<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10 - Q

(Mark One)

[X]         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended October 28, 2001

                                       OR

[ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                For the transition period from ______ to ______.

                         Commission file number 1-13740

                               BORDERS GROUP, INC.
                               -------------------
             (Exact name of registrant as specified in its charter)


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


                  100 Phoenix Drive, Ann Arbor, Michigan 48108
                  --------------------------------------------
                    (Address of principal executive offices)
                                   (zip code)

                                 (734) 477-1100
                                 --------------
              (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes       X           No
   --------------       --------------

           Title of Class                       Shares Outstanding As of
           --------------                           December 5, 2001
            Common Stock                            ----------------
                                                       81,487,380


<PAGE>

                               BORDERS GROUP, INC.



                                      INDEX



Part I - Financial Information

<TABLE>
<CAPTION>
                                                                                                    Page

<S>                                                                                                 <C>
     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                                                                       N/A

Part II - Other information

     Item 1.       Legal Proceedings                                                                  17

     Item 2.       Changes in Securities and Use of Proceeds                                         N/A

     Item 3.       Defaults Upon Senior Securities                                                   N/A

     Item 4.       Submission of Matters to a vote of                                                N/A
                   Securityholders

     Item 5.       Other Information                                                                 N/A

     Item 6.       Exhibits and Reports on Form 8-K                                                   17


Signatures                                                                                            18
</TABLE>


<PAGE>

                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                              13 WEEKS ENDED

                                                                                    OCTOBER 28,             OCTOBER 22,
                                                                                       2001                     2000
                                                                               ----------------------   ---------------------
<S>                                                                            <C>                      <C>
Sales                                                                             $          713.7         $        701.1
Cost of merchandise sold, including
     occupancy costs                                                                         534.0                  523.8
                                                                               ----------------------   ---------------------

Gross margin                                                                                 179.7                  177.3
Selling, general and administrative expenses                                                 177.9                  174.3
Pre-opening expense                                                                            2.5                    2.3
Goodwill amortization                                                                          0.7                    0.7
                                                                               ----------------------   ---------------------

Operating loss                                                                                (1.4)                   -
Interest expense                                                                               3.5                    4.1
                                                                               ----------------------   ---------------------

Loss from continuing operations before income tax                                             (4.9)                  (4.1)
Income tax provision (benefit)                                                                (1.8)                  (1.5)
                                                                               ----------------------   ---------------------

Loss from continuing operations                                                               (3.1)                  (2.6)
Loss from discontinued operations, net of income tax credit of $1.5                           -                       2.4
                                                                               ----------------------   ---------------------
Net loss                                                                          $           (3.1)        $         (5.0)
                                                                               ======================   =====================

EARNINGS (LOSS) PER COMMON SHARE DATA --
   Diluted earnings (loss) per common share:
       Continuing operations                                                      $          (0.04)        $        (0.03)
       Discontinued operations                                                                -                     (0.03)
                                                                               ----------------------   ---------------------
       Net diluted loss per common share                                          $          (0.04)        $        (0.06)
                                                                               ======================   =====================
   Diluted weighted average common shares
   outstanding (in thousands)                                                               81,184                 78,579
                                                                               ======================   =====================

   Basic earnings (loss) per common share:
       Continuing operations                                                      $          (0.04)        $        (0.03)
       Discontinued operations                                                                -                     (0.03)
                                                                               ----------------------   ---------------------
       Net basic loss per common share                                            $          (0.04)        $        (0.06)
                                                                               ======================   =====================
   Basic weighted average common shares
   outstanding (in thousands)                                                               81,184                 78,579
                                                                               ======================   =====================
</TABLE>

           See accompanying Notes to Unaudited Condensed Consolidated
                              Financial Statements.


                                      (1)
<PAGE>

                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                              39 WEEKS ENDED

                                                                                    OCTOBER 28,             OCTOBER 22,
                                                                                       2001                     2000
                                                                               ----------------------   ---------------------
<S>                                                                            <C>                      <C>
Sales                                                                             $        2,183.4         $      2,079.1
Cost of merchandise sold, including
     occupancy costs                                                                       1,632.8                1,545.6
Fulfillment center inventory writedowns                                                       12.7                    -
                                                                               ----------------------   ---------------------

Gross margin                                                                                 537.9                  533.5
Selling, general and administrative expenses                                                 536.2                  519.9
Legal settlement expense                                                                       2.4                    -
Pre-opening expense                                                                            4.8                    4.7
Asset impairments and other writedowns                                                        15.8                    -
Goodwill amortization                                                                          2.0                    2.1
                                                                               ----------------------   ---------------------

Operating income (loss)                                                                      (23.3)                   6.8
Interest expense                                                                              11.5                    9.8
                                                                               ----------------------   ---------------------

Loss from continuing operations before income tax                                            (34.8)                  (3.0)
Income tax provision (benefit)                                                               (12.9)                  (1.1)
                                                                               ----------------------   ---------------------

Loss from continuing operations                                                              (21.9)                  (1.9)
Loss from discontinued operations, net of income tax credit of $3.6                          -                        5.6
                                                                               ----------------------   ---------------------
Net loss                                                                          $          (21.9)        $         (7.5)
                                                                               ======================   =====================

EARNINGS (LOSS) PER COMMON SHARE DATA --
   Diluted earnings (loss) per common share:
       Continuing operations                                                      $          (0.27)        $        (0.02)
       Discontinued operations                                                                -                     (0.07)
                                                                               ----------------------   ---------------------
       Net diluted loss per common share                                          $          (0.27)        $        (0.09)
                                                                               ======================   =====================
   Diluted weighted average common shares
   outstanding (in thousands)                                                               80,489                 78,307
                                                                               ======================   =====================

   Basic earnings (loss) per common share:
       Continuing operations                                                      $          (0.27)        $        (0.02)
       Discontinued operations                                                                -                     (0.07)
                                                                               ----------------------   ---------------------
       Net basic loss per common share                                            $          (0.27)        $        (0.09)
                                                                               ======================   =====================
   Basic weighted average common shares
   outstanding (in thousands)                                                               80,489                 78,307
                                                                               ======================   =====================
</TABLE>

           See accompanying Notes to Unaudited Condensed Consolidated
                              Financial Statements.

