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 May 5, 2007OR[
                ]
            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 “X” 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 a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer x Accelerated
      filer  ̈ Non-accelerated
      filer  ̈




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).    Yes  ̈ No x





The
      number of shares of common stock outstanding at June 7, 2007 was
      58,808,830











**BORDERS
      GROUP, INC.**





**INDEX**


**Page**Part
                I - Financial InformationItem
                1.
                Financial Statements
            1Item
                2.
                Management's Discussion and Analysis of Financial
                Condition and Results of Operations
            8Item
                3.
                Quantitative and Qualitative Disclosures about Market
                Risk
            17Item
                4.
                Controls and Procedures
            17Part
                II - Other informationItem
                1.
                Legal Proceedings
            17Item
                1A. Risk Factors
            17Item
                2.
                Unregistered Sales of Equity Securities and Use of
                Proceeds
            17Item
                3.
                Defaults Upon Senior Securities
            N/AItem
                4.
                Submission of Matters to a Vote of Security
                holders
            N/AItem
                4T. Controls and Procedures
            N/AItem
                5.
                Other Information
            N/AItem
                6.
                Exhibits
            18Signatures
            19














**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


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


**(UNAUDITED)**








**13****Weeks
                Ended****May
                5,**
              **2007**
            
            **April
                29,**
              **2006**Sales
            
            $
            876.8
            
            $
            860.0Other
                revenue
            
            
            9.0
            
            
            7.8Total
                revenue
            
            
            885.8
            
            
            867.8Cost
                of merchandise sold (includes occupancy)
            
            
            689.0
            
            
            667.1Gross
                margin
            
            
            196.8
            
            
            200.7Selling,
                general and administrative expenses
            
            
            243.6
            
            
            225.4Pre-opening
                expense
            
            
            1.3
            
            
            1.9Asset
                impairments and other writedowns
            
            
            0.8
            
            
            0.6Operating
                loss
            
            
            (48.9
            )
            
            (27.2
            )Interest
                expense
            
            
            9.9
            
            
            5.4Loss
                before income tax
            
            
            (58.8
            )
            
            (32.6
            )Income
                tax benefit
            
            
            (22.9
            )
            
            (12.4
            )Net
                loss
            
            $
            (35.9
            )
            $
            (20.2
            )Loss
                per common share data*Diluted:*Loss per common share
            
            $
            (0.61
            )
            $
            (0.31
            )Weighted average common shares outstanding (in millions)
            
            
            58.6
            
            
            64.4*Basic:*Loss per common share
            
            $
            (0.61
            )
            $
            (0.31
            )Weighted average common shares outstanding (in millions)
            
            
            58.6
            
            
            64.4Dividends
                declared per common share
            
            $
            0.11
            
            $
            0.10








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


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


**(UNAUDITED)**








**May
                5,**
              **2007**
            
            **April
                29,**
              **2006**
            
            **February
                3,**
              **2007****Assets**Current
                assets:Cash and cash equivalents
            
            $
            83.9
            
            $
            47.0
            
            $
            120.4Merchandise inventories
            
            
            1,522.3
            
            
            1,457.9
            
            
            1,452.0Accounts receivable and other current assets
            
            
            149.9
            
            
            159.5
            
            
            151.2Total current assets
            
            
            1,756.1
            
            
            1,664.4
            
            
            1,723.6Property
                and equipment, net of accumulated depreciation of$1,203.8, $992.4 and $1,183.9 at May 5, 2007, April 29,2006 and February 3, 2007, respectively
            
            
            714.5
            
            
            717.8
            
            
            707.7Other
                assets
            
            
            64.8
            
            
            78.9
            
            
            65.1Deferred
                income taxes
            
            
            80.9
            
            
            40.5
            
            
            76.7Goodwill
            
            
            40.3
            
            
            125.6
            
            
            40.3Total
                assets
            
            $
            2,656.6
            
            $
            2,627.2
            
            $
            2,613.4**Liabilities,
                Minority Interest and Stockholders’ Equity**Current
                liabilities:Short-term borrowings and current portion of long-term
                debt
            
            $
            717.6
            
            $
            437.5
            
            $
            542.6Trade accounts payable
            
            
            593.2
            
            
            616.6
            
            
            631.4Accrued payroll and other liabilities
            
            
            309.2
            
            
            271.2
            
            
            333.1Taxes, including income taxes
            
            
            22.8
            
            
            24.8
            
            
            60.4Deferred income taxes
            
            
            28.7
            
            
            29.4
            
            
            28.4Total current liabilities
            
            
            1,671.5
            
            
            1,379.5
            
            
            1,595.9Long-term
                debt
            
            
            5.2
            
            
            5.3
            
            
            5.2Other
                long-term liabilities
            
            
            376.6
            
            
            338.0
            
            
            368.3Total liabilities
            
            
            2,053.3
            
            
            1,722.8
            
            
            1,969.4Minority
                interest
            
            
            1.9
            
            
            1.4
            
            
            2.0Total liabilities and minority interest
            
            
            2,055.2
            
            
            1,724.2
            
            
            1,971.4Stockholders'
                equity:Common
                stock; 300,000,000 shares authorized;58,740,987,
                64,386,462 and 58,476,306 shares issuedand
                outstanding at May 5, 2007, April 29, 2006 andFebruary
                3, 2007, respectively
            
            
            178.4
            
            
            293.7
            
            
            175.5Accumulated
                other comprehensive income
            
            
            31.6
            
            
            21.5
            
            
            28.5Retained
                earnings
            
            
            391.4
            
            
            587.8
            
            
            438.0Total stockholders' equity
            
            
            601.4
            
            
            903.0
            
            
            642.0Total liabilities, minority interest and stockholders'
                equity
            
            $
            2,656.6
            
            $
            2,627.2
            
            $
            2,613.4








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY**


**FOR
      THE 13 WEEKS ENDED May 5, 2007**


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


**(UNAUDITED)**








**Common
                Stock**
            
            **Accumulated**
              **Other**
              **Comprehensive**
            
            **Retained****Shares**
            
            **Amount**
            
            **Income
                (Loss)**
            
            **Earnings**
            
            **Total**Balance
                at February 3, 2007
            
            
            58,476,306
            
            $
            175.5
            
            $
            28.5
            
            $
            438.0
            
            $
            642.0Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (35.9
            )
            
            (35.9
            )Currency
                translation adjustment
            
            
            -
            
            
            -
            
            
            3.1
            
            
            -
            
            
            3.1Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (32.8
            )Adoption
                of FIN 48
            
