SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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## FORM 10 - Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 26, 2003
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 | December 03, 2003       
|Common Stock   | 78,179,580              

---

# BORDERS
GROUP, INC.

# INDEX

|                               |                                                |     
|------------------------------ | ---------------------------------------------- | ----
|Part I - Financial Information |                                                |     
|                               |                                                |     
|                               |                                                | Page
|                               |                                                |     
|Item 1.                        | Financial Statements                           | 1   
|                               |                                                |     
|Item 2.                        | Management's Discussion and Analysis of        |     
|                               | Financial Condition and Results of             |     
|                               | Operations                                     | 12  
|                               |                                                |     
|Item 3.                        | Quantitative and Qualitative Disclosures about |     
|                               | Market Risk                                    | N/A 
|                               |                                                |     
|Item 4.                        | Controls and Procedures                        | 28  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Part II - Other information    |                                                |     
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Item 1.                        | Legal Proceedings                              | 28  
|                               |                                                |     
|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               | 29  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Signatures                     |                                                | 30  
|                               |                                                |     

ii

---

# BORDERS GROUP,
INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS(AMOUNTS IN
MILLIONS EXCEPT PER SHARE DATA)(UNAUDITED)

| |                                                     |                                                    |       |       |  |   |       |       |   | 
| | --------------------------------------------------- | -------------------------------------------------- | ----- | ----- |  | - | ----- | ----- | - | 
|
|
|
| |                                                     |                                                    |       |       |  |   |       |       |   | 
| | Sales                                               |                                                    | $     | 807.9 |  |   | $     | 749.8 |   | 
| | Other revenue                                       |                                                    | 8.8   |       |  |   | 6.9   |       |  
| |                                                     |                                                    |       |       |  |  
| | Total revenue                                       |                                                    | 816.7 |       |  |   | 756.7 |       |  
| | Cost of merchandise sold, including occupancy costs |                                                    | 611.0 |       |  |   | 563.7 |       |  
| | Inventory writedowns                                |                                                    | -     |       |  |   | -     |       |  
| |                                                     |                                                    |       |       |  |  
| | Gross margin                                        |                                                    | 205.7 |       |  |   | 193.0 |       |  
| | Selling, general and administrative expenses        |                                                    | 201.0 |       |  |   | 189.3 |       |  
| | Pre-opening expense                                 |                                                    | 2.3   |       |  |   | 2.9   |       |  
| | Asset impairments and other writedowns              |                                                    | (0.6  | )     |  |   | -     |       |  
| |                                                     |                                                    |       |       |  |  
| | Operating income                                    |                                                    | 3.0   |       |  |   | 0.8   |       |  
| | Interest expense                                    |                                                    | 2.2   |       |  |   | 3.8   |       |  
| |                                                     |                                                    |       |       |  |  
| | Income (loss) before income tax                     |                                                    | 0.8   |       |  |   | (3.0  | )     |  
| | Income tax provision (benefit)                      |                                                    | 0.3   |       |  |   | (1.2  | )     |  
| |                                                     |                                                    |       |       |  |  
| | Net income (loss)                                   | $                                                  | 0.5   |       |  | $ | (1.8  | )     |  
| |                                                     |                                                    |       |       |  |  
| | EARNINGS (LOSS) PER COMMON SHARE DATA --            |                                                    |       |       |  |   |       |       |  
| |                                                     |                                                    |       |       |  |   |       |       |   | 
| |                                                     | Diluted earnings (loss) per common share           | $     | 0.01  |  |   | $     | (0.02 | ) | 
| |                                                     |                                                    |       |       |  |  
| |                                                     | Diluted weighted average common shares outstanding |       | 79.0  |  |   |       | 79.3  |   | 
| |                                                     |                                                    |       |       |  |  
| |                                                     | Basic earnings (loss) per common share             | $     | 0.01  |  |   | $     | (0.02 | ) | 
| |                                                     |                                                    |       |       |  |  
| |                                                     | Basic weighted average common shares outstanding   |       | 77.5  |  |   |       | 79.3  |   | 
| |                                                     |                                                    |       |       |  |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

---

# BORDERS GROUP,
INC.CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS(AMOUNTS IN
MILLIONS EXCEPT PER SHARE DATA)(UNAUDITED)

| |                                                     |                                                    |         |         |  |   |         |         |  | 
| | --------------------------------------------------- | -------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | 
|
|
|
| |                                                     |                                                    |         |         |  |   |         |         |  | 
| | Sales                                               |                                                    | $       | 2,386.2 |  |   | $       | 2,265.1 |  | 
| | Other revenue                                       |                                                    | 22.5    |         |  |   | 20.1    |         | 
| |                                                     |                                                    |         |         |  |  
| | Total revenue                                       |                                                    | 2,408.7 |         |  |   | 2,285.2 |         | 
| | Cost of merchandise sold, including occupancy costs |                                                    | 1,801.9 |         |  |   | 1,692.6 |         | 
| | Inventory writedowns                                |                                                    | 0.5     |         |  |   | -       |         | 
| |                                                     |                                                    |         |         |  |  
| | Gross margin                                        |                                                    | 606.3   |         |  |   | 592.6   |         | 
| | Selling, general and administrative expenses        |                                                    | 593.5   |         |  |   | 570.4   |         | 
| | Pre-opening expense                                 |                                                    | 5.5     |         |  |   | 4.7     |         | 
| | Asset impairments and other writedowns              |                                                    | -       |         |  |   | -       |         | 
| |                                                     |                                                    |         |         |  |  
| | Operating income                                    |                                                    | 7.3     |         |  |   | 17.5    |         | 
| | Interest expense                                    |                                                    | 7.0     |         |  |   | 8.7     |         | 
| |                                                     |                                                    |         |         |  |  
| | Income before income tax                            |                                                    | 0.3     |         |  |   | 8.8     |         | 
| | Income tax provision                                |                                                    | 0.1     |         |  |   | 3.3     |         | 
| |                                                     |                                                    |         |         |  |  
| | Net income                                          | $                                                  | 0.2     |         |  | $ | 5.5     |         | 
| |                                                     |                                                    |         |         |  |  
| | EARNINGS PER COMMON SHARE DATA --                   |                                                    |         |         |  |   |         |         | 
| |                                                     |                                                    |         |         |  |   |         |         |  | 
| |                                                     | Diluted earnings per common share                  | $       | -       |  |   | $       | 0.07    |  | 
| |                                                     |                                                    |         |         |  |  
| |                                                     | Diluted weighted average common shares outstanding |         | 78.8    |  |   |         | 82.6    |  | 
| |                                                     |                                                    |         |         |  |  
| |                                                     | Basic earnings per common share                    | $       | -       |  |   | $       | 0.07    |  | 
| |                                                     |                                                    |         |         |  |  
| |                                                     | Basic weighted average common shares outstanding   |         | 77.8    |  |   |         | 80.7    |  | 
| |                                                     |                                                    |         |         |  |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

