primarily due to increased corporate payroll and store operating expenses of
      0.9% as a percentage of sales, due to the de-leveraging of fixed costs resulting
      from cost increases to support strategic initiatives. Partially offsetting
      these
      increases were decreased advertising expense of 0.5% as a percentage of sales, primarily
      due to reduced newsprint advertising, and decreased store payroll of 0.1% as
      a
      percentage of sales, primarily a result of the increase in comparable store
      sales.





SG&A
      dollars increased $10.8 million, or 3.8%, to $291.6 million in 2005 from $280.8
      million in 2004, primarily due to cost increases to support strategic
      initiatives and increased store payroll expenses resulting from new store
      openings, partially offset by decreased advertising expense.





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





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





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





***Depreciation
      expense***





Depreciation
      expense increased $4.3 million, or 11.1%, to $43.0 million in 2005 from $38.7
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new and remodeled stores’ capital expenditures, as well as
      accelerated depreciation related to store remodels.





***Interest
      income***





Borders
      interest income increased $2.8 million, or 96.6%, to $5.7 million in 2005 from
      $2.9 million in 2004. This was the result of Borders’ continued positive cash
      flow at fixed internal interest rates.





***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      1.9% in 2005 from 2.2% in 2004, and net income dollars decreased $3.1 million,
      or 12.0%, to $22.7 million in 2005 from $25.8 million in 2004.





**Waldenbooks**





**13
                Weeks Ended**
            
            **26
                Weeks Ended**(dollar
                amounts in millions)
            
            **July
                23, 2005**
            
            **July
                25, 2004**
            
            **July
                23, 2005**
            
            **July
                25, 2004**Sales
            
            $
            151.0
            
            $
            150.0
            
            $
            294.1
            
            $
            300.8Other
                revenue
            
            $
            0.6
            
            $
            4.5
            
            $
            1.6
            
            $
            9.9Net
                income
            
            $
            0.5
            
            $
            1.5
            
            $
            1.0
            
            $
            4.4Net
                income as % of sales
            
            
            0.3
            %
            
            1.0
            %
            
            0.3
            %
            
            1.5
            %Depreciation
                expense
            
            $
            3.6
            
            $
            3.4
            
            $
            7.0
            
            $
            6.9Interest
                income
            
            $
            11.0
            
            $
            10.3
            
            $
            21.9
            
            $
            20.8Store
                Openings
            
            
            8
            
            
            4
            
            
            11
            
            
            5Store
                Closings
            
            
            6
            
            
            3
            
            
            12
            
            
            11Store
                Count
            
            
            704
            
            
            727
            
            
            704
            
            
            727






18


**Waldenbooks
      - Comparison of the 13 weeks ended July 23, 2005 to the 13 weeks ended July
      25,
      2004**





***Sales***





Waldenbooks'
      sales increased $1.0 million, or 0.7%, to $151.0 million in 2005 from $150.0
      million in 2004. This increase was comprised of increased comparable store
      sales
      of $2.9 million, partially offset by decreased non-comparable sales associated
      with 2005 and 2004 store closings of $1.9 million.





***Other
      revenue***





Waldenbooks'
      other revenue, which consists of membership income from the Preferred Reader
      Program, decreased $3.9 million, or 86.7%, to $0.6 million in 2005 from $4.5
      million in 2004. This was due to the change in the Preferred Reader Program
      as
      previously discussed.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.7%, to 20.7% in 2005 from 22.4
      % in
      2004. This was primarily due to a 2.6% decrease in other revenue as a percentage
      of sales, due to the change in the Preferred Reader Program, as previously
      discussed, and increased product costs as a percentage of sales of 0.6%,
      primarily due to increased bestseller discounts in 2005, driven by the release
      of the sixth book in the Harry Potter series. Partially offsetting these items
      were decreased store occupancy expenses of 1.2% as a percentage of sales, due
      to
      occupancy costs for stores open more than one year remaining essentially flat
      while comparable store sales increased, as well as decreased distribution costs
      of 0.3% as a percentage of sales.