            
            
            
            
            
            
            
            
            
            
            (4.2
            )
            
            (4.2
            )Cash
                dividends declared ($0.11 percommon
                share)
            
            
            -
            
            
            -
            
            
            -
            
            
            (6.5
            )
            
            (6.5
            )Issuance
                of common stock
            
            
            264,681
            
            
            2.7
            
            
            -
            
            
            -
            
            
            2.7Tax
                benefit of equity compensation
            
            
            -
            
            
            0.2
            
            
            -
            
            
            -
            
            
            0.2Balance
                at May 5, 2007
            
            
            58,740,987
            
            $
            178.4
            
            $
            31.6
            
            $
            391.4
            
            $
            601.4








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**BORDERS
      GROUP, INC.**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(dollars
      in millions)**


**(UNAUDITED)**








**13
                Weeks Ended****May
                5,**
              **2007**
            
            **April
                29,**
              **2006**Cash
                provided by (used for):OperationsNet loss
            
            $
            (35.9
            )
            $
            (20.2
            )Adjustments to reconcile net loss to operating cash flows:Depreciation
            
            
            28.0
            
            
            30.0Loss
                on disposal of assets
            
            
            0.1
            
            
            0.5Gain on disposal of assets
            
            
            (0.5
            )
            
            -Increase
                in minority interest
            
            
            (0.1
            )
            
            -(Increase) Decrease in deferred income taxes
            
            
            (3.0
            )
            
            0.9Decrease in other long-term assets
            
            
            0.4
            
            
            0.9Increase
                (Decrease) in other long-term liabilities
            
            
            (2.8
            )
            
            8.6Cash
                provided by (used for) current assets and current
                liabilities:Increase in inventories
            
            
            (65.6
            )
            
            (50.4
            )Decrease in accounts receivable
            
            
            15.1
            
            
            14.2Increase in prepaid expenses
            
            
            (15.7
            )
            
            (16.4
            )Decrease in accounts payable
            
            
            (39.8
            )
            
            (44.3
            )Decrease in taxes payable
            
            
            (31.9
            )
            
            (110.8
            )Decrease in expenses payable and accrued liabilities
            
            
            (16.8
            )
            
            (29.6
            )Net cash used for operations
            
            
            (168.5
            )
            
            (216.6
            )InvestingCapital expenditures
            
            
            (37.6
            )
            
            (40.4
            )Proceeds from sale of assets
            
            
            1.2
            
            
            -Net cash used for investing
            
            
            (36.4
            )
            
            (40.4
            )FinancingRepayment of long-term debt
            
            
            (0.2
            )
            
            (0.1
            )Net
                funding from credit facility
            
            
            172.6
            
            
            228.1Proceeds from the excess tax benefit of stock option
                exercises
            
            
            0.2
            
            
            2.8Issuance of common stock
            
            
            2.7
            
            
            14.7Payment of cash dividends
            
            
            (6.5
            )
            
            (6.5
            )Repurchase of common stock
            
            
            -
            
            
            (17.7
            )Net cash provided by financing
            
            
            168.8
            
            
            221.3Effect
                of exchange rates on cash and equivalents
            
            
            (0.4
            )
            
            1.1Net
                decrease in cash and equivalents
            
            
            (36.5
            )
            
            (34.6
            )Cash
                and equivalents at beginning of year
            
            
            120.4
            
            
            81.6Cash
                and equivalents at end of period
            
            $
            83.9
            
            $
            47.0








See
      accompanying Notes to Unaudited Condensed Consolidated Financial
      Statements.








**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 February 3, 2007.




The
      Company’s fiscal year ends on the Saturday closest to the last day of January.
      Fiscal 2007 will consist of 52 weeks, and will end on February 2, 2008.
      References herein to years are to the Company’s fiscal years.





At
      May 5,
      2007, the Company operated 572 superstores under the Borders name, including
      502
      in the United States, 41 in the United Kingdom, 20 in Australia, three in Puerto
      Rico, four in New Zealand and one each in Singapore and Ireland. The Company
      also operated 553 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 30 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. As of May 5, 2007, Paperchase operated
      100 stores, primarily in the United Kingdom, and Paperchase shops have been
      added to nearly 250 domestic Borders superstores.





**NOTE
      2 - COMMITMENTS AND CONTINGENCIES**





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





On
      October 29, 2002, Gary Gerlinger, individually and on behalf of all other
      similarly situated consumers in the United States who, during the period from
      August 1, 2001 to the present, purchased books online from either Amazon.com,
      Inc. (“Amazon”) or the Company, instituted an action against the Company and
      Amazon in the United States District Court for the Northern District of
      California. The Complaint alleges that the agreement pursuant to which an
      affiliate of Amazon operates Borders.com as a co-branded site (the “Mirror
      Site”) violates federal anti-trust laws, California statutory law and the common
      law of unjust enrichment. The Complaint seeks injunctive relief, damages,
      including treble damages or statutory damages where applicable, attorneys fees,
      costs and disbursements, disgorgement of all sums obtained by allegedly wrongful
      acts, interest and declaratory relief. On November 1, 2005, the Court granted
      the Company’s Motion to Dismiss all of the remaining claims of the plaintiff.
      The anti-trust claims were dismissed with prejudice, and the unfair competition
      claims were dismissed without prejudice. The plaintiff has appealed the
      decision. The Company has not included any liability in its consolidated
      financial statements in connection with this matter and has expensed as incurred
      all legal costs to date.





Certain
      states and private litigants have sought to impose sales or other tax collection
      efforts on out-of-jurisdiction companies that engage in e-commerce. The Company
      and Amazon have been named as defendants in actions filed by a private litigant
      on behalf of the state of Illinois under the state’s False Claims Act relating
      to the failure to collect use taxes on Internet sales in Illinois for periods
      both before and after the implementation of the Web Site Agreement. The
      Complaints seek judgments, jointly and severally, against














**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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





the
      defendants for, among other things, injunctive relief, treble the amount of
      damages suffered by the state of Illinois as a result of the alleged violations
      of the defendants, penalties, costs and expenses, including legal fees. Similar
      actions previously filed against the Company in Tennessee and Nevada have been
      dismissed.