---

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

| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  |  | 
| | ------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  |  | 
|
|
| | ASSETS                               |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| | Current Assets:                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| |                                      | Cash and cash equivalents                                         | $                                                    | 110.6   |         |  | $ | 68.3    |         |  | $ | 269.1   |         | 
| |                                      | Merchandise inventories                                           |                                                      | 1,478.0 |         |  |   | 1,437.6 |         |  |   | 1,183.3 |         | 
| |                                      | Accounts receivable and other current assets                      |                                                      | 72.9    |         |  |   | 72.2    |         |  |   | 88.9    |         | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Current Assets                                 |         | 1,661.5 |  |   |         | 1,578.1 |  |   |         | 1,541.3 |  | 
| |                                      | Property and equipment, net of accumulated depreciation           |                                                      |         |         |  |   |         |         |  |   |         |         | 
| |                                      |                                                                   | of $724.7, $630.4 and $667.4 at October 26, 2003,    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | October 27, 2002, and January 26, 2003, respectively |         | 563.2   |  |   |         | 555.3   |  |   |         | 553.8   |  | 
| |                                      | Other assets and deferred charges                                 |                                                      | 86.1    |         |  |   | 107.5   |         |  |   | 76.6    |         | 
| |                                      | Goodwill                                                          |                                                      | 99.7    |         |  |   | 93.7    |         |  |   | 96.5    |         | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Assets                                         | $       | 2,410.5 |  |   | $       | 2,334.6 |  |   | $       | 2,268.2 |  | 
|
| | LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| | Current Liabilities:                 |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |        
| |                                      | Short-term debt and capital lease obligations due within one year | $                                                    | 136.9   |         |  | $ | 171.8   |         |  | $ | 112.7   |         | 
| |                                      | Trade accounts payable                                            |                                                      | 801.1   |         |  |   | 785.7   |         |  |   | 565.4   |         | 
| |                                      | Accrued payroll and other liabilities                             |                                                      | 233.9   |         |  |   | 225.7   |         |  |   | 280.1   |         | 
| |                                      | Taxes, including income taxes                                     |                                                      | 53.2    |         |  |   | 48.4    |         |  |   | 120.7   |         | 
| |                                      | Deferred income taxes                                             |                                                      | 8.7     |         |  |   | -       |         |  |   | 8.7     |         | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Current Liabilities                            |         | 1,233.8 |  |   |         | 1,231.6 |  |   |         | 1,087.6 |  | 
| |                                      | Long-term debt                                                    |                                                      | 50.7    |         |  |   | 50.0    |         |  |   | 50.0    |         | 
| |                                      | Long-term capital lease and financing obligations                 |                                                      | 12.9    |         |  |   | 48.7    |         |  |   | 19.0    |         | 
| |                                      | Other long-term liabilities                                       |                                                      | 86.8    |         |  |   | 79.2    |         |  |   | 81.0    |         | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Liabilities                                    |         | 1,384.2 |  |   |         | 1,409.5 |  |   |         | 1,237.6 |  | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      | Stockholders' Equity:                                             |                                                      |         |         |  |   |         |         |  |   |         |         | 
| |                                      | Common stock; 200,000,000 shares authorized;                      |                                                      |         |         |  |   |         |         |  |   |         |         | 
| |                                      |                                                                   | 78,009,042, 79,048,273 and 78,731,922 issued and     |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | outstanding at October 26, 2003, October 27, 2002,   |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | and January 26, 2003, respectively                   |         | 644.0   |  |   |         | 665.6   |  |   |         | 657.0   |  | 
| |                                      | Deferred compensation                                             |                                                      | (0.5    | )       |  |   | (0.2    | )       |  |   | (0.2    | )       | 
| |                                      | Accumulated other comprehensive income (loss)                     |                                                      | 13.2    |         |  |   | (3.5    | )       |  |   | 4.4     |         | 
| |                                      | Retained earnings                                                 |                                                      | 369.6   |         |  |   | 263.2   |         |  |   | 369.4   |         | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Stockholders' Equity                           |         | 1,026.3 |  |   |         | 925.1   |  |   |         | 1,030.6 |  | 
| |                                      |                                                                   |                                                      |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Liabilities & Stockholders' Equity             | $       | 2,410.5 |  |   | $       | 2,334.6 |  |   | $       | 2,268.2 |  | 
|

