SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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## FORM 10 - Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 25, 2004
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to

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Commission file number 1-13740

# BORDERS GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

---

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

Yes X       
  No

|               | Shares Outstanding As of
|-------------- | ------------------------
|Title of Class | May 21, 2004            
|Common Stock   | 77,579,203              

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# BORDERS
GROUP, INC.

# INDEX

|                               |                                                |     
|------------------------------ | ---------------------------------------------- | ----
|Part I - Financial Information |                                                |     
|                               |                                                |     
|                               |                                                | Page
|                               |                                                |     
|Item 1.                        | Financial Statements                           | 1   
|                               |                                                |     
|Item 2.                        | Management's Discussion and Analysis of        |     
|                               | Financial Condition and Results of             |     
|                               | Operations                                     | 11  
|                               |                                                |     
|Item 3.                        | Quantitative and Qualitative Disclosures about |     
|                               | Market Risk                                    | 21  
|                               |                                                |     
|Item 4.                        | Controls and Procedures                        | 21  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Part II - Other Information    |                                                |     
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Item 1.                        | Legal Proceedings                              | 21  
|                               |                                                |     
|Item 2.                        | Changes in Securities and Use of Proceeds      | 22  
|                               |                                                |     
|Item 3.                        | Defaults Upon Senior Securities                | N/A 
|                               |                                                |     
|Item 4.                        | Submission of Matters to a vote of             | N/A 
|                               | Securityholders                                |     
|                               |                                                |     
|Item 5.                        | Other Information                              | N/A 
|                               |                                                |     
|Item 6.                        | Exhibits and Reports on Form 8-K               | 22  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Signatures                     |                                                | 23  
|                               |                                                |     

ii

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

| |                                                     |                                                          |       |       |  |   |       |       |   | 
| | --------------------------------------------------- | -------------------------------------------------------- | ----- | ----- |  | - | ----- | ----- | - | 
|
|
|
| |                                                     |                                                          |       |       |  |   |       |       |   | 
| | Sales                                               |                                                          | $     | 830.8 |  |   | $     | 751.4 |   | 
| | Other revenue                                       |                                                          | 7.3   |       |  |   | 7.2   |       |  
| |                                                     |                                                          |       |       |  |  
| | Total revenue                                       |                                                          | 838.1 |       |  |   | 758.6 |       |  
| | Cost of merchandise sold, including occupancy costs |                                                          | 627.2 |       |  |   | 569.6 |       |  
| | Inventory writedowns                                |                                                          | 0.1   |       |  |   | -     |       |  
| |                                                     |                                                          |       |       |  |  
| | Gross margin                                        |                                                          | 210.8 |       |  |   | 189.0 |       |  
| | Selling, general and administrative expenses        |                                                          | 203.0 |       |  |   | 193.0 |       |  
| | Pre-opening expense                                 |                                                          | 0.7   |       |  |   | 1.5   |       |  
| | Asset impairments and other writedowns              |                                                          | 0.4   |       |  |   | -     |       |  
| |                                                     |                                                          |       |       |  |  
| | Operating income (loss)                             |                                                          | 6.7   |       |  |   | (5.5  | )     |  
| | Interest expense                                    |                                                          | 1.9   |       |  |   | 2.2   |       |  
| |                                                     |                                                          |       |       |  |  
| | Income (loss) before income tax                     |                                                          | 4.8   |       |  |   | (7.7  | )     |  
| | Income tax provision (benefit)                      |                                                          | 1.8   |       |  |   | (2.9  | )     |  
| |                                                     |                                                          |       |       |  |  
| | Net income (loss)                                   | $                                                        | 3.0   |       |  | $ | (4.8  | )     |  
| |                                                     |                                                          |       |       |  |  
| | Earnings (loss) per common share data               |                                                          |       |       |  |   |       |       |  
| | Diluted:                                            |                                                          |       |       |  |   |       |       |  
| |                                                     | Income (loss) per common share                           | $     | 0.04  |  |   | $     | (0.06 | ) | 
| |                                                     |                                                          |       |       |  |  
| |                                                     | Weighted average common shares outstanding (in millions) |       | 79.8  |  |   |       | 78.4  |   | 
| | Basic:                                              |                                                          |       |       |  |   |       |       |  
| |                                                     | Income (loss) per common share                           | $     | 0.04  |  |   | $     | (0.06 | ) | 
| |                                                     |                                                          |       |       |  |  
| |                                                     | Weighted average common shares outstanding (in millions) |       | 78.2  |  |   |       | 78.4  |   | 
| |                                                     |                                                          |       |       |  |   |       |       |  
| | Dividends declared per common share                 | $                                                        | 0.08  |       |  | $ | -     |       |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

---

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

| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  |  | 
| | ------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  |  | 
|
|
| | Assets                                                  |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| | Current assets:                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| |                                                         | Cash and cash equivalents                                   | $                                                             | 234.4   |         |  | $ | 136.4   |         |  | $ | 378.8   |         | 
| |                                                         | Merchandise inventories                                     |                                                               | 1,271.7 |         |  |   | 1,189.5 |         |  |   | 1,235.6 |         | 
| |                                                         | Accounts receivable and other current assets                |                                                               | 95.6    |         |  |   | 99.0    |         |  |   | 98.3    |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total current assets                                          |         | 1,601.7 |  |   |         | 1,424.9 |  |   |         | 1,712.7 |  | 
| |                                                         | Property and equipment, net of accumulated depreciation     |                                                               |         |         |  |   |         |         |  |   |         |         | 
| |                                                         |                                                             | of $772.3, $677.3 and $763.5 at April 25, 2004,               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | April 27, 2003 and January 25, 2004, respectively             |         | 525.9   |  |   |         | 543.7   |  |   |         | 577.7   |  | 
| |                                                         | Other assets                                                |                                                               | 72.3    |         |  |   | 90.3    |         |  |   | 70.2    |         | 
| |                                                         | Deferred income taxes                                       |                                                               | 1.1     |         |  |   | 2.0     |         |  |   | 1.3     |         | 
| |                                                         | Goodwill                                                    |                                                               | 102.5   |         |  |   | 95.1    |         |  |   | 104.3   |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total assets                                                  | $       | 2,303.5 |  |   | $       | 2,156.0 |  |   | $       | 2,466.2 |  | 
|
| | Liabilities, Minority Interest and Stockholders' Equity |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| | Current liabilities:                                    |                                                             |                                                               |         |         |  |   |         |         |  |   |         |        
| |                                                         | Short-term borrowings and current portion of long-term debt | $                                                             | 130.1   |         |  | $ | 116.7   |         |  | $ | 141.2   |         | 
| |                                                         | Trade accounts payable                                      |                                                               | 576.5   |         |  |   | 546.9   |         |  |   | 595.9   |         | 
| |                                                         | Accrued payroll and other liabilities                       |                                                               | 249.9   |         |  |   | 265.0   |         |  |   | 281.8   |         | 
| |                                                         | Taxes, including income taxes                               |                                                               | 60.7    |         |  |   | 54.0    |         |  |   | 133.1   |         | 
| |                                                         | Deferred income taxes                                       |                                                               | 12.1    |         |  |   | 8.7     |         |  |   | 12.1    |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total current liabilities                                     |         | 1,029.3 |  |   |         | 991.3   |  |   |         | 1,164.1 |  | 
| |                                                         | Long-term debt                                              |                                                               | 56.2    |         |  |   | 50.0    |         |  |   | 57.2    |         | 
| |                                                         | Long-term capital lease obligations                         |                                                               | -       |         |  |   | 19.0    |         |  |   | -       |         | 
| |                                                         | Other long-term liabilities                                 |                                                               | 95.5    |         |  |   | 82.4    |         |  |   | 90.2    |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total liabilities                                             |         | 1,181.0 |  |   |         | 1,142.7 |  |   |         | 1,311.5 |  | 
| |                                                         | Minority interest                                           |                                                               | 1.7     |         |  |   | -       |         |  |   | 1.7     |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total liabilities and minority interest                       |         | 1,182.7 |  |   |         | 1,142.7 |  |   |         | 1,313.2 |  | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         | Stockholders' equity:                                       |                                                               |         |         |  |   |         |         |  |   |         |         | 
| |                                                         | Common stock; 200,000,000 shares authorized;                |                                                               |         |         |  |   |         |         |  |   |         |         | 
| |                                                         |                                                             | 77,762,697, 78,086,696 and 78,273,341 issued and              |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | outstanding at April 25, 2004, April 27, 2003                 |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | and January 25, 2004, respectively                            |         | 623.3   |  |   |         | 646.5   |  |   |         | 646.3   |  | 
| |                                                         | Deferred compensation                                       |                                                               | (0.8    | )       |  |   | (0.5    | )       |  |   | (0.6    | )       | 
| |                                                         | Accumulated other comprehensive income                      |                                                               | 18.3    |         |  |   | 2.7     |         |  |   | 24.1    |         | 
| |                                                         | Retained earnings                                           |                                                               | 480.0   |         |  |   | 364.6   |         |  |   | 483.2   |         | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total stockholders' equity                                    |         | 1,120.8 |  |   |         | 1,013.3 |  |   |         | 1,153.0 |  | 
| |                                                         |                                                             |                                                               |         |         |  |   |         |         |  |   |         |         |  | 
| |                                                         |                                                             | Total liabilities, minority interest and stockholders' equity | $       | 2,303.5 |  |   | $       | 2,156.0 |  |   | $       | 2,466.2 |  | 
|