Gross
      margin dollars decreased $2.5 million, or 7.4%, to $31.2 million in 2005 from
      $33.7 million in 2004, primarily due to store closures and the decrease in
      gross
      margin percentage noted above.





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





SG&A
      as a percentage of sales decreased 0.2%, to 27.2% in 2005 from 27.4% in
      2004. This was
      primarily due to decreased store payroll and operating expenses of 0.5% as
      a
      percentage of sales and decreased corporate operating expenses of 0.3% as a
      percentage of sales, resulting from these costs remaining essentially flat
      while
      comparable store sales increased. Partially offsetting the decrease in these
      costs were increased corporate payroll expense of 0.6% as a percentage of sales,
      due to the de-leveraging of fixed costs resulting from cost increases to support
      strategic initiatives.





SG&A
      dollars remained flat at $41.0 million in 2005 and 2004.





***Depreciation
      expense***





Depreciation
      expense increased $0.2 million, or 5.9%, to $3.6 million in 2005 from $3.4
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new airport and outlet stores, as well as on capital additions
      related to the conversion of select Waldenbooks stores to Borders
      Express.





***Interest
      income***





Interest
      income increased $0.7 million, or 6.8%, to $11.0 million in 2005 from $10.3
      million in 2004. This was the result of Waldenbooks' continued positive cash
      flow at fixed internal interest rates.





***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      0.3% in 2005 from 1.0% in 2004, and net income dollars decreased $1.0 million,
      or 66.7%, to $0.5 million in 2005 from $1.5 million in 2004.





19


**Waldenbooks
      - Comparison of the 26 weeks ended July 23, 2005 to the 26 weeks ended July
      25,
      2004**





***Sales***





Waldenbooks'
      sales decreased $6.7 million, or 2.2%, to $294.1 million in 2005 from $300.8
      million in 2004. This decrease was comprised of decreased comparable store
      sales
      of $2.1 million and decreased non-comparable sales associated with 2005 and
      2004
      store closings of $4.6 million.





***Other
      revenue***





Waldenbooks'
      other revenue, which consists of membership income from the Preferred Reader
      Program, decreased $8.3 million, or 83.8%, to $1.6 million in 2005 from $9.9
      million in 2004. This was due to the change in the Preferred Reader Program
      as
      previously discussed.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 1.8%, to 21.7% in 2005 from 23.5%
      in
      2004. This was primarily due to a 2.7% decrease in other revenue as a percentage
      of sales, due to the change in the Preferred Reader Program, as previously
      discussed, partially offset by decreased store occupancy expenses of 0.7% as
      a
      percentage of sales due to favorable lease renewal rates, and decreased
      distribution costs of 0.2% as a percentage of sales.





Gross
      margin dollars decreased $6.8 million, or 9.6%, to $63.9 million in 2005 from
      $70.7 million in 2004, primarily due to store closings, decreased comparable
      store sales and the decrease in gross margin percentage.





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





SG&A
      as a percentage of sales increased 0.7%, to 28.4% in 2005 from 27.7% in 2004.
      This was primarily due to increased corporate payroll expense of 0.7% as a
      percentage of sales, due to the de-leveraging of fixed costs resulting from
      comparable store sales declines and cost increases to support strategic
      initiatives, and increased advertising expense of 0.2% as a percentage of sales.
      Partially offsetting the increase in these costs were decreased store operating
      expenses of 0.2% as a percentage of sales.





SG&A
      dollars remained flat at $83.4 million in 2005 and 2004.





***Depreciation
      expense***





Depreciation
      expense increased $0.1 million, or 1.4%, to $7.0 million in 2005 from $6.9
      million in 2004. This was primarily the result of increased depreciation expense
      recognized on new airport and outlet stores, as well as on capital additions
      related to the conversion of select Waldenbooks stores to Borders
      Express.





***Interest
      income***





Interest
      income increased $1.1 million, or 5.3%, to $21.9 million in 2005 from $20.8
      million in 2004. This was the result of Waldenbooks' continued positive cash
      flow at fixed internal interest rates.