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

---

# BORDERS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE 39 WEEKS ENDED OCTOBER 26, 2003(DOLLARS IN MILLIONS)
(UNAUDITED)

| |                                 |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   |         |       |   | 
| | ------------------------------- | ------------------------------- | ---------- | - | - | ----- | ----- | - | - | ---- | ---- | - | - | ---- | ---- | - | - | ----- | - |  | - | ------- | ----- | - | 
|
|
|
|
| | BALANCE AT JANUARY 26, 2003     | 78,731,922                      |            |   | $ | 657.0 |       |   | $ | (0.2 | )    |   | $ | 4.4  |      |   | $ | 369.4 |   |  | $ | 1,030.6 |       |  
| |                                 |                                 |            |   |   |       |       |   |   |      |      |   |   |     
| | Net income                      | -                               |            |   |   | -     |       |   |   | -    |      |   |   | -    |      |   |   | 0.2   |   |  |   | 0.2     |       |  
| | Currency translation adjustment | -                               |            |   |   | -     |       |   |   | -    |      |   |   | 9.7  |      |   |   | -     |   |  |   | 9.7     |       |  
| | Change in fair value of         |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   |         |       |  
| |                                 | derivatives, net of tax of $0.5 | -          |   |   |       | -     |   |   |      | -    |   |   |      | (0.9 | ) |   |       | - |  |   |         | (0.9  | ) | 
| |                                 |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   |         |       |  
| | Comprehensive income            |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   | 9.0     |       |  
| | Issuance of common stock        | 1,244,891                       |            |   |   | 15.8  |       |   |   | -    |      |   |   | -    |      |   |   | -     |   |  |   | 15.8    |       |  
| | Repurchase and retirement of    |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   |         |       |  
| |                                 | common stock                    | (1,967,771 | ) |   |       | (31.5 | ) |   |      | -    |   |   |      | -    |   |   |       | - |  |   |         | (31.5 | ) | 
| | Change in deferred              |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   |         |       |  
| |                                 | compensation                    | -          |   |   |       | -     |   |   |      | (0.3 | ) |   |      | -    |   |   |       | - |  |   |         | (0.3  | ) | 
| | Tax benefit of equity           |                                 |            |   |   |       |       |   |   |      |      |   |   |      |      |   |   |       |   |  |   |         |       |  
| |                                 | compensation                    | -          |   |   |       | 2.7   |   |   |      | -    |   |   |      | -    |   |   |       | - |  |   |         | 2.7   |   | 
| |                                 |                                 |            |   |   |       |       |   |   |      |      |   |   |     
| | BALANCE AT OCTOBER 26, 2003     | 78,009,042                      |            |   | $ | 644.0 |       |   | $ | (0.5 | )    |   | $ | 13.2 |      |   | $ | 369.6 |   |  | $ | 1,026.3 |       |  
| |                                 |                                 |            |   |   |       |       |   |   |      |      |   |   |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

---

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

| |                                                              |                                                                     |                                                      |                                |        |       |        |      |        |       |   | 
| | ------------------------------------------------------------ | ------------------------------------------------------------------- | ---------------------------------------------------- | ------------------------------ | ------ | ----- | ------ | ---- | ------ | ----- | - | 
|
|
|
|
| | CASH PROVIDED BY (USED FOR):                                 |                                                                     |                                                      |                                |        |       |        |      |       
| | OPERATIONS                                                   |                                                                     |                                                      |                                |        |       |        |      |       
| | Net income                                                   | $                                                                   | 0.2                                                  |                                |        | $     | 5.5    |      |       
| | Adjustments to reconcile net income to operating cash flows: |                                                                     |                                                      |                                |        |       |        |      |       
| |                                                              | Depreciation                                                        |                                                      | 73.3                           |        |       |        | 69.7 |        |      
| |                                                              | Decrease in deferred income taxes                                   |                                                      | -                              |        |       |        | 21.1 |        |      
| |                                                              | Increase / (decrease) in other long-term assets and liabilities     |                                                      | (8.7                           | )      |       |        | 13.9 |        |      
| |                                                              | Asset impairments and other writedowns                              |                                                      | 0.6                            |        |       |        | -    |        |      
| |                                                              | Cash provided by (used for) current assets and current liabilities: |                                                      |                                |        |       |        |      |        |      
| |                                                              |                                                                     | Increase in inventories                              |                                | (286.4 | )     |        |      | (251.0 | )     |  
| |                                                              |                                                                     | Decrease in accounts receivable                      |                                | 21.1   |       |        |      | 8.3    |       |  
| |                                                              |                                                                     | Increase in prepaid expenses                         |                                | (4.1   | )     |        |      | (5.1   | )     |  
| |                                                              |                                                                     | Increase in accounts payable                         |                                | 232.6  |       |        |      | 143.2  |       |  
| |                                                              |                                                                     | Decrease in taxes payable                            |                                | (64.6  | )     |        |      | (59.9  | )     |  
| |                                                              |                                                                     | Decrease in expenses payable and accrued liabilities |                                | (48.3  | )     |        |      | (63.5  | )     |  
| |                                                              |                                                                     |                                                      |                                |        |      
| |                                                              |                                                                     |                                                      | Net cash used for operations   | (84.3  | )     |        |      | (117.8 | )     |  
| | INVESTING                                                    |                                                                     |                                                      |                                |        |       |        |      |       
| | Capital expenditures                                         |                                                                     | (76.6                                                | )                              |        |       | (85.7  | )    |       
| | Acquisition                                                  |                                                                     | (2.9                                                 | )                              |        |       | -      |      |       
| |                                                              |                                                                     |                                                      |                                |        |      
| |                                                              |                                                                     |                                                      | Net cash used for investing    |        | (79.5 | )      |      |        | (85.7 | ) | 
| | FINANCING                                                    |                                                                     |                                                      |                                |        |       |        |      |       
| | Net funding from long term debt                              |                                                                     | -                                                    |                                |        |       | 50.0   |      |       
| | Net funding from credit facility                             |                                                                     | 19.4                                                 |                                |        |       | 78.9   |      |       
| | Capital lease repayment                                      |                                                                     | (0.9                                                 | )                              |        |       | (1.3   | )    |       
| | Issuance of common stock                                     |                                                                     | 15.8                                                 |                                |        |       | 16.9   |      |       
| | Repurchase of common stock                                   |                                                                     | (31.5                                                | )                              |        |       | (64.0  | )    |       
| |                                                              |                                                                     |                                                      |                                |        |      
| |                                                              |                                                                     |                                                      | Net cash provided by financing |        | 2.8   |        |      |        | 80.5  |   | 
| |                                                              |                                                                     |                                                      |                                |        |      
| | Effect of exchange rates on cash and equivalents             |                                                                     | 2.5                                                  |                                |        |       | 1.1    |      |       
| | NET DECREASE IN CASH AND EQUIVALENTS                         |                                                                     | (158.5                                               | )                              |        |       | (121.9 | )    |       
| |                                                              |                                                                     |                                                      |                                |        |      
| | Cash and equivalents at beginning of year                    |                                                                     | 269.1                                                |                                |        |       | 190.2  |      |       
| |                                                              |                                                                     |                                                      |                                |        |      
| | Cash and equivalents at end of period                        | $                                                                   | 110.6                                                |                                |        | $     | 68.3   |      |       
| |                                                              |                                                                     |                                                      |                                |        |       |        |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

---

# BORDERS
GROUP, INC.NOTES TO
UNAUDITED CONDENSEDCONSOLIDATED
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 26, 2003.