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

---

# BORDERS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE 13 WEEKS ENDED APRIL 25, 2004(dollars in millions except share amounts)
(UNAUDITED)

| |                                    |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |   | 
| | ---------------------------------- | ------------------------------- | ---------- | - | - | ----- | ----- | - | - | ---- | ---- | - | - | ---- | --- |  | - | ----- | ---- | - | - | ------- | ----- | - | 
|
|
|
|
| | Balance at January 25, 2004        | 78,273,341                      |            |   | $ | 646.3 |       |   | $ | (0.6 | )    |   | $ | 24.1 |     |  | $ | 483.2 |      |   | $ | 1,153.0 |       |  
| |                                    |                                 |            |   |   |       |       |   |   |      |      |   |   |     
| | Net income                         | -                               |            |   |   | -     |       |   |   | -    |      |   |   | -    |     |  |   | 3.0   |      |   |   | 3.0     |       |  
| | Currency translation adjustment    | -                               |            |   |   | -     |       |   |   | -    |      |   |   | (6.0 | )   |  |   | -     |      |   |   | (6.0    | )     |  
| | Change in fair value of            |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |  
| |                                    | derivatives, net of tax of $0.1 | -          |   |   |       | -     |   |   |      | -    |   |   |      | 0.2 |  |   |       | -    |   |   |         | 0.2   |   | 
| |                                    |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |  
| | Comprehensive loss                 |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   | (2.8    | )     |  
| | Cash dividends declared ($0.08 per |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |  
| |                                    | common share)                   | -          |   |   |       | -     |   |   |      | -    |   |   |      | -   |  |   |       | (6.2 | ) |   |         | (6.2  | ) | 
| | Issuance of common stock           | 1,625,682                       |            |   |   | 20.7  |       |   |   | -    |      |   |   | -    |     |  |   | -     |      |   |   | 20.7    |       |  
| | Repurchase and retirement of       |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |  
| |                                    | common stock                    | (2,136,326 | ) |   |       | (50.1 | ) |   |      | -    |   |   |      | -   |  |   |       | -    |   |   |         | (50.1 | ) | 
| | Change in deferred                 |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |  
| |                                    | compensation                    | -          |   |   |       | -     |   |   |      | (0.2 | ) |   |      | -   |  |   |       | -    |   |   |         | (0.2  | ) | 
| | Tax benefit of equity              |                                 |            |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |      |   |   |         |       |  
| |                                    | compensation                    | -          |   |   |       | 6.4   |   |   |      | -    |   |   |      | -   |  |   |       | -    |   |   |         | 6.4   |   | 
| |                                    |                                 |            |   |   |       |       |   |   |      |      |   |   |     
| | Balance at April 25, 2004          | 77,762,697                      |            |   | $ | 623.3 |       |   | $ | (0.8 | )    |   | $ | 18.3 |     |  | $ | 480.0 |      |   | $ | 1,120.8 |       |  
| |                                    |                                 |            |   |   |       |       |   |   |      |      |   |   |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

---

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

| |                                                                     |                                                                     |                                                      |                                           |        |       |        |       |        |       |   | 
| | ------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------ | ----- | ------ | ----- | ------ | ----- | - | 
|
|
|
|
| | Cash provided by (used for):                                        |                                                                     |                                                      |                                           |        |       |        |       |       
| | Operations                                                          |                                                                     |                                                      |                                           |        |       |        |       |       
| | Net income / (loss)                                                 | $                                                                   | 3.0                                                  |                                           |        | $     | (4.8   | )     |       
| | Adjustments to reconcile net income (loss) to operating cash flows: |                                                                     |                                                      |                                           |        |       |        |       |       
| |                                                                     | Depreciation                                                        |                                                      | 24.2                                      |        |       |        | 24.2  |        |      
| |                                                                     | Increase in other long-term assets                                  |                                                      | (2.3                                      | )      |       |        | (15.9 | )      |      
| |                                                                     | Increase in other long-term liabilities                             |                                                      | 1.8                                       |        |       |        | 1.6   |        |      
| |                                                                     | Cash provided by (used for) current assets and current liabilities: |                                                      |                                           |        |       |        |       |        |      
| |                                                                     |                                                                     | Increase in inventories                              |                                           | (39.3  | )     |        |       | (7.3   | )     |  
| |                                                                     |                                                                     | Decrease in accounts receivable                      |                                           | 10.8   |       |        |       | 23.2   |       |  
| |                                                                     |                                                                     | Increase in prepaid expenses                         |                                           | (5.7   | )     |        |       | (33.8  | )     |  
| |                                                                     |                                                                     | Decrease in accounts payable                         |                                           | (18.0  | )     |        |       | (17.9  | )     |  
| |                                                                     |                                                                     | Decrease in taxes payable                            |                                           | (65.8  | )     |        |       | (66.5  | )     |  
| |                                                                     |                                                                     | Decrease in expenses payable and accrued liabilities |                                           | (26.0  | )     |        |       | (14.7  | )     |  
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash used for operations              | (117.3 | )     |        |       | (111.9 | )     |  
| | Investing                                                           |                                                                     |                                                      |                                           |        |       |        |       |       
| |                                                                     | Capital expenditures                                                |                                                      | (13.5                                     | )      |       |        | (16.4 | )      |      
| |                                                                     | Proceeds from sale-leaseback of assets                              |                                                      | 32.3                                      |        |       |        | -     |        |      
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash provided by (used for) investing |        | 18.8  |        |       |        | (16.4 | ) | 
| | Financing                                                           |                                                                     |                                                      |                                           |        |       |        |       |       
| |                                                                     | Net repayment of long-term capital lease obligations                |                                                      | (0.4                                      | )      |       |        | (0.2  | )      |      
| |                                                                     | Net funding from (repayment of) credit facility                     |                                                      | (7.2                                      | )      |       |        | 6.9   |        |      
| |                                                                     | Issuance of common stock                                            |                                                      | 20.7                                      |        |       |        | 3.1   |        |      
| |                                                                     | Payment of cash dividends                                           |                                                      | (6.2                                      | )      |       |        | -     |        |      
| |                                                                     | Repurchase of common stock                                          |                                                      | (50.1                                     | )      |       |        | (13.8 | )      |      
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash used for financing               |        | (43.2 | )      |       |        | (4.0  | ) | 
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Effect of exchange rates on cash and equivalents                    |                                                                     | (2.7                                                 | )                                         |        |       | (0.4   | )     |       
| | Net decrease in cash and equivalents                                |                                                                     | (144.4                                               | )                                         |        |       | (132.7 | )     |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Cash and equivalents at beginning of year                           |                                                                     | 378.8                                                |                                           |        |       | 269.1  |       |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Cash and equivalents at end of period                               | $                                                                   | 234.4                                                |                                           |        | $     | 136.4  |       |       
| |                                                                     |                                                                     |                                                      |                                           |        |       |        |      

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

---

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

## NOTE 1 - BASIS
OF PRESENTATION

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

The Companys fiscal
year ends on the Sunday immediately preceding the last Wednesday in January. At
April 25, 2004, the Company operated 485 superstores primarily under the Borders
name, including 24 in the United Kingdom, nine in Australia, two in Puerto Rico,
and one each in Singapore and New Zealand. The Company also operated 712
mall-based and other bookstores primarily under the Waldenbooks name, and 36
bookstores under the Books etc. name in the United Kingdom.

## NOTE 2 -
COMMITMENTS AND CONTINGENCIES

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

On October 29, 2002, Gary
Gerlinger, individually and on behalf of all other similarly situated consumers
in the United States who, during the period from August 1, 2001 to the present,
purchased books online from either Amazon 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 recently issued an order granting the motion as
to certain of plaintiffs claims, denying it as others and requesting
additional briefing on certain issues. The order also denied certain
cross-motions filed by the plaintiff. The Company intends to vigorously defend
the action. The Company has not included any liability in its consolidated
financial statements in connection with this lawsuit and has expensed as
incurred all legal costs to date. Although an adverse resolution of the matter
could have a material adverse effect on the result of the operations of the
Company for the applicable period or periods, the Company does not believe that
this litigation will have a material effect on its liquidity or financial
position.