***Net
      income***





Due
      to
      the factors mentioned above, net income as a percentage of sales decreased
      to
      0.3% in 2005 from 1.5% in 2004, and net income dollars decreased $3.4 million,
      or 77.3%, to $1.0 million in 2005 from $4.4 million in 2004.





20


**International**





**13
                Weeks Ended**
            
            **26
                Weeks Ended******(dollar
                amounts in millions)
            
            **July
                23, 2005**
            
            **July
                25, 2004**
            
            **July
                23, 2005**
            
            **July
                25, 2004**Sales
            
            $
            122.1
            
            $
            104.3
            
            $
            246.8
            
            $
            207.0Other
                revenue
            
            $
            2.2
            
            $
            1.2
            
            $
            4.6
            
            $
            2.4Net
                loss
            
            $
            (5.2
            )
            $
            (2.8
            )
            $
            (11.0
            )
            $
            (6.3
            )Net
                loss as % of sales
            
            
            (4.3
            )%
            
            (2.7
            )%
            
            (4.5
            )%
            
            (3.0
            )%Depreciation
                expense
            
            $
            4.6
            
            $
            3.6
            
            $
            9.1
            
            $
            7.4Interest
                expense
            
            $
            5.3
            
            $
            4.3
            
            $
            10.4
            
            $
            9.0Superstore
                Store Openings
            
            
            1
            
            
            -
            
            
            5
            
            
            -Superstore
                Store Count
            
            
            47
            
            
            37
            
            
            47
            
            
            37Books
                etc. Store Openings
            
            
            -
            
            
            1
            
            
            -
            
            
            1Books
                etc. Store Closings
            
            
            2
            
            
            1
            
            
            2
            
            
            1Books
                etc. Store Count
            
            
            33
            
            
            36
            
            
            33
            
            
            36





**International
      - Comparison of the 13 weeks ended July 23, 2005 to the 13 weeks ended July
      25,
      2004**





***Sales***





International
      sales increased $17.8 million, or 17.1%, to $122.1 million in 2005 from $104.3
      million in 2004. Of this increase in sales, 2.5% was due to the translation
      of
      foreign currencies to U.S. dollars. The remaining 14.6% was the result of new
      superstore openings, partially offset by comparable store sales decreases,
      primarily a result of the slow sales environment in the U.K. The impact of
      price
      changes on comparable store sales was not significant.





***Other
      revenue***





Other
      revenue increased $1.0 million, or 83.3%, to $2.2 million in 2005 from $1.2
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005, as previously
      discussed.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 0.8%, to 20.9% in 2005 from 20.1%
      in
      2004, primarily the result of a decrease of 2.2% in merchandise costs as a
      percentage of sales. This was primarily due to the acquisition of Paperchase,
      which offers merchandise with higher margins than the International superstores’
      core products. In addition, the Company negotiated improved vendor terms, which
      further contributed to the reduction in merchandise costs. Also contributing
      to
      the increase in the gross margin percentage are improvements of 0.3% in product
      markdowns as a percentage of sales, resulting from improved vendor terms related
      to returnability of merchandise, largely in the Company’s Asia Pacific stores.
      Partially offsetting these factors were increased occupancy costs of 1.1% as
      a
      percentage of sales, due to rent expense recorded for the construction build-out
      period of new stores opening in the second and third quarters of 2005, as well
      as increased freight and distribution costs of 0.6% as a percentage of sales,
      largely due to the higher supply chain costs of Paperchase.





Gross
      margin dollars increased $4.7 million, or 22.5%, to $25.6 million in 2005 from
      $20.9 million in 2004. Of this increase, $0.3 million is the result of
      translation of foreign currencies to U.S. dollars. The remainder of the increase
      is due to new superstore openings, the acquisition of Paperchase and the
      improved gross margin rate.





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





SG&A
      as a percentage of sales increased 3.4%, to 23.8% in 2005 from 20.4% in 2004.
      This was primarily the result of increases as a percentage of sales in store
      payroll of 1.4%, administrative expenses of 1.2%, administrative payroll of
      0.8%
      and store operating expenses of 0.6%, all of which are due to the acquisition
      of
      Paperchase. These increases were partially offset by decreased advertising
      costs
      of 0.6% as a percentage of sales.