                                      (2)
<PAGE>


                               BORDERS GROUP, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                 OCTOBER 28,         OCTOBER 22,         JANUARY 28,
                                                                    2001                2000                2001
                                                              ------------------  ------------------  ------------------
<S>                                                           <C>                 <C>                 <C>
                           ASSETS
Current Assets:
   Cash and cash equivalents                                    $        62.1       $        56.4        $       59.1
   Merchandise inventories                                            1,405.0             1,386.5             1,201.2
   Accounts receivable and other current assets                          75.2                78.4                74.8
                                                              ------------------  ------------------  ------------------
         Total Current Assets                                         1,542.3             1,521.3             1,335.1
Property and equipment, net of accumulated depreciation of
   $561.3, $456.8 and $515.9 at October 28, 2001, October
   22, 2000, and January 28, 2001, respectively                         533.8               566.4               562.3
Other assets and deferred charges                                        57.2                35.3                56.5
Goodwill, net of accumulated amortization of $55.1, $52.2
   and $53.1 at October 28, 2001, October 22, 2000 and
   January 28, 2001, respectively                                        90.3               110.2                93.2
                                                              ------------------  ------------------  ------------------
         Total Assets                                           $     2,223.6       $     2,233.2        $    2,047.1
                                                              ==================  ==================  ==================
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Short-term  debt and capital lease  obligations due within
     one year                                                   $       279.4       $       386.7        $      144.4
   Trade accounts payable                                               789.1               754.1               623.6
   Accrued payroll and other liabilities                                188.2               183.5               256.6
   Taxes, including income taxes                                         36.2                30.0                93.3
                                                              ------------------  ------------------  ------------------
         Total Current Liabilities                                    1,292.9             1,354.3             1,117.9
Long-term debt and capital lease obligations                             13.8                15.6                15.0
Other long-term liabilities                                              73.1                70.1                67.7
                                                              ------------------  ------------------  ------------------
         Total Liabilities                                            1,379.8             1,440.0             1,200.6
                                                              ------------------  ------------------  ------------------
Stockholders' Equity:
Common stock; 200,000,000 shares authorized; 81,307,005,
   78,501,289 and 78,649,501 issued and outstanding at October
   28, 2001, October 22, 2000, and January 28, 2001,
   respectively                                                         711.2               684.0               685.2
Officers receivable and deferred compensation                            (0.5)               (1.2)               (1.0)
Accumulated other comprehensive loss                                    (15.3)               (8.8)               (8.0)
Retained earnings                                                       148.4               119.2               170.3
                                                              ------------------  ------------------  ------------------
         Total Stockholders' Equity                                     843.8               793.2               846.5
                                                              ------------------  ------------------  ------------------
         Total Liabilities & Stockholders' Equity               $     2,223.6       $     2,233.2        $    2,047.1
                                                              ==================  ==================  ==================
</TABLE>

           See accompanying Notes to Unaudited Condensed Consolidated
                             Financial Statements.

                                      (3)
<PAGE>

                               BORDERS GROUP, INC.
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE 39 WEEKS ENDED OCTOBER 28, 2001
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                  DEFERRED          ACCUMULATED

                                                                COMPENSATION           OTHER

                                         COMMON STOCK            AND OFFICER      COMPREHENSIVE     RETAINED

                                     SHARES         AMOUNT       RECEIVABLES           LOSS         EARNINGS       TOTAL
                                  --------------  ------------ ----------------  ----------------- ------------ ------------
<S>                               <C>             <C>          <C>               <C>               <C>          <C>
BALANCE AT JANUARY 28, 2001          78,649,501    $    685.2   $         (1.0)   $          (8.0)  $    170.3   $    846.5
                                  --------------  ------------ ----------------  ----------------- ------------ ------------
Net loss                                      -             -                -                  -        (21.9)       (21.9)

Currency translation adjustment               -             -                -               (3.0)           -         (3.0)
Cumulative effect of change in
  accounting method, net of tax               -             -                -               (1.6)           -         (1.6)
Change in fair value of
  derivatives, net of tax                     -             -                -               (2.7)           -         (2.7)
                                                                                                                ------------
Comprehensive income (loss)                                                                                           (29.2)

Issuance of common stock              3,148,644          27.5                -                  -            -         27.5
Repurchase and retirement of
  common stock                         (491,140)         (7.0)               -                  -            -         (7.0)
Change in receivable and
  deferred compensation                       -             -              0.5                  -            -          0.5
Tax benefit of equity
  compensation                                -           5.5                -                  -            -          5.5
                                  --------------  ------------ ----------------  ----------------- ------------ ------------

BALANCE AT OCTOBER 28, 2001          81,307,005    $    711.2   $         (0.5)   $         (15.3)  $    148.4   $    843.8
                                  ==============  ============ ================  ================= ============ ============
</TABLE>







           See accompanying Notes to Unaudited Condensed Consolidated
                             Financial Statements.