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





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





**NOTE
      3 - FINANCING**





*Credit
      Facility:* The
      Company has a Multicurrency Revolving Credit Agreement (the “Credit Agreement”),
      which was restated as of July 31, 2006 and which will expire in July 2011.
      The Credit Agreement provides for borrowings of up to $1,125.0 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 the applicable increment or LIBOR plus the applicable 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 if borrowings under the facility exceed (or would exceed after
      the
      payments) 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
      $714.8 at May 5, 2007, $384.2 at April 29, 2006 and $539.6 at February 3,
      2007.





*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
      Company repaid the Notes with funds from the Credit Agreement on July 31,
      2006.





*Debt
      of Consolidated VIEs:* At May
      5, 2007, 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
      $5.0,
      long-term debt (including current portion) of $5.3 and minority interest of
      $0.3
      at May 5, 200 7.





As
      of May
      5, 2007 the Company was in compliance with its debt covenants. The Company
      currently does not meet the Credit Agreement’s fixed charge coverage ratio
      requirement; however, borrowings under the Credit Agreement have not exceeded
      90% of permitted borrowings. The Company plans to pursue additional financing
      beyond its existing Credit Agreement in the form of a term loan ranging from
      $150.0 to $200.0, which it expects to complete in the second quarter of this
      year. This additional financing is expected to provide the flexibility to fund
      the execution of the Company’s strategic plan and ensure that borrowings under
      the Credit Agreement do not exceed 90% of the borrowings permitted thereunder.
      The additional financing may include covenants that are more restrictive than
      those under the Credit Agreement.





**NOTE
      4 - INCOME TAXES**





The
      Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48), as
      amended, as of the beginning of the current fiscal year. Upon adoption, the
      Company recognized an additional $4.2 liability for unrecognized tax benefits,
      which was accounted for as a reduction to beginning retained earnings.





As
      of the
      beginning of the year, total unrecognized tax benefits, adjusted for the impact
      of the adoption of FIN 48, totaled $13.8. As of the end of the first quarter,
      this amount increased to $13.9. This balance represents the total amount of
      unrecognized tax benefits that, if recognized, would affect the effective tax
      rate. The Company recognizes interest and penalties related to uncertain tax
      positions










**BORDERS
      GROUP, INC.**


**NOTES
      TO UNAUDITED CONDENSED**


**CONSOLIDATED
      FINANCIAL STATEMENTS**


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








in
      its
      income tax provision. The adoption of FIN 48 also resulted in the
      reclassification of $7.2 from current taxes payable to non-current accrued
      liabilities.





A
      number
      of the Company’s tax returns remain subject to examination by taxing
      authorities. These include federal tax returns for 2003 through 2006, tax
      returns in certain states for 1996 through 2006, and tax returns in certain
      foreign jurisdictions for 1999 through 2006.





**NOTE
      5- SEGMENT INFORMATION**





The
      Company is organized based upon the following operating segments: domestic
      Borders superstores, Waldenbooks Specialty Retail stores, International stores
      (including Borders, Books etc. and Paperchase stores), and Corporate (consisting
      of certain corporate governance and 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. The Company evaluates the performance of its segments and
      allocates resources to them based on operating income and anticipated future
      contribution.











**13
                Weeks Ended********May
                5,****2007**
            
            ******April
                29,****2006**SalesBorders
            
            $
            615.0
            
            $
            606.4Waldenbooks
            
            
            108.1
            
            
            127.2International
            
            
            153.7
            
            
            126.4Total
                sales
            
            $
            876.8
            
            $
            860.0Operating
                income (loss)Borders
            
            $
            (22.0
            )
            $
            1.5Waldenbooks
            
            
            (14.0
            )
            
            (16.0
            )International
            
            
            (9.8
            )
            
            (10.3
            )Corporate
            
            
            (3.1
            )
            
            (2.4
            )Total
                operating income (loss)
            
            $
            (48.9
            )
            $
            (27.2
            )Total
                assetsBorders
            
            $
            1,767.0
            
            $
            1,659.4Waldenbooks
            
            
            318.9
            
            
            350.6International
            
            
            462.6
            
            
            499.0Corporate
            
            
            108.1
            
            
            118.2Total
                assets
            
            $
            2,656.6
            
            $
            2,627.2





Total
      assets for the Corporate segment include certain corporate headquarters asset
      balances, 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********May
                5,****2007**
            
            ******April
                29,****2006**Borders
            
            $
            2.8
            
            $
            3.1Waldenbooks
            
            
            -
            
            
            1.5International
            
            
            -
            
            
            0.1Total
            
            $
            2.8
            
            $
            4.7





****


**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 May 5, 2007, the Company operated 572 superstores under the Borders
      name, including 502 in the United States, 41 in the United Kingdom, 20 in
      Australia, three in Puerto Rico, four in New Zealand and one each in Singapore
      and Ireland. The Company also operated 553 mall-based and other bookstores
      primarily under the Waldenbooks name in the United States and 30 bookstores
      under the Books etc. name in the United Kingdom. In addition, the Company owns
      and operates United Kingdom-based Paperchase Products Limited (“Paperchase”), a
      designer and retailer of stationery, cards and gifts. As of May 5, 2007,
      Paperchase operated 100 stores, primarily in the United Kingdom, and Paperchase
      shops have been added to nearly 250 domestic Borders superstores.





**Business
      Strategy**





On
      March 22, 2007, the Company announced a new strategic plan, which consists
      of the following principal components:





*Grow
      comparable store sales and profitability in the domestic
      Borders*  *superstores.* In
      2007, the Company will focus on improving key retailing practices at its
      domestic superstores, including increasing effectiveness of merchandise
      presentation, improving assortment planning, replenishment and supply chain
      effectiveness, and ensuring consistency of execution across the chain. The
      Company will also continue development of a new concept store, which began
      in
      2006. The first new concept store is scheduled to open in early 2008. The
      concept store will include the implementation of “destination businesses” within
      certain of the Company’s most popular categories, which will help to distinguish
      the Company’s domestic superstores from competitors. The concept store will also
      include a Seattle’s Best Coffee cafe and a Paperchase shop, which continue to be
      drivers of both sales and increased profitability for their categories. In
      addition to the changes to the concept store, the Company has made changes
      to
      its loyalty program, Borders Rewards, which was launched domestically in early
      2006 and has grown to nearly 17 million members. The Company has modified
      Borders Rewards for 2007 to increase profitability, and will use the program
      to
      drive revenue through partnerships with other organizations, and drive sales
      by
      employing customer data to tailor promotions that meet specific customer needs
      and interests.