SG&A
      dollars increased $7.7 million, or 36.0%, to $29.1 million in 2005 from $21.4
      million in 2004. Of this increase, $0.4 million is the result of translation
      of
      foreign currencies to U.S. dollars. The remainder of the increase is primarily
      due to store openings, the acquisition of Paperchase and the increased store
      payroll and operating expenses required.





21


***Depreciation
      expense***





Depreciation
      expense increased $1.0 million, or 27.8%, to $4.6 million in 2005 from $3.6
      million in 2004. This was primarily due to depreciation expense recognized
      on
      new stores' capital expenditures.





***Interest
      expense***





Interest
      expense increased $1.0 million, or 23.3%, to $5.3 million in 2005 from $4.3
      million in 2004. This was a result of interest earned on holdings from the
      sale
      of the Charing Cross property in 2004. The proceeds from this sale were utilized
      in the purchase of Paperchase, which was completed at the end of the second
      quarter of 2004.





***Net
      loss***




Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      4.3%
      in 2005 as compared to 2.7% in 2004, and net loss dollars increased $2.4
      million, or 85.7%, to $5.2 million in 2005 from $2.8 million in
      2004.





**International
      - Comparison of the 26 weeks ended July 23, 2005 to the 26 weeks ended July
      25,
      2004**





***Sales***





International
      sales increased $39.8 million, or 19.2%, to $246.8 million in 2005 from $207.0
      million in 2004. Of this increase in sales, 3.2% was due to the translation
      of
      foreign currencies to U.S. dollars. The remaining 16.0% was the result of new
      superstore openings and comparable store sales increases. The impact of price
      changes on comparable store sales was not significant.





***Other
      revenue***





Other
      revenue increased $2.2 million, or 91.7%, to $4.6 million in 2005 from $2.4
      million in 2004. This increase was primarily due to wholesale revenue earned
      through the franchise agreement with Berjaya in 2005, as previously
      discussed.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 1.2%, to 21.2% in 2005 from 20.0%
      in
      2004, primarily the result of a decrease of 2.9% in merchandise costs as a
      percentage of sales. This was primarily due to the acquisition of Paperchase,
      which offers merchandise with higher margins than the International superstores’
      core products. In addition, the Company negotiated improved vendor terms, which
      further contributed to the reduction in merchandise costs. Also contributing
      to
      the increase in the gross margin percentage are improvements of 0.2% in product
      markdowns as a percentage of sales, resulting from improved vendor terms related
      to returnability of merchandise, largely in the Company’s Asia Pacific stores.
      Partially offsetting these factors were increased occupancy costs of 1.4% as
      a
      percentage of sales, due to rent expense recorded for the construction build-out
      period of new stores opening in the first three quarters of 2005, as well as
      increased distribution costs of 0.5% as a percentage of sales, largely due
      to
      the higher supply chain costs of Paperchase.





Gross
      margin dollars increased $10.9 million, or 26.4%, to $52.2 million in 2005
      from
      $41.3 million in 2004. Of this increase, $1.0 million is the result of
      translation of foreign currencies to U.S. dollars. The remainder of the increase
      is due to new superstore openings, the acquisition of Paperchase and the
      improved gross margin rate.





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





SG&A
      as a percentage of sales increased 3.4%, to 24.0% in 2004 from 20.6% in 2003.
      This was primarily the result of increases as a percentage of sales in store
      payroll of 1.4%, administrative expenses of 1.0%, administrative payroll of
      0.7%
      and store operating expenses of 0.6%, all of which are due to the acquisition
      of
      Paperchase. These increases were partially offset by decreased advertising
      costs
      of 0.3% as a percentage of sales.





SG&A
      dollars increased $16.5 million, or 38.6%, to $59.3 million in 2005 from $42.8
      million in 2004. Of this increase, $1.1 million is the result of translation
      of
      foreign currencies to U.S. dollars. The remainder of the increase is primarily
      due to store openings, the acquisition of Paperchase and the increased store
      payroll and operating expenses required.