5

---

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

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

The Company does not
believe that it should be liable under existing laws and regulations for any
failure by it or Amazon to collect sales or other taxes relating to Internet
sales. Although an adverse resolution of claims relating to the failure to
collect sales or other taxes on online sales could have a material effect on the
results of the operations of the Company for the applicable period or periods,
the Company does not believe that any such claims will have a material adverse
effect on its liquidity or financial position.

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

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

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

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

Lease Guaranty
Agreement: Borders leases for 13 of its retail stores and its
distribution center in Harrisburg, Pennsylvania have been guaranteed by Kmart.
Under the terms of a lease guaranty, indemnification and reimbursement agreement
entered into upon completion of the IPO, as amended, (Lease Guaranty Agreement),
the underlying leases will be transferable by Borders, subject to a right of
first refusal in favor of Kmart with respect to sites within a three-mile radius
of a Kmart store and, with respect to all other sites, a right of first offer in
favor of Kmart. The Company and Borders are required to indemnify Kmart with
respect to (i) any liabilities Kmart may incur under the lease guarantees,
except those liabilities arising from the gross negligence or willful misconduct

6

---

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

of Kmart, and (ii) any
losses incurred by Kmart after taking possession of any particular premises,
except to the extent such losses arise solely from the acts or omissions of
Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the
Companys or Borders failure to provide any required indemnity, (ii)
a knowing and material violation of the limitations on transfers of guaranteed
leases set forth in the agreement, or (iii) certain events of bankruptcy, Kmart
will have the right to assume any or all of the guaranteed leases and to take
possession of all of the premises underlying such guaranteed leases; provided,
that in the event of a failure or failures to provide required indemnities, the
remedy of taking possession of all of the premises underlying the guaranteed
leases may be exercised only if such failures relate to an aggregate liability
of $10.0 or more and only if Kmart has provided 100 days prior written
notice. In the event of a failure to provide required indemnities resulting in
losses of more than the equivalent of two months rent under a particular lease
but less than $10.0, Kmart may exercise such remedy of possession as to the
premises underlying the guaranteed lease or leases to which the failure to
provide the indemnity relates and one additional premise for each such premises
to which the failure relates, up to a maximum, in any event, of five additional
premises, and thereafter, with respect to such additional premises, Kmart
remedies and indemnification rights shall terminate. In the event of a failure
to provide required indemnities resulting in liabilities of less than the
equivalent of two months rent under a particular lease, Kmart may exercise such
remedy of possession only as to the premises underlying the guaranteed lease or
leases to which the failure to provide the indemnity relates. The Lease Guaranty
Agreement will remain in effect until the expiration of all lease guarantees,
which the Company believes will be in January 2020.

## NOTE 3 -
FINANCING

Credit Facility: The
Company has a Multicurrency Revolving Credit Agreement (the Credit
Agreement), which will expire in June 2005. The Credit Agreement provides
for borrowings of up to $450.0. Borrowings under the Credit Agreement bear
interest at a variable base rate plus an increment or LIBOR plus an increment at
the Companys option. The Credit Agreement contains covenants which limit,
among other things, the Companys ability to incur indebtedness, grant
liens, make investments, consolidate or merge, declare dividends, dispose of
assets, repurchase its common stock in excess of $225.0 over the term of the
Agreement (plus any proceeds and tax benefits resulting from stock option
exercises and tax benefits resulting from restricted shares purchased by
employees from the Company), and requires the Company to meet certain financial
measures regarding fixed coverage, leverage, tangible net worth and capital
expenditures. The Company had borrowings outstanding under the Credit Agreement
(or a prior agreement) of $116.3 at April 25, 2004, $116.3 at April 27, 2003 and
$126.9 at January 25, 2004.

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

Lease Financing
Facilities. The Company has two lease financing facilities (collectively,
the Lease Financing Facilities) to finance new stores and other
property owned by unaffiliated entities and leased to the Company or its
subsidiaries. The original facility (the Original Lease Facility)
will expire in June 2006. In June of 2002, the Company established a new
facility (the New Lease Facility), which will expire in 2007. The
aggregate amount available under the Lease Financing Facilities is $25.0.
Properties to be financed after the effective date of the New Lease Facility
will be financed under that Facility, and no additional properties will be
financed under the Original Lease Facility. The Lease Financing Facilities
provide financing to lessors of properties leased to the Company or its
subsidiaries through loans from lenders for up to 95% of a projects cost.
Additionally, under the New Lease Facility, the unaffiliated lessor will make
equity contributions approximating 5% of the cost of each project. The lessors
under the Original Lease Facility have made similar contributions.

7

---

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

Independent of the
Companys obligations relating to the leases, the Company and certain of
its subsidiaries guarantee payment when due of all amounts required to be paid
to the third-party lenders. The principal amount guaranteed is limited to
approximately 89% of the original cost of a project so long as the Company is
not in default under the lease relating to such project. The agreements relating
to both of the Lease Financing Facilities contain covenants and events of
default that are similar to those contained in the Credit Agreement described
above. Security interests in the properties underlying the leases and in the
Companys interests in the leases have been given to the lenders. The Lease
Financing Facilities contain cross default provisions with respect to the
obligations of the Company under the Credit Agreement and certain other
agreements to which the Company is a party. There also are cross default
provisions with respect to the obligations relating to the Lease Financing
Facilities of Wilmington Trust Company, as owner trustee of a grantor trust
formed for the Lease Financing Facilities, and the unaffiliated beneficial owner
of the grantor trust. At April 25, 2004, the maximum loss that the Company could
incur under these guarantees approximated $13.8.

The Company pays lessors
who have financed properties under the Original Lease Facility regular rental
amounts for use of the properties. These payments are equal to the carrying cost
of the lessors borrowings for construction of the properties, and do not
include amortization of the principal amounts of the lessors indebtedness
relating to the properties. The rental payments are categorized as occupancy
expense, and as such are included as a component of Cost of merchandise
sold in the Companys consolidated statements of operations. These
rental payments are also included in the disclosure of future minimum lease
payments under operating leases.

There were two, four and
two properties financed through the Original Lease Facility at April 25, 2004,
April 27, 2003 and January 25, 2004, respectively, with financed values of
$13.8, $22.6 and $13.8. The two properties financed through the Original Lease
Facility at April 25, 2004 and January 25, 2004 were consolidated by the
Company, pursuant to the provisions of Financial Accounting Standards Board
(FASB) issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), as discussed below. Of the amount financed under the
Original Lease Facility at April 27, 2003, the Company had recorded $19.0 as
capitalized leases, under Other assets (for the capital lease
assets) and Long-term capital lease obligations (for the capital
lease liabilities) on the consolidated balance sheets at April 27, 2004. These
amounts were treated as non-cash items on the consolidated statements of cash
flows. There were no borrowings under the New Lease Facility as of April 25,
2004, April 27, 2003 or January 25, 2004.

Consolidated VIEs:
Pursuant to the requirements of FIN 46, the Company is the primary beneficiary
of the two variable interest entities (VIEs) that own the two properties
financed under the Original Lease Facility at April 25, 2004. As a result, the
Company consolidates these VIEs and has recorded land, property and equipment,
net of accumulated depreciation, of $12.0, short-term borrowings of $13.8, and
minority interest of $1.3 at April 25, 2004. These amounts have been treated as
non-cash items on the consolidated statements of cash flows.

The Company also is the
primary beneficiary of two additional VIEs, due to the Companys guarantee
of the debt of these entities. As a result, the Company consolidates these VIEs
and has recorded property and equipment, net of accumulated depreciation, of
$5.5, long-term debt of $5.8, and minority interest of $0.4 at April 25, 2004.
These amounts have been treated as non-cash items on the consolidated statements
of cash flows.

Mortgage Notes:
During 1994, the Company entered into agreements in which leases with respect to
four Borders locations served as collateral for certain mortgage pass-through
certificates. These mortgage pass-through certificates included a provision
requiring the Company to repurchase the underlying mortgage notes in certain
events. In the fourth quarter of 2001, the Company was obligated to purchase the
notes for $33.5, due to Kmart Corporations (the former guarantor of the
leases) failure to maintain investment grade credit ratings. As a result, the
Company has categorized this prepaid rent amount as part of Other
assets in the consolidated balance sheets and is amortizing the balance
over each propertys remaining lease term. The remaining balance at April
25, 2004 was approximately $28.3.