*Right-size
      the Waldenbooks Specialty Retail business.* The
      Waldenbooks Specialty Retail segment has experienced negative comparable store
      sales percentages for the past several years, primarily due to the overall
      decrease in mall traffic, sluggish bestsellers and increased competition from
      all channels. The Company is working to aggressively right-size the Waldenbooks
      mall store base, which could result in additional asset impairments and store
      closure costs in the next few years, but will position the Company to improve
      sales, profitability and free cash flow in the long term. The Company will
      retain stable locations that meet acceptable profit and return on investment
      objectives. The Company is also making changes to product mix and formats to
      drive sales and profitability.





*Explore
      strategic alternatives in the International segment.* The
      Company has moderated growth and investment in its International businesses,
      while focusing on improving the profitability of the investments the Company
      has
      already made. Strategic alternatives for portions of the International
      businesses are being explored, including the U.K. superstores, Books etc.
      stores, and the Ireland, Australia and New Zealand superstores. The Company
      believes the Borders brand has global potential, however, and believes that
      future International growth will most likely utilize a franchise business model,
      which the Company has applied successfully in Malaysia and the United Arab
      Emirates, or another similar risk-sharing model.





*Leverage
      innovation, technology and strategic alliances to differentiate
      our*  *business.* In
      order to achieve the goals of the strategic plan detailed above, the Company
      plans to enhance its current systems environment. This includes a focus on
      the
      systems supporting the domestic Borders superstore business, including supply
      chain and in-store technology enhancements. In addition, this effort includes
      development of a proprietary e-commerce platform, which will include both
      in-store and online e-commerce components. The proprietary e-commerce Web site
      will also allow the Company to engage in key partnerships that are expected
      to
      build incremental revenues and margins. The Company expects to launch its
      e-commerce Web site in early 2008.









**Other
      Information**





The
      Company launched Borders Rewards during the first quarter of 2006. Membership
      in
      Borders Rewards is free, with no enrollment costs or annual fees. Beginning
      April 12, 2007, the Company replaced the program’s previous member benefits with
      Borders Bucks. Members can earn Borders Bucks in increments of $5 for each
      cumulative $150 they spend on qualifying purchases in a calendar year at Borders
      and Waldenbooks stores nationwide. In addition to the launch of Borders Bucks,
      the Company will be offering Bonus Rewards Events, whereby members get specific
      deals periodically throughout the year.




The
      Company has signed an agreement with Berjaya Corporation Berhad (“Berjaya”), a
      publicly-listed diversified corporation headquartered in Malaysia, establishing
      a franchise arrangement under which Berjaya will operate Borders stores in
      Malaysia. As of May 5, 2007, Berjaya operated three Borders stores in Malaysia.
      The Company has also signed an agreement with Al Maya Group (“Al Maya”), a
      diversified corporation headquartered in the United Arab Emirates, establishing
      a franchise agreement under which Al Maya or its affiliates will operate Borders
      stores in the United Arab Emirates and other Gulf Cooperation Council (“GCC”)
      countries, the first of which opened in Dubai during the fourth quarter of
      fiscal 2006.





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 “Web Sites”). Under these agreements,
      Amazon is the merchant of record for all sales made through the Web 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
      Web
      Sites and retains all payments from customers. The Company receives referral
      fees for products purchased through the Web 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
      Web Sites. Currently, taxes are not collected with respect to products sold
      on
      the Web Sites except in certain states. As previously discussed, the Company
      plans to launch a proprietary e-commerce site in early 2008.




**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****May
                5, 2007**
            
            **April
                29, 2006**Sales
            
            
            100.0
            %
            
            100.0
            %Other
                revenue
            
            
            1.0
            
            
            0.9Total
                revenue
            
            
            101.0
            
            
            100.9Cost
                of merchandise sold (includes occupancy)
            
            
            78.6
            
            
            77.6Gross
                margin
            
            
            22.4
            
            
            23.3Selling,
                general and administrative expenses
            
            
            27.8
            
            
            26.2Pre-opening
                expense
            
            
            0.1
            
            
            0.2Asset
                impairments and other writedowns
            
            
            0.1
            
            
            0.1Operating
                loss
            
            
            (5.6
            )
            
            (3.2
            )Interest
                expense
            
            
            1.1
            
            
            0.6Loss
                before income tax
            
            
            (6.7
            )
            
            (3.8
            )Income
                tax benefit
            
            
            (2.6
            )
            
            (1.4
            )Net
                loss
            
            
            (4.1
            )%
            
            (2.4
            )%





**Consolidated
      Results - Comparison of the 13 weeks ended May 5, 2007 to the 13 weeks ended
      April 29, 2006**





***Sales***





Consolidated
      sales increased $16.8 million, or 2.0%, to $876.8 million in 2007 from $860.0
      million in 2006. This resulted primarily from increased sales in the Borders
      and
      International segments, partially offset by decreased sales in the Waldenbooks
      segment.





Comparable
      store sales measures include stores open more than one year, with new stores
      included in the calculation upon their 13th month of operation. Comparable
      store sales measures for Waldenbooks Specialty Retail include the Company’s
      mall-based seasonal businesses, and comparable store sales measures for
      International Borders superstores include sales from licensed departments
      operating within the superstores. International comparable store sales are
      calculated in local currency.









Comparable
      store sales for domestic Borders superstores decreased 1.9% in 2007. This was
      due primarily to a decline in customer traffic of approximately 4%. Comparable
      store sales for books declined slightly, music continued to significantly
      decline, and DVD sales were relatively flat. Gifts and stationary comparable
      store sales increased, as did café sales. The impact of price changes on
      comparable store sales was not significant.





Waldenbooks
      Specialty Retail’s comparable store sales decreased 1.0% in 2007. The comparable
      store sales decrease was primarily due to a decline in customer traffic. The
      impact of price changes on comparable store sales was not
      significant.





Comparable
      store sales for International Borders superstores decreased 2.5% in 2007. In
      particular, the United Kingdom experienced negative comparable store sales,
      primarily resulting from the slow economic environment and increased
      competition. Partially offsetting these decreases were positive comparable
      store
      sales in Australia, New Zealand and Singapore.





***Other
      revenue***





Other
      revenue for the Borders and International segments primarily consists of income
      recognized from unredeemed gift cards, as well as wholesale revenue earned
      through sales of merchandise to franchisees. Other revenue for the Borders
      segment also includes wholesale revenue earned through sales of merchandise
      to
      other retailers, as well as referral fees received from Amazon as part of the
      Web Site agreement. Other revenue for the International segment also includes
      license fees received from Starbucks Coffee Company (U.K.) Limited. Other
      revenue in the Waldenbooks Specialty Retail segment primarily consists of income
      recognized from unredeemed gift cards.