22


***Depreciation
      expense***





Depreciation
      expense increased $1.7 million, or 23.0%, to $9.1 million in 2005 from $7.4
      million in 2004. This was primarily due to depreciation expense recognized
      on
      new stores' capital expenditures.





***Interest
      expense***





Interest
      expense increased $1.4 million, or 15.6%, to $10.4 million in 2005 from $9.0
      million in 2004. This was a result of interest earned on holdings from the
      sale
      of the Charing Cross property in 2004. The proceeds from this sale were utilized
      in the purchase of Paperchase, which was completed at the end of the second
      quarter of 2004.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      4.5%
      in 2005 as compared to 3.0% in 2004, and net loss dollars increased $4.7
      million, or 74.6%, to $11.0 million in 2005 from $6.3 million in
      2004.





**Corporate**





**13
                Weeks Ended**
            
            **26
                Weeks Ended**(dollar
                amounts in millions)
            
            **July
                23, 2005**
            
            **July
                25, 2004**
            
            **July
                23, 2005**
            
            **July
                25, 2004**Net
                loss
            
            $
            (8.7
            )
            $
            (6.5
            )
            $
            (16.7
            )
            $
            (13.7
            )Interest
                expense
            
            $
            11.8
            
            $
            9.5
            
            $
            22.7
            
            $
            19.0





**Corporate
      - Comparison of the 13 weeks ended July 23, 2005 to the 13 weeks ended July
      25,
      2004**





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





Net
      loss
      dollars increased $2.2 million, or 33.8%, to $8.7 million in 2005 from $6.5
      million in 2004. This was primarily due to increased interest expense for this
      segment resulting from increased borrowings to fund corporate stock repurchases
      in 2005. Interest expense represents corporate-level interest costs not charged
      to the Company's other segments.





**Corporate
      - Comparison of the 26 weeks ended July 23, 2005 to the 26 weeks ended July
      25,
      2004**





Net
      loss
      dollars increased $3.0 million, or 21.9%, to $16.7 million in 2005 from $13.7
      million in 2004. This was primarily due to increased interest expense for this
      segment resulting from increased borrowings to fund corporate stock repurchases
      in 2005. Interest expense represents corporate-level interest costs not charged
      to the Company's other segments.





**Liquidity
      and Capital Resources**





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





Net
        cash
        used for operations was $75.7 million and $77.0 million for the 26 weeks
        ended
        July 23, 2005 and July 25, 2004, respectively. Operating cash outflows for
        the
        period reflect operating results and decreases in taxes payable, expenses
        payable and accrued liabilities and accounts payable, as well as increases
        in
        inventories, prepaid expenses and other long-term assets. The most significant
        of these was the decrease in taxes payable, which resulted from payment of
        the
        Company’s estimated 2004 taxes. The current year operating cash inflows
        primarily reflect non-cash charges for depreciation and a loss on the disposal
        of assets related to the remodel program, as well as a decrease in accounts
        receivable and an increase in other long-term liabilities.
 
 Net
        cash
        provided by investing was $10.2 million in 2005, which primarily resulted
        from
        the sale of auction rate securities of $95.4 million. Net cash provided by
        investing was $78.7 million in 2004, which primarily resulted from the sale
        of
        auction rate securities of $118.0 million, as well as proceeds received from
        the
        sale-leaseback of a Company-owned store and office building in the
        United
 23
 Kingdom.
        The proceeds from the sale, totaling $32.3 million, were offset against assets
        with a net book value of $28.4 million. Direct costs associated with the
        transaction were $0.4 million. A deferred gain of $3.5 million was recorded
        on
        the consolidated balance sheets in “Other long-term liabilities” and is being
        amortized over the 20 year term of the operating lease. Net cash provided
        by
        investing in 2004 was partially offset by cash used for the acquisition of
        Paperchase of $31.4 million.