                                      (4)
<PAGE>

                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                                      39 WEEKS ENDED
                                                                            OCTOBER 28,            OCTOBER 22,
                                                                               2001                   2000
                                                                         ------------------    -------------------
<S>                                                                      <C>                   <C>
CASH PROVIDED BY (USED FOR):
OPERATIONS
Net loss from continuing operations                                        $        (21.9)        $         (1.9)
Adjustments to reconcile net loss to operating cash flows:
   Depreciation and goodwill amortization                                            69.1                   69.2
   Change in other long-term assets and liabilities                                   4.5                    4.9
   Asset impairments and other writedowns                                            10.0                    -
   Cash provided by (used for) current assets and current liabilities:
     Increase in inventories                                                       (204.5)                (307.7)
     Decrease in accounts payable                                                   166.5                  179.3
     Decrease in taxes payable                                                      (52.6)                 (47.4)
     Other, net                                                                     (73.7)                 (45.2)
                                                                         ------------------    -------------------
     Net cash used for continuing operations                                       (102.6)                (148.8)
     Net cash provided by (used for) discontinued operations                          1.9                  (19.5)
                                                                         ------------------    -------------------
         Net cash used for operations                                              (100.7)                (168.3)

INVESTING
Capital expenditures                                                                (56.9)                 (84.1)
Disposition of property and equipment                                                 5.6                    -
Net investing activities of discontinued operations                                   -                    (1.7)
                                                                         ------------------    -------------------
         Net cash used for investing                                                (51.3)                 (85.8)

FINANCING
Net funding from credit facility                                                    137.2                  263.8
Issuance of common stock                                                             27.5                   11.6
Repurchase of common stock                                                           (7.0)                  (7.2)
Other, net                                                                           (2.1)                   0.9
                                                                         ------------------    -------------------
         Net cash provided by financing                                             155.6                  269.1
Effect of exchange rates on cash and equivalents                                     (0.6)                  (0.2)
                                                                         ------------------    -------------------
NET INCREASE IN CASH AND EQUIVALENTS                                                  3.0                   14.8
Cash and equivalents at beginning of year                                            59.1                   41.6
                                                                         ------------------    -------------------
Cash and equivalents at end of period                                      $         62.1         $         56.4
                                                                         ==================    ===================
</TABLE>

           See accompanying Notes to Unaudited Condensed Consolidated
                             Financial Statements.


                                      (5)
<PAGE>

                               BORDERS GROUP, INC.
                          NOTES TO UNAUDITED CONDENSED
                        CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)


NOTE 1 - BASIS OF PRESENTATION

    The accompanying unaudited condensed consolidated financial statements of
Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. All adjustments, consisting only of normal
recurring adjustments, have been made which, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods. The
results of operations for such interim periods are not necessarily indicative of
results of operations for a full year. The unaudited condensed consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements and notes thereto for the fiscal year ended
January 28, 2001.

    The Company's fiscal year ends on the Sunday immediately preceding the last
Wednesday in January. At October 28, 2001, the Company operated 374 superstores
primarily under the Borders name, including 11 in the United Kingdom, five in
Australia, and one each in Singapore, New Zealand, and Puerto Rico. The Company
also operated 856 mall-based and other bookstores primarily under the
Waldenbooks name, and 34 bookstores under the Books etc. name in the United
Kingdom. The Company also operated the Internet commerce site Borders.com
through July 31, 2001. Effective August 1, 2001, the Company re-launched
Borders.com as a co-branded Web site powered by Amazon.com's e-commerce
platform. Amazon.com is the seller of record, providing inventory, fulfillment,
site content and customer service for the co-branded site.

NOTE 2 - COMMITMENTS AND CONTINGENCIES

    During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation to maintain required
investment grade ratings or the termination of the guarantee by Kmart
Corporation of the Company's obligations under the related leases (which would
require the mutual consent of Kmart Corporation and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6.

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




                                      (6)
<PAGE>

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


    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 Borders 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. The hearing on the motion to certify the action as a class action has
been rescheduled for April 19, 2002. The Company intends to vigorously defend
the action, including contesting the certification of the action as a class
action.

    The Company has not included any liability in its financial statements in
connection with the lawsuits described above and has expensed as incurred all
costs to date.

    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. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity or financial position.

NOTE 3 - FINANCING

    Credit Facility: The Company has a $472.8 multicurrency credit agreement
(the Credit Facility), which expires in October 2002. Borrowings under the
Credit Facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The Credit Facility contains operating covenants which limit
the Company's ability to incur indebtedness, grant liens, make acquisitions,
merge, declare dividends, dispose of assets, issue or repurchase its common
stock in excess of $100.0 million (plus any proceeds and tax benefits resulting
from stock option exercises and tax benefits resulting from restricted shares
purchased by employees from the Company), and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company is prohibited under the Credit Facility from
paying cash dividends on common shares. The Company had borrowings outstanding
under the Credit Facility of $278.3 as of October 28, 2001 and $143.5 as of
January 28, 2001.

    Lease Financing Facility: The Company has a $175.0 lease financing facility
(the Lease Facility) to finance new stores and other property through operating
leases, which expires in October 2002. The Lease Facility provides financing to
lessors through loans from a third party lender for up to 95% of a project cost.
It is expected that lessors will make equity contributions approximating 5% of
each project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
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 Lease Facility contains covenants and events of
default that are similar to those contained in the Credit Facility described
above. There was $132.1 outstanding under the Lease Facility as of October 28,
2001 and $163.1 as of January 28, 2001.