8

---

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

## NOTE 4 
STOCK-BASED BENEFIT PLANS

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

| |                                    |                                       |     |      |  |   |      |       |   |  |  |  |  |  |  |  |  |  | 
| | ---------------------------------- | ------------------------------------- | --- | ---- |  | - | ---- | ----- | - |  |  |  |  |  |  |  |  |  | 
|
|
|
| | Net income (loss), as reported     | $                                     | 3.0 |      |  | $ | (4.8 | )     |   |  |  |  |  |  |  |  | 
| | Add: Stock-based employee expense  |                                       |     |      |  |   |      |       |   |  |  |  |  |  |  |  | 
| |                                    | included in reported net income,      |     |      |  |   |      |       |   |  |  |  |  |  |  |  |  | 
| |                                    | net of related tax effects            |     | 0.1  |  |   |      | -     |   |  |  |  |  |  |  |  |  | 
| | Deduct: Total stock-based employee |                                       |     |      |  |   |      |       |   |  |  |  |  |  |  |  | 
| |                                    | compensation expense determined under |     |      |  |   |      |       |   |  |  |  |  |  |  |  |  | 
| |                                    | fair value method for all awards,     |     |      |  |   |      |       |   |  |  |  |  |  |  |  |  | 
| |                                    | net of tax                            |     | 1.3  |  |   |      | 2.0   |   |  |  |  |  |  |  |  |  | 
| |                                    |                                       |     |      |  |   |      |       |   |  | 
| | Pro-forma net income (loss)        | $                                     | 1.8 |      |  | $ | (6.8 | )     |   |  |  |  |  |  |  |  | 
| |                                    |                                       |     |      |  |   |      |       |   |  | 
| | Earnings (loss) per share:         |                                       |     |      |  |   |      |       |   |  |  |  |  |  |  |  | 
| |                                    | Basic -- as reported                  | $   | 0.04 |  |   | $    | (0.06 | ) |  |  |  |  |  |  |  |  | 
| |                                    | Basic -- pro-forma                    | $   | 0.02 |  |   | $    | (0.09 | ) |  |  |  |  |  |  |  |  | 
| |                                    | Diluted -- as reported                | $   | 0.04 |  |   | $    | (0.06 | ) |  |  |  |  |  |  |  |  | 
| |                                    | Diluted -- pro-forma                  | $   | 0.02 |  |   | $    | (0.09 | ) |  |  |  |  |  |  |  |  | 

## NOTE 5-
SEGMENT INFORMATION

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

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

Total assets for the
Corporate segment include certain corporate headquarters property and equipment,
net of accumulated depreciation, of $67.2 and $73.3 at April 25, 2004 and April
27, 2003, respectively, whose related depreciation expense has been allocated to
the Borders, Waldenbooks and International segments. Depreciation expense
allocated to the Borders segment totaled $2.4 and $2.8 for the 13 weeks ended
April 25, 2004 and April 27, 2003, respectively. Depreciation expense allocated
to the Waldenbooks segment totaled $1.1 and $1.5 for the 13 weeks ended April
25, 2004 and April 27, 2003, respectively. Depreciation expense allocated to the
International segment totaled $0.1 and $0.0 for the 13 weeks ended April 25,
2004 and April 27, 2003, respectively.

9

---

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

| |                         |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  |  |  | 
| | ----------------------- | ------------- | ------- | ------- | - | - | ------- | ------- | - |  |  |  |  |  |  |  |  |  | 
|
|
|
| | Sales                   |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  | 
| |                         | Borders       | $       | 577.3   |   |   | $       | 521.5   |   |  |  |  |  |  |  |  |  | 
| |                         | Walden        |         | 150.8   |   |   |         | 150.3   |   |  |  |  |  |  |  |  |  | 
| |                         | International |         | 102.7   |   |   |         | 79.6    |   |  |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total sales             | $             | 830.8   |         |   | $ | 751.4   |         |   |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Net income (loss)       |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  | 
| |                         | Borders       | $       | 10.5    |   |   | $       | 4.8     |   |  |  |  |  |  |  |  |  | 
| |                         | Walden        |         | 2.9     |   |   |         | 0.5     |   |  |  |  |  |  |  |  |  | 
| |                         | International |         | (3.2    | ) |   |         | (4.2    | ) |  |  |  |  |  |  |  |  | 
| |                         | Corporate     |         | (7.2    | ) |   |         | (5.9    | ) |  |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total net income (loss) | $             | 3.0     |         |   | $ | (4.8    | )       |   |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total assets            |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  | 
| |                         | Borders       | $       | 1,392.6 |   |   | $       | 1,337.2 |   |  |  |  |  |  |  |  |  | 
| |                         | Walden        |         | 304.1   |   |   |         | 318.5   |   |  |  |  |  |  |  |  |  | 
| |                         | International |         | 362.6   |   |   |         | 314.5   |   |  |  |  |  |  |  |  |  | 
| |                         | Corporate     |         | 244.2   |   |   |         | 185.8   |   |  |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total assets            | $             | 2,303.5 |         |   | $ | 2,156.0 |         |   |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 

## NOTE 6 - SALE-LEASEBACK TRANSACTIONS

In March 2004, the Company
entered into an agreement with GE Pension Limited to sell and subsequently
leaseback the Company-owned property at 120 Charing Cross Road, London U.K. WC2J
0JR, owned by its Books, Etc. subsidiary. There were no future commitments,
obligations, provisions, or circumstances included in either the sale contract
or the lease contract that would result in the Companys continuing
involvement, therefore, the assets associated with the property were removed
from the Companys condensed consolidated balance sheets.

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

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 U.K. Limited, Borders Australia Pty Limited and others
(individually and collectively, the Company), is the second largest
operator of book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and number of stores.
At April 25, 2004, the Company operated 485 superstores under the Borders name,
including 24 in the United Kingdom, nine in Australia, two in Puerto Rico, and
one each in Singapore and New Zealand. The Company also operated 712 mall-based
and other bookstores primarily under the Waldenbooks name in the United States
and 36 bookstores under the Books etc. name in the United Kingdom.

The Companys business
strategy is to continue its growth and increase its profitability through (i)
expanding and refining its core domestic superstore business, (ii) driving
International growth by expanding established markets and leveraging
infrastructure investments, (iii) leveraging strategic alliances and in-store
Web-based commerce technologies which enhance the customer experience, and (iv)
maximizing cash flow and profitability at Waldenbooks through a combination of
selective growth and profit initiatives. Specifically, the Company expects to
open 18 to 20 domestic Borders stores and will undertake an expanded remodel
program, through which the Company expects to complete major remodels of 40 to
50 existing stores in 2004. International store growth over the next several
years will primarily focus on existing markets with approximately six to eight
International store openings annually. The International segment achieved full
year profitability for the first time in 2003 and full year profit growth is
expected going forward. The Waldenbooks segment has experienced negative
comparable store sales percentages for the past several years primarily due to
the overall decrease in mall traffic and the impact of superstore openings;
however, as a result of the successful plan to optimize the Waldenbooks store
base, the comparable store sales percentages are generally improving. The
Company is continuing to implement this plan in order to continue improving
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 rate
going forward. In addition, Waldenbooks manages the Companys kiosks and
small format stores, including those in airports and outlet malls and selective
growth in these small format stores is expected in 2004. The Companys
objectives with respect to these initiatives are to continue to grow
consolidated sales and earnings in 2004. In addition, subject to Board approval,
the Company plans to provide returns to stockholders through quarterly cash
dividends and share repurchases by utilizing free cash flow generated by the
business. In March 2004, the Board of Directors declared a quarterly cash
dividend of $0.08 per share on the Companys common stock, payable April
28, 2004 to stockholders of record at the close of business April 7, 2004, and
in May 2004, the Board of Directors declared a quarterly cash dividend of $0.08
per share on the Companys common stock, payable July 28, 2004 to
stockholders of record at the close of business July 7, 2004. In May 2003, the
Board of Directors authorized an increase in the amount of share repurchases to
$150 million (plus any proceeds and tax benefits resulting from stock option
exercises and tax benefits resulting from restricted shares purchased by
employees from the Company).

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

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

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

11

---

Sales in the Companys consolidated statements of operations.
The Company also pays referral fees to Amazon pursuant to this agreement. This
service was offered to customers beginning November 27, 2002.

The Companys first
quarters of 2004 and 2003 consisted of the 13 weeks ended April 25, 2004 and
April 27, 2003, respectively.