Other
      revenue increased $1.2 million, or 15.4%, to $9.0 million in 2007 from
      $7.8 million in 2006. This is mainly due to increased royalty income from
      franchise stores.





***Gross
      margin***





Consolidated
      gross margin decreased $3.9 million, or 1.9%, to $196.8 million in 2007 from
      $200.7 million in 2006. As a percentage of sales, consolidated gross margin
      decreased 0.9%, to 22.4% in 2007 from 23.3% in 2006. This was due to decreases
      in the Borders and Waldenbooks Specialty Retail segments, partially offset
      by an
      increase in the International segment. The decrease in the Borders segment
      was
      primarily the result of increased promotional discounts and occupancy expense
      as
      a percentage of sales, while the decrease in the Waldenbooks Specialty Retail
      segment was mainly due to a slight increase in markdowns as a percentage of
      sales. The
      increase in the International segment was primarily due to lower occupancy
      expense 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
      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 $18.2
      million, or 8.1%, to $243.6 million in 2007 from $225.4 million in 2006. As
      a
      percentage of sales, SG&A increased 1.6%, to 27.8% in 2007 from 26.2% in
      2006, due to increases in all segments. The Borders increase was primarily
      due
      to increases (as a percentage of sales) in store expenses, store payroll, and
      administrative payroll. In addition, Borders recognized income from the Visa
      Check/MasterMoney Antitrust Litigation settlement in 2006. This settlement
      pertained to a class action lawsuit brought against Visa and MasterMoney related
      to their debit card policies. The increase in the Waldenbooks Specialty Retail
      segment was the result of increased store expenses and administrative payroll
      as
      a percentage of sales. The International increase was primarily due to expenses
      incurred to explore strategic alternatives for that segment. The increase in
      SG&A as a percentage of sales was also impacted by negative comparable store
      sales in all business segments.





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 $4.5 million, or 83.3%, to $9.9 million in 2007
      from
      $5.4 million in 2006. This was primarily a result of increased borrowings to
      fund capital expenditures and inventory investment.










***Taxes***





The
      effective tax rate differed for the quarters presented from the federal
      statutory rate primarily as a result of a change in the mix of earnings between
      high and low tax jurisdictions. The Company's effective tax rate used was 39.0%
      in 2007 compared to 37.9% in 2006. This increase is primarily due to a greater
      portion of earnings being realized in jurisdictions with higher tax
      rates.





***Net
      loss***





Due
      to
      the factors mentioned above, net loss as a percentage of sales increased to
      4.1%
      in 2007 from 2.4% in 2006, and net loss dollars increased to $35.9 million
      in
      2007 from $20.2 million in 2006.





**Segment
      Results**





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





**Domestic
      Borders Superstores**


**13
                Weeks Ended****(dollar
                amounts in millions)**
            
            **May
                5, 2007**
            
            **April
                29, 2006**Sales
            
            $
            615.0
            
            $
            606.4Other
                revenue
            
            $
            4.9
            
            $
            5.1Operating
                income (loss)
            
            $
            (22.0
            )
            $
            1.5Operating
                income (loss) as % of sales
            
            
            (3.6
            )%
            
            0.2
            %Store
                openings
            
            
            4
            
            
            5Store
                closings
            
            
            1
            
            
            -Store
                count
            
            
            502
            
            
            478





**Domestic
      Borders Superstores - Comparison of the 13 weeks ended May 5, 2007 to the 13
      weeks ended April 29, 2006**





***Sales***





Domestic
      Borders Superstore sales increased $8.6 million, or 1.4%, to $615.0 million
      in
      2007 from $606.4 million in 2006. This increase was comprised of non-comparable
      sales of $20.0 million, associated with 2007 and 2006 store openings, partially
      offset by decreased comparable store sales of $11.4 million.





***Other
      revenue***





Other
      revenue decreased $0.2 million, or 3.9%, to $4.9 million in 2007 from $5.1
      million in 2006.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 2.0%, to 23.6% in 2007 from 25.6%
      in
      2006. This was primarily due to increased promotional discounts and occupancy
      expense of 1.8% as a percentage of sales. The increase in occupancy as a
      percentage of sales resulted from the de-leveraging of costs driven by negative
      comparable store sales and costs related to store closures. In addition,
      distribution and freight costs increased 0.2% as a percentage of sales.





Gross
      margin dollars decreased $9.7 million, or 6.3%, to $145.3 million in 2007 from
      $155.0 million in 2006, due primarily to the decrease in gross margin percentage
      noted above.




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





SG&A
      as a percentage of sales increased 1.8%, to 26.9% in 2007 from 25.1% in 2006.
      The increase was due to increased store expenses of 0.8% as a percentage of
      sales, primarily the result of income received in 2006 from the Visa
      Check/MasterMoney Antitrust Litigation settlement. In addition, store payroll
      increased 0.4% as a percentage of sales, as a result of sales decreasing at
      a
      rate greater than payroll. The remainder of the increase in SG&A as a
      percentage of sales was due to investment in strategic initiatives and the
      development of the e-commerce Web site.





SG&A
      dollars increased $13.5 million, or 8.9%, to $165.5 million in 2007 from $152.0
      million in 2006 primarily due to new store openings and the increased store
      payroll and operating expenses required. Also contributing to the increase
      was
      the 2006 income from the Visa Check/MasterMoney Antitrust Litigation
      settlement.










***Operating
      income (loss)***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales was 3.6%
      in
      2007 compared to operating income of 0.2% in 2006. Operating loss was $22.0
      million in 2007 compared to operating income of $1.5 million in
      2006.





**Waldenbooks
      Specialty Retail**


**13
                Weeks Ended****(dollar
                amounts in millions)**
            
            **May
                5, 2007**
            
            **April
                29, 2006**Sales
            
            $
            108.1
            
            $
            127.2Other
                revenue
            
            $
            0.5
            
            $
            0.5Operating
                loss
            
            $
            (14.0
            )
            $
            (16.0
            )Operating
                loss as % of sales
            
            
            (13.0
            )%
            
            (12.6
            )%Store
                openings
            
            
            -
            
            
            3Store
                closings
            
            
            11
            
            
            16Store
                count
            
            
            553
            
            
            665





**Waldenbooks
      Specialty Retail - Comparison of the 13 weeks ended May 5, 2007 to the 13 weeks
      ended April 29, 2006**





***Sales***





Waldenbooks
      Specialty Retail sales decreased $19.1 million, or 15.0%, to $108.1 million
      in
      2007 from $127.2 million in 2006. This was comprised of decreased non-comparable
      sales associated with 2007 and 2006 store closings of $18.1 million and
      decreased comparable store sales of $1.0 million.