                                      (7)
<PAGE>

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



NOTE 4 - ASSET IMPAIRMENTS AND OTHER WRITEDOWNS

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

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

NOTE 5 - LEGAL SETTLEMENT

    On April 19, 2001, the Company announced that a settlement had been reached
in the action instituted by the American Booksellers Association and 26
independent bookstores against the Company and Barnes and Noble, Inc. The
Company paid $2.4 under the agreement. The Company has categorized this charge
as "Legal settlement expense" in the Condensed Consolidated Statements of
Operations.

NOTE 6 - CHANGE IN ACCOUNTING PRINCIPLE

    Effective January 29, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), as amended. FAS 133 requires the transition adjustment
resulting from adoption to be reported in net income or other comprehensive
income, as appropriate, as the cumulative effect of a change in accounting
principle. Accordingly, the Company recorded a cumulative transition adjustment
to decrease other comprehensive income by $1.6, net of tax, to recognize the
fair value of its derivative financial instruments as of the date of adoption.

    The Company is subject to risk resulting from interest rate fluctuations, as
interest on the Company's borrowings is principally based on variable rates. The
Company's objective in managing its exposure to interest rate fluctuations is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. The Company primarily utilizes interest rate
swaps to achieve this objective, effectively converting a portion of its
variable-rate exposures to fixed interest rates. In accordance with the
provisions of FAS 133, the Company has designated all of its interest rate swap
agreements as cash flow hedges.

    The Company recognizes the fair value of its derivatives on the balance
sheet. Changes in the fair value of a derivative that is designated as and meets
all the required criteria for a cash flow hedge are recorded in accumulated
other comprehensive income and reclassified into earnings as the underlying
hedged item affects earnings. Amounts reclassified into earnings related to
interest swap agreements are included in interest expense. During the quarter
ended October 28, 2001, no unrealized after-tax net gains or losses related to
interest rate swaps were recorded in other comprehensive income. As of October
28, 2001, $4.3 of net unrealized losses related to interest rate swaps was
included in accumulated other comprehensive income, approximately $3.9 of which
is expected to be reclassified into earnings during the next twelve months. The
hedge ineffectiveness for the quarter ending October 28, 2001 was not material.


                                      (8)
<PAGE>

                               BORDERS GROUP, INC.
                          NOTES TO UNAUDITED CONDENSED
                        CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)


NOTE 7 - SEGMENT INFORMATION

    The Company is organized based upon the following operating segments:
domestic Borders stores, international Borders and Books etc. stores, Walden
stores, and other (consisting of interest expense and certain corporate
governance costs).

    Segment data includes charges allocating certain corporate headquarters
costs to each segment. Transactions between segments, consisting principally of
inventory transfers, are recorded primarily at cost. The Company evaluates the
performance of its segments and allocates resources to them based on anticipated
future contribution. Amounts relating to Borders.com, other than intercompany
interest expense (net of related taxes) have been included in the Borders
segment; intercompany interest charges (net of related taxes) relating to
Borders.com have been included in the Other segment.

<TABLE>
<CAPTION>
                                                      13 WEEKS ENDED                       39 WEEKS ENDED
                                                OCTOBER 28,      OCTOBER 22,        OCTOBER 28,       OCTOBER 22,
                                                   2001             2000               2001              2000
                                              ---------------  ---------------    ---------------   ---------------
<S>                                           <C>              <C>                <C>               <C>
Sales:
     Borders                                     $     480.6      $    464.3         $  1,492.3        $   1,377.9
     Walden                                            173.8           185.3              526.2              555.5
     International                                      59.3            51.5              164.9              145.7
                                              ---------------  ---------------    ---------------   ---------------
Total sales                                      $     713.7      $    701.1         $  2,183.4        $   2,079.1
                                              ===============  ===============    ===============   ===============

Net income (loss):
     Borders                                     $       4.1      $      2.6         $      3.0        $      14.0
     Walden                                             (1.3)            1.1               (3.5)               2.8
     International                                      (3.1)           (3.8)             (11.0)             (11.2)
     Other                                              (2.8)           (2.5)             (10.4)              (7.5)
                                              ---------------  ---------------    ---------------   ---------------
Total continuing operations                             (3.1)           (2.6)             (21.9)              (1.9)
         Discontinued operations                         -               2.4                -                  5.6
                                              ---------------  ---------------    ---------------   ---------------
Total net loss                                   $      (3.1)     $     (5.0)        $    (21.9)       $      (7.5)
                                              ===============  ===============    ===============   ===============
<CAPTION>

                                                                                   OCTOBER 28,       OCTOBER 22,
                                                                                       2001              2000
                                                                                  ---------------   ---------------
<S>                                                                               <C>               <C>
Total assets:
     Borders                                                                         $  1,396.1        $   1,378.3
     Walden                                                                               492.8              527.5
     International                                                                        233.7              204.3
     Other                                                                                 88.8               84.6
                                                                                  ---------------   ---------------
Total continuing operations                                                             2,211.4            2,194.7
         Discontinued operations                                                           12.2               38.5
                                                                                  ---------------   ---------------
Total assets                                                                         $  2,223.6        $   2,233.2
                                                                                  ===============   ===============
</TABLE>



                                      (9)
<PAGE>

                               BORDERS GROUP, INC.
                          NOTES TO UNAUDITED CONDENSED
                        CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)


NOTE 8 - NEW ACCOUNTING GUIDANCE

    In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.