The Companys fiscal
year ends on the Sunday immediately preceding the last Wednesday in January. At
October 26, 2003, the Company operated 473 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 750 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.  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 filed a Second Amended Complaint limited to allegations of violations of the Robinson-Patman
Act. The Second Amended Complaint  alleges that Intimate has suffered $11.3 or more in damages and requests treble damages,  injunctive
and declaratory  relief,  interest,  costs,  attorneys' fees and other unspecified relief. On September 30, 2003, the Court granted the
defendants' Motion For Summary Judgment and dismissed the case. Intimate has filed a Notice of Appeal.

Two former employees,
individually and on behalf of a purported class consisting of all current and
former employees who worked as assistant managers in Borders stores in the state
of California at any time between April 10, 1996, and the present, have filed an
action against the Company in the Superior Court of California for the County of
San Francisco. The action alleges that the individual plaintiffs and the
purported class members worked hours for which they were entitled to receive,
but did not receive, overtime compensation under California law, and that they
were classified as exempt store management employees but were forced to work
more than 50% of their time in non-exempt tasks. The Amended Complaint, which
names two additional plaintiffs, alleges violations of the California Labor Code
and the California Business and Professions Code. The relief sought includes
compensatory and punitive damages, penalties, preliminary and permanent
injunctions requiring Borders to pay overtime compensation as required under
California and Federal law, prejudgment interest, costs, and attorneys
fees and such other relief as the court deems proper. On July 29, 2002, the
Superior Court of California granted the plaintiffs motion for class
certification in the action. The class certified consists of all individuals who
worked as Assistant Managers in a Borders superstore in California at any time
between April 10, 1996 and March 18, 2001. The class was further certified by
the Court into the following subclasses: Assistant Manager-Merchandising;
Assistant Manager-Inventory; Assistant Manager-Human Resources; Assistant
Manager-Music; Assistant Manager-Training; Assistant Manager-Cafe. The
Companys request for an immediate appeal of the class certification ruling
has been denied. Mediation did not result in a resolution of the matter, and the
Company will continue to vigorously defend the action. Given current factual and
legal uncertainties, the Company is not in a position to reasonably estimate the
amount of the loss, if any. The trial is scheduled for March 15, 2004.

On October 29, 2002, Gary
Gerlinger, individually and on behalf of all other similarly situated consumers
in the United States who, during the period from August 1, 2001 to the present,
purchased books online from either Amazon.com, Inc. (Amazon) or the
Company, instituted an action against the Company and Amazon in the United
States District Court for the Northern District of California. The Complaint
alleges that the agreement pursuant to which an affiliate of Amazon operates
Borders.com as a co-branded site violates federal anti-trust laws, California
statutory law and the common law of unjust enrichment. The Complaint seeks
injunctive relief, damages, including treble damages or statutory damages where
applicable, attorneys fees, costs and disbursements,

6

---

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

disgorgement of all sums
obtained by allegedly wrongful acts, interest and declaratory relief. The
Company has filed an answer denying any liability and intends to vigorously
defend the action.

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

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
state alleges should 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 Tennessee, Nevada
and Illinois under the applicable states False Claims Act relating to the
failure to collect use taxes on Internet sales in Tennessee, 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 Tennessee, Nevada and Illinois as a result of
the alleged violations of the defendants, penalties, costs and expenses,
including legal fees. The Tennessee action has been dismissed, but the appeal
period has not yet 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. In January 2002, Kmart filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Such filing has not affected the
operations of the Company.

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

Tax Allocation and Indemnification
Agreement. Prior to the completion of its initial public offering (IPO), the
Company was included in the consolidated federal income tax returns of Kmart and
filed on a combined basis with Kmart in certain states. Pursuant to a tax
allocation and indemnification agreement between the Company and Kmart (Tax
Allocation Agreement) the Company will remain obligated to pay to Kmart any
income taxes the Company would have had to pay if it had filed separate tax
returns for the tax period beginning on January 26, 1995, and ending on June 1,
1995, the date of the consummation of the IPO (to the extent that it has not
previously paid such amounts to Kmart). In addition, if the tax liability
attributable to the Company for any previous tax period during which the Company
was included in a consolidated federal income tax return filed by Kmart or a
combined state return is adjusted as a result of an action of a taxing authority
or a court, then the Company will pay to Kmart the amount of any increase in
such liability and Kmart 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.

7

---

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

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 uponcompletion of the IPO, as amended, (Lease Guaranty Agreement),
the underlying leases will be transferable by Borders, subject to a right of
first refusal in favor of Kmart with respect to sites within a three-mile radius
of a Kmart store and, with respect to all other sites, a right of first offer in
favor of Kmart. The Company and Borders are required to indemnify Kmart with
respect to (i) any liabilities Kmart may incur under the lease guarantees,
except those liabilities arising from the gross negligence or willful misconduct
of Kmart, and (ii) any losses incurred by Kmart after taking possession of any
particular premises, except to the extent such losses arise solely from the acts
or omissions of Kmart. Under the terms of the Lease Guaranty Agreement, in the
event of (i) the Companys or Borders failure to provide any required
indemnity, (ii) a knowing and material violation of the limitations on transfers
of guaranteed leases set forth in the agreement, or (iii) certain events of
bankruptcy, Kmart will have the right to assume any or all of the guaranteed
leases and to take possession of all of the premises underlying such guaranteed
leases; provided, that in the event of a failure or failures to provide required
indemnities, the remedy of taking possession of all of the premises underlying
the guaranteed 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 $136.9 at October 26, 2003, $170.5 at October 27, 2002
and $112.1 at January 26, 2003.