## Results of
Operations

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

| |                                                |       |   |  |       |    |  |  |  |  |  |  | 
| | ---------------------------------------------- | ----- | - |  | ----- | -- |  |  |  |  |  |  | 
|
|
|
|
| | Sales                                          | 100.0 | % |  | 100.0 | %  |  |  |  |  |  |  | 
| | Other revenue                                  | 0.9   |   |  | 1.0   |    |  |  |  |  |  |  | 
| |                                                |       |   |  |       |    |  |  | 
| | Total revenue                                  | 100.9 |   |  | 101.0 |    |  |  |  |  |  |  | 
| | Cost of merchandise sold (including occupancy) | 75.5  |   |  | 75.8  |    |  |  |  |  |  |  | 
| | Inventory writedowns                           | -     |   |  | -     |    |  |  |  |  |  |  | 
| |                                                |       |   |  |       |    |  |  | 
| | Gross margin                                   | 25.4  |   |  | 25.2  |    |  |  |  |  |  |  | 
| | Selling, general and administrative expenses   | 24.5  |   |  | 25.7  |    |  |  |  |  |  |  | 
| | Pre-opening expense                            | 0.1   |   |  | 0.2   |    |  |  |  |  |  |  | 
| | Asset impairments and other writedowns         | -     |   |  | -     |    |  |  |  |  |  |  | 
| |                                                |       |   |  |       |    |  |  | 
| | Operating income (loss)                        | 0.8   |   |  | (0.7  | )  |  |  |  |  |  |  | 
| | Interest expense                               | 0.2   |   |  | 0.3   |    |  |  |  |  |  |  | 
| |                                                |       |   |  |       |    |  |  | 
| | Income (loss) before income tax                | 0.6   |   |  | (1.0  | )  |  |  |  |  |  |  | 
| | Income tax provision (benefit)                 | 0.2   |   |  | (0.4  | )  |  |  |  |  |  |  | 
| |                                                |       |   |  |       |    |  |  | 
| | Net income (loss)                              | 0.4   | % |  | (0.6  | )% |  |  |  |  |  |  | 
| |                                                |       |   |  |       |    |  |  | 

Consolidated Results - Comparison of
the 13 weeks ended April 25, 2004 to the 13 weeks ended April 27, 2003

Sales

Consolidated sales
increased $79.4 million, or 10.6%, to $830.8 million in 2004 from $751.4 million
in 2003. This resulted primarily from increased sales in the Borders,
International segments, along with a slight increase in sales from the
Waldenbooks segment.

Comparable store sales for
all Borders superstores increased 4.3% in 2004. Comparable store sales measures
for all Borders superstores, which are based upon a 52-week year, include all
stores open more than one year except those not offering music (of which there
are 10, representing approximately 2% of total sales). New stores are included
in the calculation of comparable store sales measures upon the 13th month of
operation. The comparable store sales increase for 2004 was due primarily to the
book, movie and gifts and stationery categories, which experienced strong
positive comparable store sales, partially offset by negative comparable store
sales in the music category. Comparable store sales of books increased due to
continued strength in bestsellers. Sales of movies improved on a comparable
store basis primarily as the result of increased sales of digital videodiscs
(DVDs). Sales of the gifts and stationery category also increased, principally
the result of category management initiatives resulting in product enhancements,
improved placements, and a slight increase in space allocation. The impact of
price changes on comparable store sales was not significant.

Waldenbooks
comparable store sales increased 5.6% in 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 increase for 2004
was primarily due to improved conversion of mall traffic. The impact of price
changes on comparable store sales was not significant.

Other revenue

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

Waldenbooks sells
memberships in its Preferred Reader Program, which offers members discounts on
purchases and other benefits. The Company recognizes membership income on a
straight-line basis over the 12-month term of the membership, and categorizes
the

12

---

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.

Gross margin

Consolidated gross margin
increased $21.8 million, or 11.5%, to $210.8 million in 2004 from $189.0 million
in 2003. As a percentage of sales, consolidated gross margin increased to 25.4%
in 2004 from 25.2% in 2003. This was primarily due to the Waldenbooks and
International segments gross margin as a percentage of sales increasing, while
the Borders segment remained flat. In the Waldenbooks segment, the improvement was
primarily due to occupancy costs for stores open more than one year remaining
essentially flat while comparable store sales improved. The International
segment improvement was due to higher third party vendor income from café
operations and lower costs related to shrink and distribution as a percentage of
sales, offset by an increase in occupancy 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 from cost of
sales and include them in other financial statement lines.

Selling, general and administrative expenses

Consolidated selling,
general and administrative expenses (SG&A) increased $10.0 million, or 5.2%,
to $203.0 million in 2004 from $193.0 million in 2003. As a percentage of sales,
SG&A decreased to 24.5% in 2004 from 25.7% in 2003. This decrease primarily
resulted from reduced corporate non-payroll costs as percentage of sales for the
Borders, Waldenbooks and International 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 decreased $0.3 million, or 13.6%, to $1.9 million in 2004 from $2.2
million in 2003. This was primarily due to lower average debt levels in 2004 as
compared to 2003, which primarily resulted from increased cash flow generated by
the Borders segment.

Taxes

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

Net income (loss)

Due to the factors
mentioned above, net income as a percentage of sales increased to net income of
0.4% in 2004 from a net loss of 0.6% in 2003, and net income dollars increased
to net income of $3.0 million in 2004 from a net loss of $4.8 million in 2003.

## Segment Results

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

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

13

---

## Borders

| |                          |   |       |   |  |   |       |   |  |  |  |  |  |  |  |  |  |  | 
| | ------------------------ | - | ----- | - |  | - | ----- | - |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Sales                    | $ | 577.3 |   |  | $ | 521.5 |   |  |  |  |  |  |  |  |  | 
| | Net income               | $ | 10.5  |   |  | $ | 4.8   |   |  |  |  |  |  |  |  |  | 
| | Net income as % of sales |   | 1.8   | % |  |   | 0.9   | % |  |  |  |  |  |  |  |  | 
| | Depreciation expense     | $ | 17.3  |   |  | $ | 17.3  |   |  |  |  |  |  |  |  |  | 
| | Interest income          | $ | 1.8   |   |  | $ | 0.9   |   |  |  |  |  |  |  |  |  | 
| | Store openings           |   | 4     |   |  |   | 8     |   |  |  |  |  |  |  |  |  | 
| | Store closings           |   | 1     |   |  |   | -     |   |  |  |  |  |  |  |  |  | 
| | Store count              |   | 448   |   |  |   | 412   |   |  |  |  |  |  |  |  |  | 

Borders - Comparison of
the 13 weeks ended April 25, 2004 to the 13 weeks ended April 27, 2003

Sales

Borders sales
increased $55.8 million, or 10.7%, to $577.3 million in 2004 from $521.5 million
in 2003. This increase was comprised of comparable store sales increases of
$19.7 million and non-comparable sales increases of $36.1 million primarily
associated with 2004 and 2003 store openings.

Gross margin

Gross margin as a
percentage of sales remained flat at 26.5% in 2004 as compared to 2003. Store
occupancy costs as a percentage of sales decreased 0.2% as a result of the
stores rent expense representing a lower percentage of sales, primarily
due to rent expense for stores open more than one year remaining essentially
flat while comparable store sales improved. This was offset by an increase in
markdowns, freight and product costs of 0.2% as a percentage of sales.

Gross margin dollars
increased $14.7 million, or 10.6%, to $153.1 million in 2004 from $138.4 million
in 2003, which was primarily due to the increase in comparable store sales and
the increase in the gross margin percentage.

Selling, general and administrative expenses

SG&A as a percentage of
sales decreased to 23.7% in 2004 from 25.0% in 2003. This was primarily due to
an decrease of 0.8% in corporate non-payroll costs as a percentage of sales, due
to disciplined costs controls at the corporate level, a decrease of 0.5% in
store operating expenses as a percentage of sales, a decrease of 0.3% in
corporate payroll costs as a percentage of sales and a decrease of 0.1% in store
payroll as a percentage of sales, partially offset by a 0.4% increase in
advertising expenses as a percentage of sales.

SG&A dollars increased
$6.6 million, or 5.1%, to $137.0 million in 2004 from $130.4 million in 2003
primarily due to increased store payroll expenses resulting from new store
openings.

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 consolidated 2003, 2002 or 2001
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 to
date.

In the first quarter of
2004, Borders recognized as income an 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.

The Company does not expect
to recover additional insurance amounts related to its loss.

14

---

Depreciation expense

Depreciation expense
remained flat at $17.3 million in 2004 as compared to 2003.

Interest income

Interest income increased
$0.9 million, or 100.0%, to $1.8 million in 2004 from $0.9 million in 2003. This
was the result of Borders continued positive cash flow at fixed internal
interest rates.

Net income

Due to the factors
mentioned above, net income as a percentage of sales increased to 1.8% in 2004
from 0.9% in 2003, and net income dollars increased $5.7 million, or 118.8%, to
$10.5 million in 2004 from $4.8 million in 2003.