In
      fiscal
      2005, capital expenditures were $85.2 million, which primarily funded the
      remodeling of 45 domestic Borders superstores and the conversion of 48
      Waldenbooks stores to Borders Express, as well as investments in new
      merchandising systems. Additional capital spending in 2005 reflects the opening
      of five new Borders superstores, as well as four new airport stores and seven
      new outlet stores operated by the Waldenbooks segment. In fiscal 2004, capital
      expenditures were $40.2 million, which primarily funded new stores and the
      refurbishment of existing stores. Capital expenditures in 2004 reflect the
      opening of six new superstores and one new airport store, operated by the
      Waldenbooks segment, as well as the remodel of 18 existing domestic superstores.





Net
      cash
      used for financing in 2005 was $100.3 million, resulting from the repurchase
      of
      common stock totaling $117.5 million, the payment of the Company’s quarterly
      cash dividends of $12.9 million, partially offset by $14.3 million of proceeds
      from stock option exercises and funding from the Company’s credit facility of
      $15.8 million. Net cash used for financing in 2004 was $80.8 million, resulting
      from the repurchase of common stock totaling $91.7 million, the repayment of
      the
      credit facility of $0.7 million, the payment of the Company’s quarterly cash
      dividends of $12.3 million and the repayment of capital lease obligations of
      $0.4 million, partially offset by $24.3 million of proceeds from stock option
      exercises.





The
      Company expects capital expenditures to approximate $175.0 million in 2005,
      resulting primarily from new superstore openings and a store remodel program,
      through which the Company plans to complete major remodels of approximately
      100
      domestic Borders superstore locations, most of which will include conversion
      to
      Seattle’s Best cafes and Paperchase gifts and stationery shops, convert
      approximately 100 Waldenbooks stores to Borders Express, and open approximately
      15 new airport and outlet mall stores. In addition, capital expenditures will
      result from International store openings and continued investment in new buying
      and merchandising systems. The Company currently plans to open approximately
      18
      to 20 new domestic Borders superstores and approximately 14 new International
      stores in 2005. Average cash requirements for the opening of a prototype Borders
      Books and Music superstore are $2.4 million, representing capital expenditures
      of $1.2 million, inventory requirements (net of related accounts payable) of
      $1.0 million, and $0.2 million of pre-opening costs. Average cash requirements
      to open a new airport or outlet mall store range from $0.2 million to $0.7
      million, depending on the size and format of the store. Average cash
      requirements for a major remodel of a Borders superstore are between $0.1
      million to $0.4 million, and average cash requirements for a Borders Express
      conversion are less than $0.1 million. The Company plans to lease new store
      locations predominantly under operating leases.





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





The
      Company currently has a share repurchase program in place with remaining
      authorization to repurchase approximately $147.1 million. During the 26 weeks
      ended July 23, 2005 and July 25, 2004, $117.5 million and $91.7 million of
      common stock were repurchased, respectively. The Company plans to continue
      the
      repurchase of its common stock throughout fiscal 2005, subject to the Company's
      share price, capital needs and regulatory requirements.





In
      November 2003, the Board of Directors declared the Company’s first-ever
      quarterly cash dividend of $0.08 per share on the Company’s common stock. During
      2004, the Company paid a regular quarterly dividend, and intends to pay regular
      quarterly cash dividends, subject to Board approval, going forward. In December
      2004, the Board of Directors increased the quarterly dividend by 12.5% to $0.09
      per share. The declaration and payment of dividends, if any, is subject to
      the
      discretion of the Board and to certain limitations under the Michigan Business
      Corporation Act. In addition, the Company’s ability to pay dividends is
      restricted by certain agreements to which the Company is a party.





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


24


for
      this
      type of financing, including a cross default provision relating to other
      indebtedness of more than $25.0 million. As of July 23, 2005 the Company was
      in
      compliance with all covenants contained within this agreement.