***Other
      revenue***




Other
      revenue remained flat in 2007 compared to 2006.





***Gross
      margin***





Gross
      margin as a percentage of sales decreased 0.1%, to 18.7% in 2007 from 18.8%
      in
      2006. This was primarily due to increased markdowns as a percentage of
      sales.




Gross
      margin dollars decreased $3.7 million, or 15.5%, to $20.2 million in 2007 from
      $23.9 million in 2006, primarily due to store closings.





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





SG&A
      as a percentage of sales increased 0.8%, to 31.7% in 2007 from 30.9% in 2006.
      This was primarily due to a 0.7% increase in store expenses and a 0.8% increase
      in administrative payroll. Both increases were the result of sales decreasing
      at
      a rate faster than expenses. Partially offsetting these increases was a 0.7%
      decrease in non-payroll administrative costs, largely due to decreased
      depreciation expense resulting from fourth quarter 2006 asset impairments.





SG&A
      dollars decreased $5.1 million, or 13.0%, to $34.2 million in 2007 from $39.3
      million in 2006, primarily due to store closures and decreased depreciation
      expense.




***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales increased
      to 13.0% in 2007 from 12.6% in 2006, while operating loss dollars decreased
      $2.0
      million to $14.0 million in 2007 from $16.0 million in 2006.














**International**


**13
                Weeks Ended****(dollar
                amounts in millions)**
            
            **May
                5, 2007**
            
            **April
                29, 2006**Sales
            
            $
            153.7
            
            $
            126.4Other
                revenue
            
            $
            3.6
            
            $
            2.2Operating
                loss
            
            $
            (9.8
            )
            $
            (10.3
            )Operating
                loss as % of sales
            
            
            (6.4
            )%
            
            (8.1
            )%Superstore
                store openings
            
            
            2
            
            
            1Superstore
                store count
            
            
            70
            
            
            56Books
                etc. store openings
            
            
            -
            
            
            -Books
                etc. store closings
            
            
            -
            
            
            2Books
                etc. store count
            
            
            30
            
            
            31





**International
      - Comparison of the 13 weeks ended May 5, 2007 to the 13 weeks ended April
      29,
      2006**





***Sales***





International
      sales increased $27.3 million, or 21.6%, to $153.7 million in 2007 from $126.4
      million in 2006. Of this increase, $14.4 million was due to the translation
      of
      foreign currencies to U.S. dollars. The increase excluding the effect of foreign
      currency translation was 10.2% and was the result of new superstore openings,
      partially offset by a decline in comparable store sales.





***Other
      revenue***





Other
      revenue increased $1.4 million, or 63.6%, to $3.6 million in 2007 from $2.2
      million in 2006. This was primarily due to increased royalty income from
      franchise stores.





***Gross
      margin***





Gross
      margin as a percentage of sales increased 3.0%, to 20.3% in 2007 from 17.3%
      in
      2006, primarily the result of a decrease in occupancy costs of 1.2% as a
      percentage of sales. In the fourth quarter of 2006, the Company impaired a
      significant amount of fixed assets relating to certain underperforming U.K.
      superstores and Books etc. stores. As a result, depreciation expense as a
      percentage of sales decreased, driving the improvement in occupancy costs as
      a
      percentage of sales. The remainder of the increase in gross margin percentage
      was primarily due to expense recognized in 2006 to correct a prior year error
      in
      the calculation of Books etc. gross margin.





Gross
      margin dollars increased $9.5 million, or 43.6%, to $31.3 million in 2007 from
      $21.8 million in 2006. Of this increase, $2.9 **** million
      is the result of translation of foreign currencies to U.S. dollars. The
      remainder of the increase is due to new store openings and the factors described
      above.





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





SG&A
      as a percentage of sales increased 1.5%, to 26.6% in 2007 from 25.1% in 2006.
      This was primarily the result of increased administrative expenses of 1.0%
      as a
      percentage of sales, due to professional fees incurred in 2007 to explore
      strategic alternatives for the International segment. The remainder of the
      increase, or 0.5%, was due to increased advertising expense in the United
      Kingdom.





SG&A
      dollars increased $9.1 million, or 28.7%, to $40.8 million in 2007 from $31.7
      million in 2006. Of this increase, $3.6 million is primarily due to the
      translation of foreign currencies to U.S. dollars. The remainder of the increase
      is due to new store openings and the increased store payroll and operating
      expenses required, as well as professional fees incurred pursuant to the
      strategic alternatives process.




***Operating
      loss***





Due
      to
      the factors mentioned above, operating loss as a percentage of sales decreased
      to 6.4% in 2007 from 8.1% in 2006, and operating loss dollars decreased $0.5
      million, or 4.9%, to $9.8 million in 2007 from $10.3 million in
      2006.










**Corporate**


**13
                Weeks Ended****(dollar
                amounts in millions)**
            
            **May
                5, 2007**
            
            **April
                29, 2006**Operating
                loss
            
            $
            (3.1
            )
            $
            (2.4
            )





The
      Corporate segment includes various corporate governance and incentive
      costs.





**Corporate
      - Comparison of the 13 weeks ended May 5, 2007 to the 13 weeks ended April
      29,
      2006**





Operating
      loss dollars increased $0.7 million to $3.1 million in 2007 from $2.4 million
      in
      2006. This was primarily due to costs incurred to explore financing alternatives
      in 2007.





**Liquidity
      and Capital Resources**





The
      Company’s principal capital requirements are to fund investment in its strategic
      plan, including the refurbishment of existing stores, the opening of new stores,
      continued investment in new corporate information technology systems such as
      its
      e-commerce Web site, and maintenance spending on stores, distribution centers
      and corporate information technology. Additional capital requirements include
      shareholder returns in the form of dividends.





Net
      cash
      used by operations was $168.5 million and $216.6 million for 13 weeks
      ended May 5, 2007 and April 29, 2006, respectively. Operating cash outflows
      for
      the period represent operating results, increases in inventories, prepaid
      expenses, deferred income taxes, and minority interest as well as decreases
      in
      accounts payable, taxes payable, expenses payable and accrued liabilities,
      and
      other long-term liabilities. The current period operating cash inflows primarily
      reflect non-cash charges for depreciation and decreases in accounts receivable
      and other long-term assets.