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

In August 2003, the Company
entered into an interest rate swap,  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,
and it expires  concurrently  with
the due date of the Notes.

Lease Financing
Facilities. The Company has two lease financing facilities (collectively,
the Lease Financing Facilities), which were amended in May 2003, to
finance new stores and other property owned by unaffiliated entities and leased
to the Company or its subsidiaries. The original facility (the Original
Lease Facility) will expire in June 2004 (2005 if certain conditions are
satisfied). In June of 2002, the Company established a new facility (the
New Lease Facility), which will expire in 2007. The aggregate amount

8

---

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

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.

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.

There were 2, 21 and 7
properties financed through the Original Lease Facility at October 26, 2003,
October 27, 2002 and January 26, 2003, respectively, with financed values of
$13.8, $93.8 and $36.3. The Company has recorded $12.9, $48.7 and $19.0 of the
amounts under the Original Lease Facility as capitalized leases under
Other assets (for the capital lease assets) and Long-term
capital lease and financing obligations (for the capital lease
liabilities) on the consolidated balance sheets at October 26, 2003, October 27,
2002 and January 26, 2003, respectively. These amounts have been treated as
non-cash items on the consolidated statements of cash flows. There were no
borrowings under the New Lease Facility as of October 26, 2003. In the third
quarter of 2003, the Company permanently financed, through long-term leases, two
properties that had been financed through the Original Lease Facility with a
total value of approximately $6.1, which had been capitalized.

As of October 26, 2003 the
Company was in compliance with all debt covenants contained within the Credit
Agreement, Notes and Lease Financing Facilities described above.

## 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     | $                                     | 0.5 |       |   | $ | (1.8 | )     |   | $ | 0.2 |       |   | $ | 5.5 |       |  
| | Add: Stock-based employee expense  |                                       |     |       |   |   |      |       |   |   |     |       |   |   |     |       |  
| |                                    | included in reported net income,      |     |       |   |   |      |       |   |   |     |       |   |   |     |       |   | 
| |                                    | net of related tax effects            |     | -     |   |   |      | -     |   |   |     | -     |   |   |     | -     |   | 
| | Deduct: Total stock-based employee |                                       |     |       |   |   |      |       |   |   |     |       |   |   |     |       |  
| |                                    | compensation expense determined under |     |       |   |   |      |       |   |   |     |       |   |   |     |       |   | 
| |                                    | fair value method for all awards,     |     |       |   |   |      |       |   |   |     |       |   |   |     |       |   | 
| |                                    | net of tax                            |     | 3.1   |   |   |      | 3.9   |   |   |     | 6.1   |   |   |     | 8.6   |   | 
| |                                    |                                       |     |       |   |   |      |       |   |   |    
| |                                    | Pro-forma net income (loss)           | $   | (2.6  | ) |   | $    | (5.7  | ) |   | $   | (5.9  | ) |   | $   | (3.1  | ) | 
| |                                    |                                       |     |       |   |   |      |       |   |   |    
| | Earnings (loss) per share:         |                                       |     |       |   |   |      |       |   |   |     |       |   |   |     |       |  
| |                                    | Basic -- as reported                  | $   | 0.01  |   |   | $    | (0.02 | ) |   | $   | -     |   |   | $   | 0.07  |   | 
| |                                    | Basic -- pro-forma                    | $   | (0.03 | ) |   | $    | (0.07 | ) |   | $   | (0.08 | ) |   | $   | (0.04 | ) | 
| |                                    | Diluted -- as reported                | $   | 0.01  |   |   | $    | (0.02 | ) |   | $   | -     |   |   | $   | 0.07  |   | 
| |                                    | Diluted -- pro-forma                  | $   | (0.03 | ) |   | $    | (0.07 | ) |   | $   | (0.08 | ) |   | $   | (0.04 | ) | 

9

---

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

## NOTE 5 -
SEGMENT INFORMATION

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

Segment data includes
charges allocating certain corporate headquarters costs to each segment.
Transactions between segments, consisting principally of inventory transfers,
are recorded at cost. 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 $72.2 and $74.1 at October 26, 2003 and
October 27, 2002, respectively, whose related depreciation expense has been
allocated to the Borders and Waldenbooks segments. Depreciation expense
allocated to the Borders segment totaled $2.8 and $2.5 for the 13 weeks ended
October 26, 2003 and October 27, 2002, respectively, and $8.6 and $7.1 for the
39 weeks ended October 26, 2003 and October 27, 2002, respectively. Depreciation
expense allocated to the Waldenbooks segment totaled $1.4 and $1.3 for the 13
weeks ended October 26, 2003 and October 27, 2002, respectively, and $4.4 and
$3.9 for the 39 weeks ended October 26, 2003 and October 27, 2002, respectively.