    The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
provisions of the Statements will have the impact of eliminating the Company's
goodwill amortization commencing in the first quarter of fiscal 2002. The
Company has not yet determined what the effect of this new rule will be on the
earnings and financial position of the Company.

    In August 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. FAS 144 is
effective for fiscal years beginning after December 15, 2001.

    The Company expects to adopt FAS 144 beginning in the first quarter of
fiscal 2002, and it does not expect that the adoption of the Statement will have
a significant impact on the Company's financial position and results of
operations.

NOTE 9 - EFFECT OF TERRORIST ATTACKS ON SEPTEMBER 11, 2001

    As a result of the terrorist attacks on September 11, 2001, a Borders store
that operated in the World Trade Center in New York City was destroyed. The loss
of that store's sales and net income for the 13 and 39 weeks ended October 28,
2001 was not material to the consolidated results as a whole.

    The Company was fully insured for the cost of the assets destroyed at the
store. Inventory of $3.5, fixed assets of $5.6, and accounts receivable and
other of $0.9 have been removed from the accounts, offset by an insurance
recovery to date of $10.0. In addition, the Company expects to recover
additional property amounts and lost income for up to 24 months from business
interruption insurance coverage, which will be recognized when collection of
such recoveries is assured.


                                      (10)
<PAGE>


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

GENERAL

    The Company, through its subsidiaries, is the second largest operator of
book and music superstores and the largest operator of mall-based bookstores in
the world based upon both sales and number of stores. At October 28, 2001, the
Company operated 374 superstores primarily under the Borders name, including 11
in the United Kingdom, five in Australia, and one each in Singapore, New
Zealand, and Puerto Rico. The Company also operated 856 mall-based and other
bookstores primarily under the Waldenbooks name, and 34 bookstores under the
Books etc. name in the United Kingdom. The Company also operated the Internet
commerce site Borders.com through July 31, 2001. Effective August 1, 2001, the
Company re-launched Borders.com as a co-branded Web site powered by Amazon.com's
e-commerce platform. Amazon.com is the seller of record, providing inventory,
fulfillment, site content and customer service for the co-branded site.

    The Company's business strategy is to continue its growth and increase its
profitability through (i) the continued expansion and refinement of its Borders
superstore operation in the United States and internationally, (ii) the
continued focus on opportunistic store openings in its mall-based bookstore
operations and expansion of its kiosk operations, (iii) the development of
web-based commerce technologies which enhance the customer experience in-store,
and (iv) disciplined management of expenses and working capital.

    The Company's third quarters of 2001 and 2000 consisted of the 13 weeks
ended October 28, 2001 and October 22, 2000, respectively.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                     13 WEEKS ENDED                       39 WEEKS ENDED
                                            OCTOBER 28, 2001  OCTOBER 22, 2000   OCTOBER 28, 2001  OCTOBER 22, 2000
                                            ----------------  ----------------   ----------------  ----------------
<S>                                         <C>               <C>                <C>               <C>
              RESULTS OF OPERATIONS
              Sales                             100.0%            100.0%             100.0%            100.0%
              Cost of merchandise sold
                (includes occupancy)             74.8              74.7               74.8              74.3
              Fulfillment center
                inventory writedowns               --                --                0.6                --
                                                -----             -----              -----             -----
              Gross margin                       25.2              25.3               24.6              25.7
              Selling, general and
                administrative expenses          24.9              24.9               24.6              25.0
              Legal settlement expense             --                --                0.1                --
              Pre-opening expense                 0.4               0.3                0.2               0.2
              Goodwill amortization               0.1               0.1                0.1               0.1
                                                -----             -----              -----             -----
              Operating income (loss) before
                asset impairments and
                other writedowns                 (0.2)               --               (0.4)              0.4
              Asset impairments and
                other writedowns                   --                --                0.7                --
                                                -----             -----              -----             -----
              Operating income (loss)            (0.2)               --               (1.1)              0.4
              Interest expense                    0.5               0.6                0.5               0.5
                                                -----             -----              -----             -----
              Loss before income tax             (0.7)             (0.6)              (1.6)             (0.1)
              Income tax benefit                 (0.3)             (0.2)              (0.6)             (0.1)
                                                ------            ------             ------            ------
              Loss from continuing
                operations                       (0.4)             (0.4)              (1.0)               --
                                                ------            ------             ------            -----
              Discontinued operations,
                net of tax:
              Loss from operations of All
                Wound Up                           --               0.3                 --               0.3
              Net loss                           (0.4)%            (0.7)%             (1.0)%            (0.3)%
                                                ------            ------             ------            ------
</TABLE>



                                      (11)
<PAGE>


CONSOLIDATED RESULTS

    Consolidated sales increases in both the 13 and 39 weeks ended October 28,
2001 resulted primarily from the opening of new Borders superstores.

    Consolidated gross margin as a percentage of sales remained essentially flat
in the third quarter of 2001 compared to the prior year. For the 39 weeks ended
October 28, 2001, gross margin as a percentage of sales decreased compared to
the prior year. The decrease primarily resulted from a $12.7 million pre-tax
charge for the writedown of inventory affected by the Company's agreement with
Ingram Book Company ("Ingram"). On March 15, 2001, the Company announced an
agreement with Ingram, a wholesaler of books, spoken audio and magazines,
pursuant to which Ingram will provide book fulfillment services for the
Company's special order sales. The agreement included the sale to Ingram of a
large percentage of the book inventory housed in the Company's fulfillment
center in LaVergne, Tennessee, which handled the function assumed by Ingram.
Also contributing to the lower gross margin percentage for the 39 weeks ended
October 28, 2001 were increased store occupancy expenses as a percentage of
sales.