## Waldenbooks

| |                          |   |       |   |  |   |       |   |  |  |  |  |  |  |  |  |  |  | 
| | ------------------------ | - | ----- | - |  | - | ----- | - |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Sales                    | $ | 150.8 |   |  | $ | 150.3 |   |  |  |  |  |  |  |  |  | 
| | Other revenue            | $ | 5.4   |   |  | $ | 6.0   |   |  |  |  |  |  |  |  |  | 
| | Net income               | $ | 2.9   |   |  | $ | 0.5   |   |  |  |  |  |  |  |  |  | 
| | Net income as % of sales |   | 1.9   | % |  |   | 0.3   | % |  |  |  |  |  |  |  |  | 
| | Depreciation expense     | $ | 3.5   |   |  | $ | 4.1   |   |  |  |  |  |  |  |  |  | 
| | Interest income          | $ | 10.5  |   |  | $ | 9.3   |   |  |  |  |  |  |  |  |  | 
| | Store openings           |   | 1     |   |  |   | 2     |   |  |  |  |  |  |  |  |  | 
| | Store closings           |   | 5     |   |  |   | 6     |   |  |  |  |  |  |  |  |  | 
| | Store count              |   | 712   |   |  |   | 774   |   |  |  |  |  |  |  |  |  | 

Waldenbooks - Comparison
of the 13 weeks ended April 25, 2004 to the 13 weeks ended April 27, 2003

Sales

Waldenbooks sales
increased $0.5 million, or 0.3%, to $150.8 million in 2004 from $150.3 million
in 2003. This increase was comprised of increased comparable store sales of $8.1
million and decreased non-comparable sales associated with 2004 and 2003 store
closings of $7.6 million.

Other revenue

Waldenbooks other
revenue, which consists of membership income from the Preferred Reader Program,
was largely consistent in 2004 with 2003.

Other revenue dollars were
$5.4 million in 2004 and $6.0 million in 2003.

Gross margin

Gross margin as a
percentage of sales increased to 24.5% in 2004 from 23.1% in 2003. This was
primarily due to a 1.3% decrease in store occupancy expenses as a percentage of
sales, as a result of rent expense for stores remaining open more than one year
remaining essentially flat while comparable stores sales improved. In addition,
distribution and other costs improved 0.6% as a percentage of sales. This was
partially offset by a decrease of 0.4% in other revenue as a percentage of sales
and an increase in markdowns and product costs of 0.1% as a percentage of sales.

Gross margin dollars
increased $2.3 million, or 6.6%, to $37.0 million in 2004 from $34.7 million in
2003, primarily due to the increase in comparable store sales and the increase
in gross margin percentage.

Selling, general and administrative expenses

SG&A as a percentage of
sales decreased to 28.1% in 2004 from 28.7% in 2003. This was primarily due
decreased corporate non-payroll expenses of 0.5% as a percentage of sales due to
disciplined costs controls at the corporate level and decreased advertising

15

---

expenses of 0.1% as a percentage of sales.

SG&A dollars decreased
$0.8 million, or 1.9%, to $42.4 million in 2004 from $43.2 million in 2003
primarily due to store closings.

Depreciation expense

Depreciation expense
decreased $0.6 million, or 14.6%, to $3.5 million in 2004 from $4.1 million in
2003. This was primarily due to a lower fixed asset base resulting from prior
year asset impairments and store closings.

Interest income

Interest income increased
$1.2 million, or 12.9%, to $10.5 million in 2004 from $9.3 million in 2003. This
was the result of Waldenbooks continued positive cash flow at fixed
internal interest rates.

Net income

Due to the factors
mentioned above, net income as a percentage of sales increased to 1.9% in 2004
from 0.3% in 2003, while net income dollars increased $2.4 million, to $2.9
million in 2004 from $0.5 million in 2003.

## International

| |                           |   |       |   |  |   |      |   |  |  |  |  |  |  |  |  |  |  | 
| | ------------------------- | - | ----- | - |  | - | ---- | - |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Sales                     | $ | 102.7 |   |  | $ | 79.6 |   |  |  |  |  |  |  |  |  | 
| | Net loss                  | $ | 3.2   |   |  | $ | 4.2  |   |  |  |  |  |  |  |  |  | 
| | Net loss as % of sales    |   | 3.1   | % |  |   | 5.3  | % |  |  |  |  |  |  |  |  | 
| | Depreciation expense      | $ | 3.4   |   |  | $ | 2.8  |   |  |  |  |  |  |  |  |  | 
| | Interest expense          | $ | 4.7   |   |  | $ | 4.6  |   |  |  |  |  |  |  |  |  | 
| | Superstore store openings |   | -     |   |  |   | 3    |   |  |  |  |  |  |  |  |  | 
| | Superstore store count    |   | 37    |   |  |   | 33   |   |  |  |  |  |  |  |  |  | 
| | Books etc. store closings |   | -     |   |  |   | 1    |   |  |  |  |  |  |  |  |  | 
| | Books etc. store count    |   | 36    |   |  |   | 36   |   |  |  |  |  |  |  |  |  | 

International -
Comparison of the 13 weeks ended April 25, 2004 to the 13 weeks ended April 27,
2003

Sales

International sales
increased $23.1 million, or 29.0%, to $102.7 million in 2003 from $79.6 million
in 2002. Of this increase in sales, 17.0% was due to the translation of foreign
currencies to U.S. dollars. The remaining 12% was the result of new superstore
openings and comparable store sales increases. The impact of price changes on
comparable store sales was not significant.

Gross margin

Gross margin as a
percentage of sales increased to 20.2% in 2004 from 20.0% in 2003. The
International segment experienced a 0.2% increase in third party vendor income
from café operations as a percentage of sales, due to its agreement with
Starbucks Coffee Company (U.K.) Limited. In addition, gross margin as a
percentage of sales was impacted by decreases of 0.2% in shrink and 0.2% in
distribution costs as a percentage of sales, primarily due to the annualization
of superstores opened in fiscal 2003. Offsetting these factors was a 0.4%
increase in occupancy costs as a percentage of sales, which resulted from
currency fluctuations and the annualization of superstores opened in fiscal
2003.

Gross margin dollars
increased $4.8 million, or 30.2%, to $20.7 million in 2004 from $15.9 million in
2003, primarily due to new superstore openings.

Selling, general and administrative expenses

SG&A as a percentage of
sales decreased to 20.8% in 2004 from 22.5% in 2003. This improvement was
primarily the result of decreases, as a percentage of sales, in store payroll
costs of 1.3% due to changes in the store management structure and store
operating expenses of 0.4% due to disciplined cost controls at the store level.
Although these expenses increased in dollars, they increased at

16

---

rates less than
sales growth. In addition corporate non-payroll costs decreased 0.3%, due to
increased income from the Companys gift certificate program based on
favorable redemption trends. Offsetting those improvements was an increase in
advertising costs of 0.3% as a percentage of sales, due to increased spending
targeted at driving sales.

SG&A dollars increased
$3.5 million, or 19.6%, to $21.4 million in 2004 from $17.9 million in 2003,
primarily due to currency fluctuations, as well as 2003 superstore openings and
the increased store payroll and operating expenses required.

Depreciation expense

Depreciation expense
increased $0.6 million, or 21.4%, to $3.4 million in 2004 from $2.8 million in
2003. This was primarily due to depreciation expense recognized on new
stores capital expenditures.

Interest expense

Interest expense increased
$0.1 million, or 2.2%, to $4.7 million in 2004 from $4.6 million in 2003.

Net loss

Due to the factors
mentioned above, net loss as a percentage of sales decreased to 3.1% in 2004 as
compared to 5.3% in 2003, and net loss dollars decreased $1.0 million, or 23.8%,
to $3.2 million in 2004 from $4.2 million in 2003.

## Corporate

| |                  |   |     |  |  |   |     |  |  |  |  |  |  |  |  |  |  |  | 
| | ---------------- | - | --- |  |  | - | --- |  |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Interest expense | $ | 9.5 |  |  | $ | 7.8 |  |  |  |  |  |  |  |  |  | 
| | Net loss         | $ | 7.2 |  |  | $ | 5.9 |  |  |  |  |  |  |  |  |  | 

Corporate - Comparison
of the 13 weeks ended April 25, 2004 to the 13 weeks ended April 27, 2003

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

Net loss dollars increased
$1.3 million, or 22.0%, to $7.2 million in 2004 from $5.9 million in 2003. This
was primarily due to increased interest expense for this segment primarily
resulting from increased borrowings to fund corporate stock repurchases in 2004,
partially offset by a reduction in various governance costs as compared to the
prior year. Interest expense represents corporate-level interest costs not
charged to the Companys other segments.