| |                         |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |   |  | 
| | ----------------------- | ------------- | ----- | ----- | - | - | ----- | ----- | - | - | ------- | ------- | - | - | ------- | ------- | - |  | 
|
|
|
| | Sales                   |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                         | Borders       | $     | 551.7 |   |   | $     | 511.8 |   |   | $       | 1,643.2 |   |   | $       | 1,559.9 |   | 
| |                         | Walden        |       | 161.5 |   |   |       | 164.6 |   |   |         | 480.5   |   |   |         | 502.9   |   | 
| |                         | International |       | 94.7  |   |   |       | 73.4  |   |   |         | 262.5   |   |   |         | 202.3   |   | 
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total sales             | $             | 807.9 |       |   | $ | 749.8 |       |   | $ | 2,386.2 |         |   | $ | 2,265.1 |         |  
| |                         |               |       |       |   |   |       |       |   |   |        
| | Net income (loss)       |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                         | Borders       | $     | 7.4   |   |   | $     | 6.3   |   |   | $       | 22.8    |   |   | $       | 29.3    |   | 
| |                         | Walden        |       | 0.7   |   |   |       | (0.8  | ) |   |         | 3.8     |   |   |         | (0.2    | ) | 
| |                         | International |       | (2.1  | ) |   |       | (3.6  | ) |   |         | (9.8    | ) |   |         | (13.5   | ) | 
| |                         | Corporate     |       | (5.5  | ) |   |       | (3.7  | ) |   |         | (16.6   | ) |   |         | (10.1   | ) | 
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total net income (loss) | $             | 0.5   |       |   | $ | (1.8  | )     |   | $ | 0.2     |         |   | $ | 5.5     |         |  
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total assets            |               |       |       |   |   |       |       |   |   |         |         |   |   |         |         |  
| |                         | Borders       |       |       |   |   |       |       |   |   | $       | 1,476.1 |   |   | $       | 1,468.8 |   | 
| |                         | Walden        |       |       |   |   |       |       |   |   |         | 413.2   |   |   |         | 447.1   |   | 
| |                         | International |       |       |   |   |       |       |   |   |         | 366.4   |   |   |         | 320.9   |   | 
| |                         | Corporate     |       |       |   |   |       |       |   |   |         | 154.8   |   |   |         | 97.8    |   | 
| |                         |               |       |       |   |   |       |       |   |   |        
| | Total assets            |               |       |       |   |   |       |       |   | $ | 2,410.5 |         |   | $ | 2,334.6 |         |  
| |                         |               |       |       |   |   |       |       |   |   |        

## NOTE 6 
NEW ACCOUNTING GUIDANCE

In November 2002, the
Emerging Issues Task Force issued Consensus No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor (EITF 02-16), which is effective prospectively for all vendor
arrangements entered into after December 31, 2002. The Consensus requires that
consideration received from a vendor be considered a reduction of the prices of
vendors products and shown as a reduction of cost of sales in the income
statement of the customer. If the consideration represents a reimbursement of
specific incremental identifiable costs incurred, these amounts should be offset
against the related costs with any excess consideration recorded in cost of
sales. In fiscal 2003, the Company has reclassified the prior years vendor

10

---

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

consideration to conform to
current year presentation and EITF 02-16.
Additionally, the Company recorded $0.3 of excess vendor consideration as a
reduction to its inventory balance in the first quarter of 2003.

In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46
requires the consolidation of variable interest entities in which an enterprise
absorbs a majority of the entitys expected losses, receives a majority of
the entitys expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise that has a controlling financial
interest through ownership of a majority voting interest in the entity.

The Company leases two
properties from unconsolidated variable interest entities (VIEs) that had
borrowings outstanding under the Original Lease Facility at October 26, 2003.
Third parties have invested capital at risk equal to or in excess of 5% of the
assets of the VIEs, with the remainder being financed through borrowings under
the Original Lease Facility. This, and certain other criteria, allow the Company
not to consolidate the VIEs in the Companys financial statements at
October 26, 2003. Rather, the Company accounts for these arrangements as capital
leases. Accordingly, the capitalizable portion of the leased facilities and the
related borrowings are reported in the Companys accompanying balance
sheets. Independent of the Companys obligations relating to these leases,
the Company and certain of its subsidiaries guarantee payment when due of all
amounts required to be paid to the third-party lenders. At October 26, 2003, the
maximum loss that the Company could incur under these guarantees approximated
$13.8.

The Company also leases two
properties from unconsolidated VIEs that had borrowings outstanding under the
Original Lease Facility at January 26, 2003, but whose borrowings had been
permanently financed by the VIE through long-term leases during the first
quarter of 2003. Third parties have invested capital at risk equal to 5% of the
assets of the VIEs, with the remainder being financed through borrowings
unrelated to the Lease Financing Facilities. This, and certain other criteria,
allow the Company not to consolidate the VIEs in the Companys financial
statements at October 26, 2003. Rather, the Company accounts for these
arrangements as operating leases. Accordingly, neither the leased facilities nor
the related debt is reported in the Companys accompanying balance sheets.
Independent of the Companys obligations relating to these leases, the
Company and certain of its subsidiaries guarantee payment when due of all
amounts required to be paid to the third-party lenders. At October 26, 2003, the
maximum loss that the Company could incur under these guarantees approximated
$6.0.

The Company expects to
begin consolidating the four VIEs mentioned above in the quarter ending January
25, 2004, because it believes it is the VIEs primary beneficiary under FIN
46s requirements. At January 25, 2004, consolidation of these VIEs would
have the effect of increasing property and equipment by $7.0, net of accumulated
depreciation of $1.6, and increasing long-term capital lease and financing
obligations by $6.9. Minority interests of $1.7 would also be reported, and the
Company would record a charge of $1.0, net of tax, as a cumulative effect of
change in accounting principle.

In April 2003, the FASB
issued Statement of Financial Accounting Standards No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities (FAS
149). In general, this statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of FAS 149 is not expected to have an
impact on the Companys consolidated financial position or disclosures.

In May 2003, the FASB
issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (FAS 150). This statement affects the
classification, measurement and disclosure requirements of the following three
types of freestanding financial instruments: 1) manditorily redeemable shares,
which the issuing company is obligated to buy back with cash or other assets; 2)
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets, which includes put options and forward
purchase contracts; and 3) obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers
shares. In general, FAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of FAS
150 is not expected to have an impact on the Companys consolidated
financial position or disclosures.