    Consolidated selling, general and administrative expenses as a percentage of
sales remained flat in the third quarter of 2001 compared to the prior year.
Consolidated selling, general and administrative expenses decreased as a
percentage of sales for the 39 weeks ended October 28, 2001 compared to the
prior year primarily as a result of strong expense control. In particular,
Borders store payroll costs and advertising costs decreased as a percentage of
sales.

    On April 19, 2001, the Company announced that a settlement had been reached
in the action instituted by the American Booksellers Association and 26
independent bookstores against the Company and Barnes and Noble, Inc. The
Company paid $2.4 million under the agreement. The Company has categorized this
charge as "Legal settlement expense" in the Condensed Consolidated Statements of
Operations.

    In addition to the writedown of inventory discussed above, the Company's
agreement with Ingram resulted in a pre-tax charge of $15.8 million in the first
quarter of 2001. This charge is primarily related to the writedown of assets
used by the current Company-owned facility to fulfill special order sales,
including computer hardware and software, leasehold improvements, and warehouse
equipment.

    Interest expense remained essentially flat as a percentage of sales in both
the 13 and 39 weeks ended October 28, 2001 compared to the prior year.

    In January 2001, the Company adopted a plan to discontinue operations of All
Wound Up, a seasonal retailer of interactive toys and novelty merchandise the
Company had acquired in March 1999. All Wound Up is reflected in the
Consolidated Statements of Operations as a discontinued operation.

    The Company includes certain distribution and other expenses in its
inventory costs, particularly freight, distribution payroll, and certain
occupancy expenses. In addition, certain selling, general and administrative
expenses are included in inventory costs. These amounts approximate 2% of total
inventory.

    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 for the 13 and 39 weeks ended October 28,
2001 was not material to the consolidated results as a whole.

    The Company was fully insured for the cost of the assets destroyed at the
store. Inventory of $3.5, fixed assets of $5.6, and accounts receivable and
other of $0.9 have been removed from the accounts, offset by an insurance
recovery to date of $10.0. In addition, the Company expects to recover
additional property amounts and lost income for up to 24 months from business
interruption insurance coverage, which will be recognized when collection of
such recoveries is assured.



                                      (12)
<PAGE>


SEGMENT RESULTS

    The Company is organized based upon the following operating segments:
domestic Borders stores, Waldenbooks stores, international Borders and Books
etc. stores, and other (consisting of interest expense and certain corporate
governance costs). See Note 7 of the Notes to Consolidated Financial Statements
for further information relating to these segments.

    Segment data includes charges allocating certain corporate headquarters
costs to each segment. Transactions between segments, consisting principally of
inventory transfers, are recorded primarily at cost. The Company evaluates the
performance of its segments and allocates resources to them based on anticipated
future contribution. Amounts relating to Borders.com, other than intercompany
interest expense (net of related taxes) have been included in the Borders
segment; intercompany interest charges (net of related taxes) relating to
Borders.com have been included in the Other segment.

<TABLE>
<CAPTION>
                                                           13 WEEKS ENDED                       39 WEEKS ENDED

               (DOLLAR AMOUNTS IN MILLIONS)
               BORDERS                           OCTOBER 28, 2001  OCTOBER 22, 2000   OCTOBER 28, 2001  OCTOBER 22, 2000
                                                 ----------------  ----------------   ----------------  ----------------
<S>                                              <C>               <C>                <C>               <C>
               Sales                               $   480.6         $   464.3          $ 1,492.3         $ 1,377.9
               Net income                          $     4.1         $     2.6          $     3.0         $    14.0
               Net income as % of sales                  0.9%              0.6%               0.2%              1.0%
               Depreciation and
                 amortization expense              $    16.3         $    14.8          $    48.2         $    45.3
               Interest expense                    $     2.7         $     3.5          $     8.5         $     9.4
               Store Openings                             11                17                 21                32
               Store Closings                              1                 -                  1                 -
               Store Count                               355               323                355               323
                                                   ---------         ---------          ---------         ---------
</TABLE>

    The increases in Borders sales in 2001 compared to the prior year are
primarily the result of new store openings. Borders operated 355 and 323 stores
at the end of the third quarter of 2001 and 2000, respectively, and experienced
comparable store sales decrease of 0.2% in the third quarter of 2001. The
comparable store sales increase for the 39 weeks ended October 28, 2001 was
1.2%.

    For the third quarter of 2001, Borders generated net income of $4.1 million,
or approximately 0.9% of sales. The increase in net income compared to the prior
year was the result of store openings and Borders' ability to leverage fixed
costs over a larger sales base. The increase in net income as a percentage of
sales was the result of a reduction in Borders.com operating expenses in
conjunction with the agreement with Amazon.com and lower store payroll expenses
as a percentage of sales. For the 39 weeks ended October 28, 2001, the decrease
in net income primarily resulted from the first quarter writeoff of certain
assets and inventory pursuant to the alliance with Ingram. Net income decreased
as a percentage of sales for the 39 weeks ended October 28, 2001, compared to
the prior year primarily due to operating agreement with Amazon.com and the
alliance with Ingram.

    Depreciation and amortization expense increased in 2001 compared to the
prior year primarily as a result of the depreciation expense recognized on new
stores' capital expenditures.