## Liquidity and
Capital Resources

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

Net cash used for
operations was $117.3 million and $111.9 million for the 13 weeks ended April
25, 2004 and April 27, 2003, respectively. Operating cash outflows for the
period resulted from 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 fiscal 2003 taxes. The current year operating cash inflows primarily
reflect operating results net of non-cash charges for depreciation, as well as a
decrease in accounts receivable and an increase in other long-term liabilities.

Net cash provided by
investing was $18.8 million, which primarily resulted from proceeds received
from the sale-leaseback of a Company-owned store and office building in the
United Kingdom. The proceeds from the sale, totaling $32.3 million were offset
against assets with a net book value of $28.4 million. Direct costs associated
with the transaction were $0.4 million. A deferred gain of $3.5 million was
recorded on the consolidated balance sheets in Other long-term
liabilities and will be amortized over the 20 year term of the operating lease.

In fiscal 2004, capital
expenditures were $13.5 million, which reflects the opening of three new
superstores and one new airport store,

17

---

operated by the Waldenbooks segment. In
fiscal 2003, capital expenditures were $16.4 million, which primarily funded new
stores and the refurbishment of existing stores. Capital expenditures in 2003
reflected the opening of 11 new superstores and two new airport stores, operated
by the Waldenbooks segment. Additional capital spending in 2003 reflected the
development and installation of in-store web-based technology and spending on
corporate information technology streamlining.

The Company expects capital
expenditures to be approximately $110.0 million for the full year of 2004,
resulting primarily from new domestic superstore openings and a major remodel
program related to 40 to 50 domestic Borders superstore locations. In addition,
capital expenditures will result from International store openings and
investment in information technology. The Company currently plans to open
approximately 18 to 20 domestic Borders superstores and six to eight
international stores in 2004. 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. The
Company also expects to open two to six new airport stores in 2004. Average cash
requirements to open a new or expanded Waldenbooks store range from $0.4 million
to $0.7 million, depending on the size and format of the store. The Company also
plans to perform major remodels of 40 to 50 domestic Borders superstore
locations. Average cash requirements for a major remodel of a Borders superstore
are between $0.3 million to $0.4 million. The Company plans to lease new store
locations predominantly under operating leases.

Net cash used for financing
was $43.2 million, resulting from the repurchase of common stock totaling $50.1
million, the repayment of the credit facility of $7.2 million, the payment of
the Companys January cash dividend of $6.2 million and the repayment of
long-term capital lease obligations of $0.4 million, offset by $20.7 million of
proceeds from stock option exercises. Net cash used for financing in 2003 was
$4.0 million, resulting primarily from the repurchase of common stock, partially
offset by funding from the credit facility and the issuance of common stock.

The Company currently has a
share repurchase program in place with remaining authorization to repurchase
approximately $113.5 million. During the 13 weeks ended April 25, 2004 and April
27, 2003, $50.1 million and $13.8 million of common stock was repurchased,
respectively. The Company plans to continue the repurchase of its common stock
throughout fiscal 2004, subject to the Companys share price and capital
needs.

In April 2004, the Board of
Directors declared a quarterly cash dividend of $0.08 per share, which equaled
$6.2 million in total, on the Companys common stock, payable April 28,
2004 to stockholders of record at the close of business April 7, 2004, and in
May 2004, the Board of Directors declared a quarterly cash dividend of $0.08 per
share on the Companys common stock, payable July 28, 2004 to stockholders
of record at the close of business July 7, 2004. The Company intends to pay
regular quarterly cash dividends, subject to Board approval, going forward.

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

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

The Company has a
Multicurrency Revolving Credit Agreement (the Credit Agreement),
which was amended in May 2003 and will expire in June 2005. The Credit Agreement
provides for borrowings of up to $450.0 million. Borrowings under the Credit
Agreement bear interest at a variable base rate plus an increment or LIBOR plus
an increment at the Companys option. The Credit Agreement contains
covenants which limit, among other things, the Companys ability to incur
indebtedness, grant liens, make investments, consolidate or merge, dispose of
assets, repurchase its common stock and/or declare dividends in excess of an
aggregate $225.0 million over the term of the Agreement (plus any proceeds and
tax benefits resulting from stock option exercises and tax benefits resulting
from restricted shares purchased by employees from the Company), and requires
the Company to meet certain financial measures regarding fixed coverage,
leverage, tangible net worth and capital expenditures. The 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. As of April 25, 2004 the Company was in
compliance with all covenants contained within this agreement.

18

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The Company currently has
in place two interest rate swaps which effectively convert a portion of the
Credit Agreements variable rate exposure to fixed interest rates. In
accordance with Statement of Financial Accounting Standards No. 133,
Accounting For Derivative Instruments and Hedging Activities (FAS
133), the Company has designated these swap agreements as cash flow hedges. The
notional amounts of these agreements total $73.0 million and the agreements
expire concurrently with the expiration of the Credit 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
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. As of April 25, 2004 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 has designated
this swap agreement as a fair market value hedge. The notional amount of the
swap agreement is $50.0 million, and it expires concurrently with the due date
of the Notes. In March 2004, the Company entered into an agreement to terminate
this swap if a termination value of $1.6 million is reached.

The Company has two lease
financing facilities (collectively, the Lease Financing Facilities)
to finance new stores and other property owned by unaffiliated entities and
leased to the Company or its subsidiaries. The original facility (the
Original Lease Facility) will expire in June 2006. In June of 2002,
the Company established a new facility (the New Lease Facility),
which will expire in 2007. The aggregate amount available under the Lease
Financing Facilities is $25.0 million. Properties to be financed after the
effective date of the New Lease Facility will be financed under that Facility,
and no additional properties will be financed under the Original Lease Facility.
The Lease Financing Facilities provide financing to lessors of properties leased
to the Company or its subsidiaries through loans from lenders for up to 95% of a
projects cost. Additionally, under the New Lease Facility, the
unaffiliated lessor will make equity contributions approximating 5% of the cost
of each project. The lessors under the Original Lease Facility have made similar
contributions.

Independent of the
Companys obligations relating to the leases, the Company and certain of
its subsidiaries guarantee payment when due of all amounts required to be paid
to the third-party lenders. The principal amount guaranteed is limited to
approximately 89% of the original cost of a project so long as the Company is
not in default under the lease relating to such project. The agreements relating
to both of the Lease Financing Facilities contain covenants and events of
default that are similar to those contained in the Credit Agreement described
above. Security interests in the properties underlying the leases and in the
Companys interests in the leases have been given to the lenders. The Lease
Financing Facilities contain cross default provisions with respect to the
obligations of the Company under the Credit Agreement and certain other
agreements to which the Company is a party. There also are cross default
provisions with respect to the obligations relating to the Lease Financing
Facilities of Wilmington Trust Company, as owner trustee of a grantor trust
formed for the Lease Financing Facilities, and the unaffiliated beneficial owner
of the grantor trust. At April 25, 2004, the maximum loss that the Company could
incur under these guarantees approximated $13.8 million.

The Company pays lessors
who have financed properties under the Original Lease Facility regular rental
amounts for use of the properties. These payments are equal to the carrying cost
of the lessors borrowings for construction of the properties, and do not
include amortization of the principal amounts of the lessors indebtedness
relating to the properties. The rental payments are categorized as occupancy
expense, and as such are included as a component of Cost of merchandise
sold in the Companys consolidated statements of operations. These
rental payments are also included in the disclosure of future minimum lease
payments under operating leases.

There were two, four and
two properties financed through the Original Lease Facility at April 25, 2004,
April 27, 2003 and January 25, 2004, respectively, with financed values of $13.8
million, $22.6 million and $13.8 million. The two properties financed through
the Original Lease Facility at April 25, 2004 and January 25, 2004 were
consolidated by the Company, pursuant to the provisions of Financial Accounting
Standards Board (FASB) issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), as discussed below. Of the amount
financed under the Original Lease Facility at April 27, 2003, the Company had
recorded $19.0 million as capitalized leases, under Other assets
(for the capital lease assets) and Long-term capital lease
obligations (for the capital lease liabilities) on the consolidated
balance sheets at April 27, 2003. These amounts were treated as non-cash items
on the consolidated statements of cash flows. There were no borrowings under the
New Lease Facility as of April 25, 2004, April 27, 2003 or January 25, 2004.

19

---

Consolidated VIEs:
Pursuant to the requirements of FIN 46, the Company is the
primary beneficiary of the two variable interest entities (VIEs) that own the
two properties financed under the Original Lease Facility at April 25, 2004. As
a result, the Company consolidates these VIEs and has recorded land, property
and equipment, net of accumulated depreciation, of $12.0 million, short-term
borrowings of $13.8 million, and minority interest of $1.3 million at April 25,
2004. These amounts have been treated as non-cash items on the consolidated
statements of cash flows.