On
      July
      30, 2002, the Company issued $50.0 million of senior guaranteed notes (the
      “Notes”) due July 30, 2006 and bearing interest at 6.31% (payable
      semi-annually). The proceeds of the sale of the Notes were used to refinance
      existing indebtedness of the Company and its subsidiaries and for general
      corporate purposes. The note purchase agreement relating to the Notes contains
      covenants which limit, among other things, the Company’s ability to incur
      indebtedness, grant liens, make investments, engage in any merger or
      consolidation, dispose of assets or change the nature of its business, and
      requires the Company to meet certain financial measures regarding net worth,
      total debt coverage and fixed charge coverage. In July 2004, the note purchase
      agreement was amended to permit the amendment to the Credit Agreement described
      above and to provide for a parity lien to secure the Notes on the same
      collateral as secures borrowings under the Credit Agreement. As of July 23,
      2005
      the Company was in compliance with all covenants contained within this
      agreement.





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





The
      Company is the primary beneficiary of two variable interest entities (“VIEs”)
      due to the Company’s guarantee of the debt of these entities. As a result, the
      Company consolidates these VIEs and has recorded property and equipment, net
      of
      accumulated depreciation, of $5.3 million, long-term debt (including current
      portion) of $5.6 million and minority interest of $0.3 million at July 23,
      2005.
      These amounts have been treated as non-cash items on the consolidated statements
      of cash flows.





**Seasonality**





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




**Critical
      Accounting Policies and Estimates**





In
      the
      ordinary course of business, the Company has made a number of estimates and
      assumptions relating to the reporting of results of operations and financial
      condition in the preparation of its financial statements in conformity with
      accounting principles generally accepted in the United States. Actual results
      could differ from those estimates under different assumptions and conditions. Such
      estimates have been disclosed in the Company's last
      Annual Report on Form
      10-K
      for the fiscal year ended January 23, 2005. There
      have been no significant changes in these estimates during the second quarter
      of
      fiscal 2005.





**New
      Accounting Guidance**





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





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





**Related
      Party Transactions**





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





**Forward
      Looking Statements**





This
      Quarterly Report on Form 10-Q contains forward-looking statements as defined
      in
      the Private Securities Litigation Reform Act of 1995. Forward-looking statements
      reflect management's current expectations and are inherently uncertain. The
      Company's actual


25


results
      may differ significantly from management's expectations. Exhibit 99.1 to this
      report, "Cautionary Statement under the Private Securities Litigation Reform
      Act
      of 1995", identifies the forward-looking statements and describes some, but
      not
      all, of the factors that could cause these differences.





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





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





There
      have been no material changes in this Item since the Company’s last Annual
      Report on Form 10-K for the fiscal year ended January 23, 2005.





**Item
      4. Controls and Procedures**





*Controls
      and Procedures:* The
      Company’s Chief Executive Officer and Chief Financial Officer have evaluated the
      effectiveness of the Company’s disclosure controls and procedures, as such term
      is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended (the “Exchange Act”), as of July 23, 2005 (the “Evaluation
      Date”). Based on such evaluation, such officers have concluded that, as of the
      Evaluation Date, the Company’s disclosure controls and procedures were effective
      in alerting them on a timely basis to material information relating to the
      Company (including its consolidated subsidiaries) required to be included in
      the
      Company’s periodic filings under the Exchange Act.





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





**Part
      II - Other Information**





**Item
      1. Legal Proceedings**





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





26


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





(c)
            The
                table below presents the total number of shares repurchased during
                the
                second quarter of fiscal 2005.





**Fiscal
                Period**
            
            
            **Total
                Number of Shares (1)**
            
            
            **Average
                Price Paid per Share**
              **(2)**
            
            
            **Total
                Number of Shares Purchased as Part of Publicly Announced Plans or
                Programs
                (3)**
            
            
            **Approximate
                Dollar Value of Shares that May Yet Be Purchased Under the Plans
                or
                Programs**April
                24, 2005
              through
              May
                21, 2005
            
            
            1,186,433
            
            $
            24.53
            
            
            1,185,000
            
            $
            172,119,780May
                22, 2005
              through
              June
                18, 2005
            
            
            1,018,600
            
            $
            25.26
            
            
            1,018,600
            
            $
            149,480,531June
                19, 2005
              through
              July
                23, 2005
            
            
            201,424
            
            $
            24.97
            
            
            200,000
            
            $
            147,106,667Total
            
            
            2,406,457
            
            $
            24.87
            
            
            2,403,600
            
            $
            147,106,667





(1)
            During
                the second quarter of 2005, the company retired 2,857 shares which
                were
                acquired pursuant to the Company’s employee benefit
                plans.