    Interest expense decreased in 2001 compared to the prior year primarily as a
result of decreased borrowing needs.

<TABLE>
<CAPTION>
                                                          13 WEEKS ENDED                     39 WEEKS ENDED
               WALDENBOOKS                     OCTOBER 28, 2001  OCTOBER 22, 2000  OCTOBER 28, 2001  OCTOBER 22, 2000
                                               ----------------  ----------------  ----------------  ----------------
<S>                                            <C>               <C>               <C>               <C>
               Sales                             $  173.8          $  185.3         $  526.2          $  555.5
               Net income (loss)                 $   (1.3)         $    1.1         $   (3.5)         $    2.8
               Net income (loss) as % of sales       (0.7)%             0.6%            (0.7)%             0.5%
               Depreciation expense              $    4.8          $    6.0         $   14.3          $   17.6
               Interest income                   $    6.8          $    6.1         $   20.4          $   18.9
               Store Openings                           7                 3               11                 8
               Store Closings                           6                 4               24                22
               Store Count                            856               890              856               890
                                                  -------           -------          -------           -------
</TABLE>

    The decreases in Waldenbooks sales in 2001 compared to the prior year are
primarily the result of the decrease in store count coupled with comparable
store sales decreases of 4.1% and 3.8% for the 13 and 39 weeks ended October 28,
2001, respectively.

    The net loss in 2001 (for both the 13 and 39 weeks ended October 28, 2001)
resulted primarily from a decrease in gross margin from the prior year.


                                      (13)
<PAGE>
This was due to higher store occupancy costs and payroll costs as a percentage
of sales resulting from the smaller store base and lower sales volume as
compared to the prior year.

    Depreciation expense decreased in 2001 (for both the 13 and 39 weeks ended
October 28, 2001) primarily as a result of the decrease in store count and the
impairment of 103 underperforming stores' leaseholds and fixtures in the fourth
quarter of 2000.

    Interest income increased in 2001 as a result of Waldenbooks' continued
positive cash flow in the periods presented.

<TABLE>
<CAPTION>
                                                           13 WEEKS ENDED                     39 WEEKS ENDED

               INTERNATIONAL                      OCTOBER 28, 2001  OCTOBER 22, 2000  OCTOBER 28, 2001  OCTOBER 22, 2000
                                                  ----------------  ----------------  ----------------  ----------------
<S>                                               <C>               <C>               <C>               <C>
               Sales                                 $   59.3          $   51.5          $  164.9          $  145.7
               Net loss                              $    3.1          $    3.8          $   11.0          $   11.2
               Net loss as % of sales                     5.2%              7.4%              6.7%              7.7%
               Depreciation and amortization         $    2.2          $    2.2          $    6.6          $    6.3
                 expense
               Interest expense                      $    3.4          $    3.2          $   10.0          $    8.8
               Superstore Store Openings                    2                 1                 5                 5
               Superstore Store Count                      19                14                19                14
               Books etc. Store Openings                    2                 1                 3                 4
               Books etc. Store Closings                    -                 -                 -                 -
               Books etc. Store Count                      34                31                34                31
                                                      -------           -------           -------           -------
</TABLE>

    The increases in International sales in 2001 compared to the prior year
resulted from new superstore openings and comparable store sales increases.

    Net loss and net loss as a percentage of sales for the 13 and the 39 weeks
ended October 28, 2001, due to increased operating income generated from the
maturation of the prior year's store base.

    Depreciation and amortization expense remained relatively flat in 2001.

    Interest expense increased in 2001 compared to the prior year due to higher
average borrowing levels necessary to finance investments in new stores.


<TABLE>
<CAPTION>
                                         13 WEEKS ENDED                      39 WEEKS ENDED
              OTHER             OCTOBER 28, 2001  OCTOBER 22, 2000  OCTOBER 28, 2001  OCTOBER 22, 2000
                                ----------------  ----------------  ----------------  ----------------
<S>                             <C>               <C>               <C>               <C>
              Net loss              $  2.8             $  2.5           $ 10.4             $  7.5
              Interest expense      $  4.2             $  3.5           $ 13.4             $ 10.5
                                    ------             ------           ------             ------
</TABLE>

    Net loss consists of various corporate governance costs and income. The net
loss for the third quarter of 2001 increased from the same period in the prior
year primarily due to increased interest expense for this segment, partially
offset by lower legal costs associated with the American Booksellers Association
litigation. The net loss for the 39 weeks ended October 28, 2001 increased from
the prior year due to the settlement cost of the American Booksellers
Association litigation, which totaled approximately $1.4 million after-tax.
Interest expense represents corporate-level interest costs not charged to the
Company's operating segments. Higher average borrowing levels for the 13 and 39
weeks ended October 28, 2001 resulted in increased interest expense compared to
the prior year.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's principal capital requirements are to fund working capital
needs, the opening of new stores, the refurbishment and expansion of existing
stores, and continued development of information commerce technologies.

    Net cash used for continuing operations for the 39 weeks ended October 28,
2001, was $102.6 million as compared to $148.8 million in the corresponding
period in the prior year. Cash from operations for the period primarily reflects
operating results net of non-cash depreciation and amortization expense and an
increase in inventories. Operating cash outflows for the period were primarily
the result of decreases in accounts payable, taxes payable, and accrued
liabilities during the period.

    Net cash provided by discontinued operations represents the cash provided by
operations of All Wound Up in the first 39 weeks of 2001.