11

---

# 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 October 26, 2003, the Company operated 473 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 750 mall-based and other bookstores primarily under the Waldenbooks
name, 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 at Waldenbooks by containing costs. Specifically, the
Company opened 32 domestic Borders stores in 2003 and expects to open a reduced
number in 2004. International store growth over the next several years will
focus on existing markets, primarily in the United Kingdom and Australia, with
approximately six to eight international store openings annually. Full year
profitability is expected to be achieved by the International segment in 2004.
The Waldenbooks segment has experienced decreased comparable sales percentages
for the past several years primarily due to the overall decrease in mall traffic
and the impact of superstore openings. As a result, the Company is continuing to
implement its plan for the optimization of the Waldenbooks store base in
order to improve sales, net income and free cash flow. This plan could result in
further store closing costs or asset impairments over the next few years. The
Companys objectives with respect to these initiatives are to continue to
grow consolidated sales and earnings in 2003. In addition, the Company plans to
provide returns to shareholders through dividends (recently announced) and share
repurchases by utilizing free cash flow generation by the business. 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). In November 2003, the Board of Directors declared a
quarterly dividend of $0.08 per share on the Companys common stock,
payable January 28, 2004 to shareholders of record at the close of business
January 7, 2004. The Company intends to pay regular quarterly dividends, subject
to Board approval, going forward.

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.

Amounts relating to the
Company-owned and -operated Borders.com web site prior to August 2001, other
than intercompany interest expense (net of related taxes), have been classified
in the Borders segment for all periods presented. Intercompany interest charges
(net of related taxes) relating to Borders.com have been included in the
Corporate segment.

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

12

---

Company recognizes revenue upon
customers pick up of the merchandise at the store, and classifies this
revenue as a component of 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.

In November of 2003, the
Company announced a multi-year extension of the Mirror Sites and Express
In-Store Pick Up agreements with Amazon.

In August of 2003, the
Company entered into an agreement with FAO, Inc. (FAO), a specialty retailer of
toys and juvenile products in the United States, by which Borders would provide
certain books, music and movies to FAO for sale in its FAO Schwarz, Zany Brainy
and The Right Start stores. FAO in turn would provide certain products from its
assortment for sale within Borders superstores. Borders shipped merchandise
related to this agreement to FAO in late October 2003. In early December 2003,
FAO filed voluntary petitions under Chapter 11 of the Bankruptcy Code for itself
and its operating subsidiaries ZB Company, Inc. and FAO Schwarz, Inc. FAO
disclosed that, at the request of its lenders, it had engaged liquidators to
sell inventory of all three of its brands pending the outcome of its efforts to
find buyers for the FAO Schwarz and The Right Start businesses. As result, the
Company may be required to write-off a net receivable, totaling $1.4 million net
of tax, for the merchandise shipped to FAO.

The Companys third
quarters of 2003 and 2002 consisted of the 13 weeks ended October 26, 2003 and
October 27, 2002, 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.

| |                                                |       |   |  |       |    |  |       |   |  |       |   | 
| | ---------------------------------------------- | ----- | - |  | ----- | -- |  | ----- | - |  | ----- | - | 
|
|
|
|
| | Sales                                          | 100.0 | % |  | 100.0 | %  |  | 100.0 | % |  | 100.0 | % | 
| | Other revenue                                  | 1.1   |   |  | 0.9   |    |  | 0.9   |   |  | 0.9   |   | 
| |                                                |       |   |  |       |    |  |       |  
| | Total revenue                                  | 101.1 |   |  | 100.9 |    |  | 100.9 |   |  | 100.9 |   | 
| | Cost of merchandise sold (including occupancy) | 75.6  |   |  | 75.2  |    |  | 75.5  |   |  | 74.7  |   | 
| | Inventory writedowns                           | -     |   |  | -     |    |  | -     |   |  | -     |   | 
| |                                                |       |   |  |       |    |  |       |  
| | Gross margin                                   | 25.5  |   |  | 25.7  |    |  | 25.4  |   |  | 26.2  |   | 
| | Selling, general and administrative expenses   | 24.9  |   |  | 25.2  |    |  | 24.9  |   |  | 25.2  |   | 
| | Pre-opening expense                            | 0.3   |   |  | 0.4   |    |  | 0.2   |   |  | 0.2   |   | 
| | Asset impairments and other writedowns         | (0.1  | ) |  | -     |    |  | -     |   |  | -     |   | 
| |                                                |       |   |  |       |    |  |       |  
| | Operating income                               | 0.4   |   |  | 0.1   |    |  | 0.3   |   |  | 0.8   |   | 
| | Interest expense                               | 0.3   |   |  | 0.5   |    |  | 0.3   |   |  | 0.4   |   | 
| |                                                |       |   |  |       |    |  |       |  
| | Income (loss) before income tax                | 0.1   |   |  | (0.4  | )  |  | -     |   |  | 0.4   |   | 
| | Income tax                                     | -     |   |  | (0.2  | )  |  | -     |   |  | 0.2   |   | 
| |                                                |       |   |  |       |    |  |       |  
| | Net income (loss)                              | 0.1   | % |  | (0.2  | )% |  | -     | % |  | 0.2   | % | 
| |                                                |       |   |  |       |    |  |       |  

Consolidated Results --
Comparison of the 13 weeks ended October 26, 2003 to the 13 weeks ended October
27, 2002

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated
sales increased $58.1 million, or 7.7%, to $807.9 million in 2003 from $749.8
million in 2002. This resulted primarily from increased sales in the Borders and
International segments due to the opening of new superstores and an increase in
Borders comparable store sales. A decrease in sales of the Waldenbooks
segment partially offset the increase in consolidated sales, due primarily to
store closures. Please see Segment Results for a detailed discussion
of the changes in sales.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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 income as Other revenue in the Companys
consolidated statements of operations. Discounts on purchases are                                                                                                                                      