Net
      cash
      used for investing for the period was $36.4 million, which primarily funded
      capital expenditures for new stores, the refurbishment of existing stores,
      the
      development of the e-commerce Web site, new corporate information technology
      systems, and maintenance spending. These expenditures were partially offset
      by
      proceeds from the Company’s sale of assets of $1.2 million. Net cash used for
      investing was $40.4 million in 2006.





Net
      cash
      provided by financing was $168.8 million in 2007, resulting primarily from
      funding from the credit facility of $172.6 million, as well as proceeds
      from the exercise of employee stock options of $2.7 million and the associated
      excess tax benefit of $0.2 million. Partially offsetting these items were
      the payment of cash dividends on shares of the Company’s common stock of
      $6.5 million and the repayment of long-term debt obligations of
      $0.2 million. Net cash used for financing was $221.3 million in 2006.





The
      Company expects capital expenditures to be approximately $170.0 million in
      2007, resulting primarily from investment in management information systems
      of
      domestic Borders superstores, in the Company’s new e-commerce strategy, and a
      reduced number of new superstore openings and store refurbishments. In addition,
      capital expenditures will result from maintenance spending for existing stores,
      distribution centers, and management information systems. The Company currently
      plans to open approximately 20 domestic Borders superstores and 7 international
      Borders superstores in 2007, as the majority of these stores were committed
      to
      prior to the Company’s finalizing its strategic plan. 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 $0.3 million to
      $0.8 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 and $0.5 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,
      financing through the Credit Agreement and new financing. The Company expects
      to
      proceed with a new term loan financing in the range of $150 million to $200
      million, to be completed in the second quarter of 2007. The Company believes
      funds generated from operations, as well as borrowings under the Credit
      Agreement and from the new term loan financing will be sufficient to fund its
      anticipated capital requirements for the next several years.





In
      January 2006, the Board of Directors authorized $250.0 million of potential
      share repurchases. The Company currently has remaining authorization to
      repurchase approximately $92.8 million. During 2006, 2005, and 2004,
      $148.7 million, $265.9 million, and $177.3 million of common
      stock was repurchased, respectively. Although the Company may in the future
      continue the repurchase of its common stock, its priority for cash utilization
      in 2007 will be to fund investment in its strategic plan, support the dividend
      and to repay debt with the cash flow generated by the Company’s
      operations.













Since
      2004, the Company has paid a regular quarterly dividend, and intends to pay
      regular quarterly cash dividends, subject to Board approval, going forward.
      In
      December 2006, the Board of Directors increased the quarterly dividend by 10.0%
      to $0.11 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 restated as of July 31, 2006 and which will expire in July 2011.
      The Credit Agreement provides for borrowings of up to $1,125.0 million secured
      by eligible inventory and accounts receivable and related assets. Borrowings
      under the Credit Agreement are limited to a specified percentage of eligible
      inventories and accounts receivable and bear interest at a variable base rate
      plus the applicable increment or LIBOR plus the applicable 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 if borrowings under the facility exceed (or would exceed after
      the
      payments) 90% of permitted borrowings thereunder, and (iv) contains default
      provisions that are typical for this type of financing, including a cross
      default provision relating to other indebtedness of more than $25.0 million.
      The
      Company had borrowings outstanding under the Credit Agreement (or a prior
      agreement) of $714.8 million at May 5, 2007, $384.2 million at April 29, 2006
      and $539.6 million at February 3, 2007.





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 Company repaid the Notes with funds from the Credit
      Agreement on July 31, 2006.





As
      of May
      5, 2007 the Company was in compliance with its debt covenants. The Company
      currently does not meet the Credit Agreement’s fixed charge coverage ratio
      requirement; however, borrowings under the Credit Agreement have not exceeded
      90% of permitted borrowings. The Company plans to pursue additional financing
      beyond its existing Credit Agreement in the form of a term loan ranging from
      $150.0 million to $200.0 million, which it expects to complete in the second
      quarter of this year. This additional financing is expected to provide the
      flexibility to fund the execution of the Company’s strategic plan and ensure
      that borrowings under the Credit Agreement do not exceed 90% of the borrowings
      permitted thereunder. The additional financing may include covenants that are
      more restrictive than those under the Credit Agreement.





**Off-Balance
      Sheet Arrangements**





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 $5.0 million, long-term debt (including current
      portion) of $5.3 million and minority interest of $0.3 million at May 5,
      2007.





**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 February 3, 2007. There
      have been no significant changes in these estimates during the first quarter
      of
      fiscal 2007.





**New
      Accounting Guidance**





The
      Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48), as
      amended, as of the beginning of the current fiscal year. Upon adoption, the
      Company recognized an additional $4.2 million liability for unrecognized tax
      benefits, which was accounted for as a reduction to beginning retained earnings.










As
      of the
      beginning of the year, total unrecognized tax benefits, adjusted for the impact
      of the adoption of FIN 48, totaled $13.8 million. As of the end of the first
      quarter, this amount increased to $13.9 million. This balance represents the
      total amount of unrecognized tax benefits that, if recognized, would affect
      the
      effective tax rate. The Company recognizes interest and penalties related to
      uncertain tax positions in its income tax provision. The adoption of FIN 48
      also
      resulted in the reclassification of $7.2 million from current taxes payable
      to
      non-current accrued liabilities.





A
      number
      of the Company’s tax returns remain subject to examination by taxing
      authorities. These include federal tax returns for 2003 through 2006, tax
      returns in certain states for 1996 through 2006, and tax returns in certain
      foreign jurisdictions for 1999 through 2006.





In
      June
      2006, the FASB ratified the Emerging Issues Task Force (“EITF”) consensus on
      EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to
      Governmental Authorities Should Be Presented in the Income Statement (That
      Is,
      Gross versus Net Presentation)” (“EITF 06-3”). EITF 06-3 states that the
      classification of taxes as gross or net is an accounting policy decision that
      is
      dependent on the type of tax and that similar taxes are to be presented in
      a
      similar manner. EITF 06-3 is effective for reporting periods beginning after
      December 15, 2006. The Company’s adoption of EITF 06-3 did not have an
      impact on its consolidated financial position or results of operations, as
      the
      Company did not change its classification policy as a result of the adoption
      (i.e.; the Company continues to exclude sales taxes from customers from net
      sales).