The Company also
is the primary beneficiary of two additional VIEs, due to the Companys
guarantee of the debt of these entities. As a result, the Company consolidates
these VIEs and has recorded property and equipment, net of accumulated
depreciation, of $5.5 million, long-term debt of $5.8 million, and minority
interest of $0.4 million at April 25, 2004. These amounts have been treated as
non-cash items on the consolidated statements of cash flows.

During 1994, the Company
entered into agreements in which leases with respect to four Borders locations
served as collateral for certain mortgage pass-through certificates. These
mortgage pass-through certificates included a provision requiring the Company to
repurchase the underlying mortgage notes in certain events. In the fourth
quarter of fiscal 2001, the Company was obligated to purchase the notes for
$33.5 million and cash payment to retain these notes was made in the first
quarter of 2002. As a result, the Company has categorized this prepaid rent
amount as part of Other assets in the consolidated balance sheets,
and is amortizing the balance over each propertys remaining lease term.

The following table summarizes
the Company's significant financing and lease obligations at April 25, 2004:

| |                              |   |       |  |   |       |  |   |       |  |   |         |  |   |         | 
| | ---------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | ------- |  | - | ------- | 
|
|
|
|
| | Credit Agreement borrowings  | $ | 116.3 |  | $ | -     |  | $ | -     |  | $ | -       |  | $ | 116.3   | 
| | Capital lease obligations    |   | -     |  |   | -     |  |   | -     |  |   | -       |  |   | -       | 
| | Operating lease obligations  |   | 246.4 |  |   | 613.6 |  |   | 578.9 |  |   | 2,293.5 |  |   | 3,732.4 | 
| | Senior guaranteed notes      |   | -     |  |   | -     |  |   | 50.0  |  |   | -       |  |   | 50.0    | 
| | Debt of consolidated VIEs   |   | 13.8  |  |   | 0.4   |  |   | 0.4   |  |   | 5.0     |  |   | 19.6    | 
| |                              |   |       |  |   |       |  |   |       |  |   |         | 
| | Total                        | $ | 376.5 |  | $ | 614.0 |  | $ | 629.3 |  | $ | 2,298.5 |  | $ | 3,918.3 | 
|
| | Lease Facility guarantees(1) | $ | 13.8  |  | $ | -     |  | $ | -     |  | $ | -       |  | $ | 13.8    | 

(1) Included as debt of consolidated VIEs

## 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 25, 2004. There have been no significant changes in these
estimates during the first quarter of fiscal 2004.

## 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

20

---

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

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

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

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

## Item 4.
Controls and Procedures

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

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

## Part II 
Other Information

## Item 1. Legal
Proceedings

The Companys Form
10-K Annual Report for the fiscal year ended January 25, 2004, describes pending
lawsuits and claims against the Company. The status of such litigation and
claims has not changed in any significant respect.

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

21

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## Item 2.
Changes in Securities and Use of Proceeds

| |                                                                                                                                                                                                                                                                                                                           |  |           |  |  |           |  |           |  |  |                 | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- |  |  | --------- |  | --------- |  |  | --------------- | 
| | (e) The table below presents the total number of shares
repurchased during the first quarter of fiscal 2004.                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                           |  |           |  |  |           |  |           |  |  |                 | 
|
|
|
|
|
| | January 26, 2004                                                                                                                                                                                                                                                                                                          |  |           |  |  |           |  |           |  |  |                 | 
| | through                                                                                                                                                                                                                                                                                                                   |  |           |  |  |           |  |           |  |  |                 | 
| | February 22, 2004                                                                                                                                                                                                                                                                                                         |  | 317,207   |  |  | $   23.83 |  | 317,207   |  |  | $   141,651,341 | 
| |                                                                                                                                                                                                                                                                                                                           |  |           |  |  |           |  |           |  |  |                 | 
| | February 23, 2004                                                                                                                                                                                                                                                                                                         |  |           |  |  |           |  |           |  |  |                 | 
| | through                                                                                                                                                                                                                                                                                                                   |  |           |  |  |           |  |           |  |  |                 | 
| | March 21, 2004                                                                                                                                                                                                                                                                                                            |  | 916,872   |  |  | $   23.41 |  | 916,872   |  |  | $   136,700,647 | 
| |                                                                                                                                                                                                                                                                                                                           |  |           |  |  |           |  |           |  |  |                 | 
| | March 22, 2004                                                                                                                                                                                                                                                                                                            |  |           |  |  |           |  |           |  |  |                 | 
| | through                                                                                                                                                                                                                                                                                                                   |  |           |  |  |           |  |           |  |  |                 | 
| | April 25, 2004                                                                                                                                                                                                                                                                                                            |  | 902,247   |  |  | $   23.42 |  | 902,247   |  |  | $   113,479,937 | 
|
| | Total                                                                                                                                                                                                                                                                                                                     |  | 2,136,326 |  |  | $   23.48 |  | 2,136,326 |  |  | $   113,479,937 | 
|
| |                                                                                                                                                                                                                                                                                                                           |  |           |  |  |           |  |           |  |  |                 | 
| | (1) Average price paid per
share includes commissions and is rounded to the nearest two decimal places.                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                           |  |           |  |  |           |  |           |  |  |                 | 
| | (2) On May 20, 2003, the Company
announced that the Board of Directors  authorized an increase in the amount of share repurchases
to $150 million (plus any proceeds and tax benefits  resulting  from stock option
exercises and tax benefits resulting from restricted shares purchased by employees from the Company).

## ITEM 6.
Exhibits and Reports on Form 8-K

Exhibits:

| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                      | 
| | --- | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                     
| |     |                      | 10.56 (1)                                                                                                                                                                                                                                                                                         | Borders Group, Inc. 2004 Long-Term Incentive Plan                                                                                                                    | 
| |     |                      | 31.1                                                                                                                                                                                                                                                                                              | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 | 
| |     |                      | 31.2                                                                                                                                                                                                                                                                                              | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002  
| |     |                      | 32.1                                                                                                                                                                                                                                                                                              | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 | 
| |     |                      | 32.2                                                                                                                                                                                                                                                                                              | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002  
| |     |                      | 99.1                                                                                                                                                                                                                                                                                              | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                              | 
| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                      | 
| |     |                      | (1) Incorporated by reference from the Companys  Proxy
Statement  dated April 14, 2004 (File No. 1-13740).                                                                                                                                                                                      
| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                      | 
| | (b) | Reports on Form 8-K: |                                                                                                                                                                                                                                                                                                  
| |     |                      | Subsequent
to the 13 weeks ended April 25, 2004 and prior to the filing of this Form 10-Q,
one report was filed on Form 8-K under Item 9. Regulation FD Disclosure. This
report, filed on May 18, 2004, furnished a press release with earnings information
for the quarter ended April 25, 2004. |                                                                                                                                                                      | 

22

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# 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:        May 27, 2004 | By: /s/ Edward W. Wilhelm
|------------------------- | -------------------------
|                          | Edward W. Wilhelm        
|                          | Senior Vice President and
|                          | Chief Financial Officer  
|                          | (Principal Financial and 
|                          | Accounting Officer)      

23

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## EXHIBIT INDEX

## DESCRIPTION OF EXHIBITS

| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                      | 
| | --- | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                     
| |     |                      | 10.56 (1)                                                                                                                                                                                                                                                                                         | Borders Group, Inc. 2004 Long-Term Incentive Plan                                                                                                                    | 
| |     |                      | 31.1                                                                                                                                                                                                                                                                                              | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 | 
| |     |                      | 31.2                                                                                                                                                                                                                                                                                              | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
302 of the Sarbanes-Oxley Act of 2002  
| |     |                      | 32.1                                                                                                                                                                                                                                                                                              | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 | 
| |     |                      | 32.2                                                                                                                                                                                                                                                                                              | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002  
| |     |                      | 99.1                                                                                                                                                                                                                                                                                              | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                              | 
| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                      | 
| |     |                      | (1) Incorporated  by reference  from the Companys  Proxy
Statement  dated April 14, 2004 (File No. 1-13740).                                                                                                                                                                                    
| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                      | 
| | (b) | Reports on Form 8-K: |                                                                                                                                                                                                                                                                                                  
| |     |                      | Subsequent
to the 13 weeks ended April 25, 2004 and prior to the filing of this Form 10-Q,
one report was filed on Form 8-K under Item 9. Regulation FD Disclosure. This
report, filed on May 18, 2004, furnished a press release with earnings information
for the quarter ended April 25, 2004. |                                                                                                                                                                      | 

24

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