                                      (14)
<PAGE>
Net cash used by discontinued operations represents the cash needed for the
operations of All Wound Up in the first 39 weeks of 2000.

    Net cash used for investing for the first 39 weeks of 2001 was $56.9 million
as compared to $84.1 million in the first 39 weeks of 2000, and primarily
represents capital expenditures for new stores.

    Net cash provided by financing in the first 39 weeks of 2001 was $155.6
million versus $269.1 million in the first 39 weeks of 2000, resulting primarily
from net borrowings under the Credit Facility and the issuance of common stock
under the Company's employee benefit plans.

    The Company has a $472.8 million multicurrency credit agreement (the Credit
Facility), which expires in October 2002. Borrowings under the Credit Facility
bear interest at a base rate or an increment over LIBOR at the Company's option.
The Credit Facility contains covenants which limit, among other things, the
Company's ability to incur indebtedness, grant liens, make acquisitions, merge,
declare dividends, dispose of assets, issue or repurchase its common stock in
excess of $100.0 million (plus any proceeds and tax benefits resulting from
stock option exercises and tax benefits resulting from restricted shares
purchased by employees from the Company), and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company is prohibited under the Credit Facility from
paying cash dividends on common shares.

    The Company believes that it can renew the Credit Facility or otherwise
obtain capital necessary to fund the Company's business plan.

    The Company has a $175.0 million lease financing facility (the Lease
Facility) to finance new stores and other property through operating leases that
expires in October 2002. The Lease Facility provides financing to lessors
through loans from a third party lender for up to 95% of a project cost. It is
expected that lessors will make equity contributions approximating 5% of each
project. Independent of its obligations as lessee, the Company guarantees
payment when due of all amounts required to be paid to the third party lender.
The principal amount guaranteed will be 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 Lease Facility contains covenants and events
of default that are similar to those contained in the Credit Facility described
above.

    There were 35 and 40 properties financed through the Lease Facility, with a
financed value of $132.1 million and $163.1 million, as of October 28, 2001, and
January 28, 2001, respectively. Management believes that the rental payments for
properties financed through the Lease Facility may be lower than those which the
Company could obtain elsewhere due to, among other factors, (i) the lower
borrowing rates available to the Company's landlords under the facility, and
(ii) the fact that rental payments for properties financed through the facility
do not include amortization of the principal amounts of the landlords'
indebtedness related to the properties. Rental payments relating to such
properties will be adjusted when permanent financing is obtained to reflect the
interest rates available at the time of the refinancing and the amortization of
principal.

    During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart Corporation (the former parent of
the Company) to maintain required investment grade ratings or the termination of
the guarantee by Kmart of the Company's obligations under the related leases
(which would require mutual consent of Kmart and Borders). In the event the
Company is required to repurchase all of the underlying mortgage notes, the
Company would be obligated to pay approximately $36.6 million. The Company would
expect to fund this obligation through its line of credit.

    The Company currently has a share repurchase program in place with remaining
authorization to repurchase approximately $90.2 million.



                                      (15)
<PAGE>


OTHER MATTERS

    NEW ACCOUNTING GUIDANCE

    In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.

    The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
provisions of the Statements will have the impact of eliminating the Company's
goodwill amortization commencing in the first quarter of fiscal 2002. The
Company has not yet determined what the effect of this new rule will be on the
earnings and financial position of the Company.

    In August 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. FAS 144 is
effective for fiscal years beginning after December 15, 2001.

    The Company expects to adopt FAS 144 beginning in the first quarter of
fiscal 2002, and it does not expect that the adoption of the Statement will have
a significant impact on the Company's financial position and results of
operations.

FORWARD-LOOKING STATEMENTS

    This Quarterly Report on Form 10-Q contains forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements reflect management's current expectations and are inherently
uncertain. The Company's actual results may differ significantly from
management's expectations. Exhibit 99.1 to this report, "Cautionary Statement
under the Private Securities Litigation Reform Act of 1995", identifies the
forward-looking statements and describes some, but not all, of the factors that
could cause these differences.




                                      (16)
<PAGE>

                           PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

    The Company's Form 10-K Annual Report for the fiscal year ended January 28,
2001, describes pending lawsuits against the Company. An adverse judgment
against the Company in any of these matters could have a material adverse effect
on the Company. The status of such litigation has not changed in any material
respect during the period covered by this Report. The hearing on the motion to
certify as a class action the lawsuit relating to overtime pay initially
instituted by Marissa Everett and Terry Blagsvedt in Superior Court of
California has been rescheduled for April 19, 2002.

    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. The Company does not believe that any such other litigation will
have a material adverse effect on its liquidity, financial position or results
of operations.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits:

(a)  Exhibits:

         99.1     Cautionary Statement under the Private Securities Litigation
                  Reform Act of 1995 - "Safe Harbor" for Forward-Looking
                  Statements.

(b)  Reports on Form 8-K:

         None



                                      (17)
<PAGE>

                                   SIGNATURES

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

                               BORDERS GROUP, INC.
                               -------------------
                                  (REGISTRANT)




Date:  December 11, 2001                    By: /s/ Edward W. Wilhelm
                                                --------------------------------
                                                Edward W. Wilhelm
                                                Senior Vice President and
                                                Chief Financial Officer
                                                (Principal Financial and
                                                Accounting Officer)



                                      (18)
<PAGE>
                                 Exhibit Index

  Exhibit No.
  -----------
      99.1        Cautionary Statement under the Private Securities Litigation
                  Reform Act of 1995 - "Safe Harbor" for Forward-Looking
                  Statements.