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





(3)
            On
                February 9, 2005, the Company announced that the Board of Directors
                authorized an increase in the amount of share repurchases to $250
                million
                (plus any proceeds and tax benefits resulting from stock option exercises
                and tax benefits resulting from restricted shares purchased by employees
                from the Company).





**Item
      4. Submission of Matters to a Vote of Securityholders**





The
      following actions were taken at the Annual Meeting of the Company held on May
      19, 2005, with the votes on such matters being indicated as below:





1.  The
      following individuals were elected to serve as directors for one year terms
      expiring in 2006:


**Name**
            **For**
            **Authority**
              **Withheld**Joel
                J. Cohen
            66,670,094
                Shares
            127,088
                SharesGregory
                P. Josefowicz
            64,763,357
                Shares
            2,033,825
                SharesAmy
                B. Lane
            66,645,646
                Shares
            151,536
                SharesVictor
                L. Lund
            65,463,556
                Shares
            1,333,626
                SharesEdna
                Greene Medford
            66,668,135
                Shares
            129,047
                SharesLawrence
                I. Pollock
            66,646,166
                Shares
            151,016
                SharesBeth
                M. Pritchard
            65,504,127
                Shares
            1,293,055
                Shares





2.
      The
      performance goals and maximum amounts payable under the Company's Annual
      Incentive Bonus Plan were re-affirmed:





For
            65,336,553
                SharesAgainst
            1,437,364
                SharesAbstain
            23,265
                Shares





27





3.
      The
      selection of Ernst & Young LLP as the Company’s independent auditors for
      fiscal 2005 was ratified:





For
            65,234,487
                SharesAgainst
            1,548,277
                SharesAbstain
            14,418
                Shares





**Item
      6. Exhibits**





Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.31.1
            Statement
                of Gregory P. Josefowicz, Chairman, President and Chief Executive
                Officer
                of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 200231.2
            Statement
                of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Statement
                of Gregory P. Josefowicz, Chairman, President and Chief Executive
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 200232.2
            Statement
                of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200299.1
            Cautionary
                Statement under the Private Securities Litigation Reform Act of 1995
                —“Safe Harbor” for Forward-Looking Statements(1)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                24, 1999 (File No. 1-13740).(2)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                27, 2002 (File No. 1-13740).








28


**SIGNATURES**





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





BORDERS
        GROUP, INC.
 (REGISTRANT)
 
 Date:
                  August 26, 2005
              By:/s/
                  Edward W. WilhelmEdward
                  W. WilhelmSenior
                  Vice President andChief
                  Financial Officer(Principal
                  Financial andAccounting
                  Officer)


29


**EXHIBIT
      INDEX**


**DESCRIPTION
      OF EXHIBITS**





Exhibits:





3.1(1)
            Restated
                Articles of Incorporation of Borders Group, Inc.3.2(2)
            Restated
                bylaws of Borders Group, Inc.31.1
            Statement
                of Gregory P. Josefowicz, Chairman, President and Chief Executive
                Officer
                of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 200231.2
            Statement
                of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 302 of the Sarbanes-Oxley Act of
                200232.1
            Statement
                of Gregory P. Josefowicz, Chairman, President and Chief Executive
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 200232.2
            Statement
                of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer
                of
                Borders Group,Inc.
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                200299.1
            Cautionary
                Statement under the Private Securities Litigation Reform Act of 1995
                —“Safe Harbor” for Forward-Looking Statements(1)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                24, 1999 (File No. 1-13740).(2)
            Incorporated
                by reference from the Company’s Annual Report on Form 10-K dated January
                27, 2002 (File No. 1-13740).





30