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 provides
      guidance for using fair value to measure assets and liabilities and only applies
      when other standards require or permit the fair value measurement of assets
      and
      liabilities. FAS 157 does not expand the use of fair value measurement.
      FAS 157 is effective for fiscal years beginning after November 15,
      2007. The Company does not expect the adoption of FAS 157 to have a
      material impact on its consolidated financial position or results of
      operations.





In
      February 2007, the Financial Accounting Standards Board issued Statement No.
      159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(“SFAS No. 159”).  SFAS No. 159 allows companies to elect to measure
      certain assets and liabilities at fair value and is effective for fiscal years
      beginning after November 15, 2007. The Company does not expect the adoption
      of
      FAS 159 to have a material impact on its consolidated financial position or
      results of operations.





**Related
      Party Transactions**





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





**Forward
      Looking Statements**





This
      report contains forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995. One can identify these forward-looking
      statements by the use of words such as "projects," "expected," "estimated,"
      "look toward," "continuing," "planning," "returning," "guidance," "goal,"
      "will," "may," "intend," "anticipates," and other words of similar meaning.
      One
      can also identify them by the fact that they do not relate strictly to
      historical or current facts. These statements are likely to address matters
      such
      as the company's future financial performance (including earnings per share
      growth, EBIT margins and inventory turns, same-store sales growth, and
      anticipated capital expenditures and depreciation and amortization amounts),
      its
      strategic plans and expected benefits relating to such plans (including steps
      to
      be taken to improve the performance of domestic superstores, the exploration
      of
      strategic alternatives with respect to certain international operations, the
      downsizing of the Specialty Retail Segment and the development of a proprietary
      website) and its intentions with respect to dividend payments and share
      repurchases.





These
      statements are subject to risks and uncertainties that could cause actual
      results and plans to differ materially from those included in the company's
      forward-looking statements. These risks and uncertainties include, but are
      not
      limited to, consumer demand for the company's products, particularly during
      the
      holiday season, which is believed to be related to general economic and
      geopolitical conditions, competition and other factors; the availability of
      adequate capital to fund the company’s operations and to carry out its strategic
      plans; the performance of the company’s information technology systems and the
      development of improvements to the systems necessary to implement the company's
      strategic plan, and, with respect to the exploration of strategic alternatives
      for certain international operations, the ability to attract interested third
      parties.





The
      sections “Forward Looking Statements” in Item 1 and “Risk Factors” in Item 1A of
      the company’s Annual Report on Form 10-K for the fiscal year ended February 3,
      2007 filed with the Securities and Exchange Commission contain more detailed
      discussions of these and other risk factors that could cause actual results
      and
      plans to differ materially from those included in the forward-looking
      statements, and those discussions are incorporated herein by reference. The
      company does not undertake any obligation to update forward-looking
      statements.













**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 may 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 February 3, 2007.





**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 May 5, 2007 (the “Evaluation
      Date”). Based on such evaluation, such officers have concluded that the
      Company’s controls and procedures were effective to ensure that information
      required to be disclosed in this quarterly report is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms, and that such information is accumulated and communicated to management,
      including the Company’s Chief Executive Officer (principal executive officer)
      and Chief Financial Officer (principal financial officer), to allow timely
      decisions regarding required disclosure.




*Changes
      in Internal Control:* **** There
      have been no changes in our internal control over financial reporting that
      occurred in the last fiscal quarter that have materially affected, or are
      reasonably likely to materially affect, our 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 2 - Commitments and Contingencies”, on page 5 of this Report, which is
      incorporated herein by reference.





**Item
      1A. Risk Factors**





The
      Company is subject to numerous risks and uncertainties, which could adversely
      affect the Company ’s
      business, financial condition, operating results and cash flows. Such risks
      and
      uncertainties have been disclosed in the Company's last
      Annual Report on Form
      10-K
      for the fiscal year ended February 3, 2007. There
      have been no significant changes in these risks
      and
      uncertainties during
      the first quarter of fiscal 2007.





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





There
      were no shares repurchases during the first quarter of fiscal 2007.











**Item
      6. Exhibits**





**Exhibits:**





**3.1(1)**
            **Restated
                Articles of Incorporation of Borders Group,
                Inc.****3.2(2)**
            **Restated
                bylaws of Borders Group, Inc.****3.3(3)**
            **First
                Amendment to the Restated By laws of Borders Group,
                Inc.****3.4(4)**
            **Amendment
                to the Restated Articles of Incorporation of Borders Group,
                Inc.****3.5(5)**
            **Second
                Amendment to the Restated By laws of Borders Group,
                Inc.****3.6(6)**
            **Amendment
                No. 1 to Second Amended and Restated Multicurrency Revolving Credit
                Agreement dated as of April 2, 2007, among the Company, its subsidiaries
                named therein and the lenders named therein****31.1**
            **Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002****31.2**
            **Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 2002****32.1**
            **Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002****32.2**
            **Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002****(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).****(3)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated July 13,
                2006 (File No. 1-13740).****(4)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).****(5)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).****(6)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated April 2,
                2007 (File No. 1-13740).**













**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:
      June 12, 2007         By: /s/
      Edward W. Wilhelm


Edward
      W. Wilhelm


Executive
      Vice President and


Chief
      Financial
      Officer


(Principal
      Financial
      and


Accounting Officer)








**** **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.****3.3(3)**
            **First
                Amendment to the Restated By laws of Borders Group,
                Inc.****3.4(4)**
            **Amendment
                to the Restated Articles of Incorporation of Borders Group,
                Inc.****3.5(5)**
            **Second
                Amendment to the Restated By laws of Borders Group,
                Inc.****3.6(6)**
            **Amendment
                No. 1 to Second Amended and Restated Multicurrency Revolving Credit
                Agreement dated as of April 2, 2007, among the Company, its subsidiaries
                named therein and the lenders named therein****31.1**
            **Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002****31.2**
            **Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 302 of the Sarbanes-Oxley
                Act
                of 2002****32.1**
            **Statement
                of George L. Jones, President and Chief Executive Officer of Borders
                Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002****32.2**
            **Statement
                of Edward W. Wilhelm, Executive Vice President and Chief Financial
                Officer
                of Borders Group, Inc. pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002****(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).****(3)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated July 13,
                2006 (File No. 1-13740).****(4)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).****(5)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated May 25,
                2007 (File No. 1-13740).****(6)**
            **Incorporated
                by reference from the Company’s Current Report on Form 8-K dated April 2,
                2007 (File No. 1-13740).**