13

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | netted against
Sales in the Companys consolidated statements of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
Company had previously categorized membership income as an offset to Cost
of merchandise sold in the Companys consolidated statements of
operations, but has determined that categorization as Other revenue
is more appropriate. Accordingly, membership income has been reclassified for
all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Consolidated
gross margin increased $12.7 million, or 6.6%, to $205.7 million in 2003 from
$193.0 million in 2002. As a percentage of sales, however, it decreased to 25.5%
in 2003 from 25.7% in 2002. This primarily resulted from a decrease in gross
margin as a percentage of sales for the Borders segment (and to a lesser extent,
a decrease in the International segment), partially offset by a slight increase
in the Waldenbooks segment. The decline in the Borders and International
segments was primarily due to increased occupancy costs as a percentage of sales
and increased bestseller discounts.                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
Company classifies the following items as Cost of merchandise sold
(including occupancy costs) on its consolidated statements of operations:
product costs and related discounts, markdowns, freight, shrinkage, capitalized
inventory costs, distribution center costs (including payroll, rent, supplies,
depreciation, and other operating expenses), and store occupancy costs
(including rent, common area maintenance, depreciation, repairs and maintenance,
taxes, insurance, and others). The Companys gross margin may not be
comparable to that of other retailers, since some retailers exclude the costs
related to their distribution network from cost of sales and include them in
other financial statement lines.                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Selling, general
and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Consolidated
selling, general and administrative expenses (SG&A) increased $11.7 million,
or 6.2%, to $201.0 million in 2003 from $189.3 million in 2002. As a percentage
of sales, however, it decreased to 24.9% in 2003 from 25.2% in 2002. This
decrease primarily resulted from decreases in SG&A expenses as a percentage
of sales for the Waldenbooks and International segments. The Waldenbooks
decrease was primarily due to a decrease in store operating expenses as a
percentage of sales as a result of disciplined cost controls and decreased
administrative expenses. International SG&A expenses as a percentage of
sales improved as the result of store payroll expenses, store operating expenses
and other administrative expenses increasing at rates less than sales growth.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
Company classifies the following items as Selling, general and
administrative expenses on its consolidated statements of operations:
store and administrative payroll, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and consulting fees,
advertising, referral fee income and others.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The
Company participates in various types of vendor incentive programs, and receives
payments and credits from vendors pursuant to co-operative advertising programs,
shared markdown programs, purchase volume incentive programs and magazine
slotting programs. These programs continue to be beneficial for both the Company
and vendors, and the Company expects continued participation in these types of
programs. Changes in vendor participation levels, as well as changes in the
volume of merchandise purchased, among other factors, could adversely impact the
Companys results of operations and liquidity.                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Asset impairments and other writedowns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In
the third quarter of 2003, Borders recognized as income an insurance
reimbursement of $1.5 million related to the September 11, 2001 loss of the
Borders store in the World Trade Center. Of this, $0.9 million was related to
asset impairments and other writedowns, $ 0.3 million was related to pre-opening
expenses and $0.3 million was related to business interruption coverage.                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Partially
offsetting the reimbursement was $0.3 million in store closure costs incurred by
Waldenbooks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Consolidated
interest expense decreased $1.6 million, or 42.1%, to $2.2 million in 2003 from
$3.8 million in 2002. This was primarily due to lower average debt levels in
2003 as compared to 2002, which primarily resulted from increased cash flow
generated by the Borders segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The Companys effective
tax rate was 38.0% in 2003 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

14

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| |                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net income (loss)                                                                                                                                                                                                                       
| | Due
to the factors mentioned above, net income as a percentage of sales increased to
0.1% in 2003 from a net loss of (0.2)% in 2002, and net income dollars increased
to $0.5 million in 2003 from a net loss of $(1.8) million in 2002.

Consolidated Results --
Comparison of the 39 weeks ended October 26, 2003 to the 39 weeks ended October
27, 2002

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Consolidated
sales increased $121.1 million, or 5.3%, to $2,386.2 million in 2003 from
$2,265.1 million in 2002. This resulted primarily from increased sales in the
Borders and International segments due to the opening of new superstores,
partially offset by a decrease in Borders comparable store sales. A
decrease in sales of the Waldenbooks segment also partially offset the increase
in consolidated sales, due primarily to store closures and a decrease in
comparable store sales. Please see Segment Results for a detailed
discussion of the changes in sales.                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
Company had previously categorized membership income as an offset to Cost
of merchandise sold in the Companys consolidated statements of
operations, but has determined that categorization as Other revenue
is more appropriate. Accordingly, membership income has been reclassified for
all periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Consolidated
gross margin increased $13.7 million, or 2.3%, to $606.3 million in 2003 from
$592.6 million in 2002. As a percentage of sales, consolidated gross margin
decreased to 25.4% in 2003 from 26.2% in 2002. This was primarily due to a
decrease in Borders (and to a lesser extent International) gross margin as a
percentage of sales partially offset by an increase in the Waldenbooks gross
margin percentage. In the Borders segment, the reduction was primarily due to
increased occupancy costs for stores open more than one
year remaining essentially flat while comparable store sales declined, and
increased bestseller discounts. In the
Waldenbooks segment, the improvement was due to lower distribution costs as
a percentage of sales, related to
Borders increased usage of Waldenbooks distribution facilities
(coupled with a corresponding decrease in Waldenbooks usage) and a
decrease in store occupancy costs as a percentage of sales.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
Company classifies the following items as Cost of merchandise sold
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, since some retailers exclude items such as their distribution and
occupancy costs from cost of sales and include them in other financial statement
lines.                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Selling, general
and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Consolidated
SG&A increased $23.1 million, or 4.0%, to $593.5 million in 2003 from $570.4
million in 2002. As a percentage of sales, SG&A decreased to 24.9% in 2003
from 25.2% in 2002. This decrease primarily resulted from a decrease in SG&A
expenses as a percentage of sales for the International and Waldenbooks
segments, while the Borders segment remained flat. The improvement in the
International segment was primarily the result of store and administrative
payroll costs, store operating expenses and corporate administrative expenses
increasing at rates less than the sales growth. The Waldenbooks improvement was
primarily due to decreased store operating expenses and administrative expenses.                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The
Company classifies the following items as Selling, general and
administrative expenses on its consolidated statements of operations:
store and administrative payroll, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and consulting fees,
advertising, referral fee income and other.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Asset impairments and other writedowns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In the second quarter of
2003, Waldenbooks incurred store closure costs of $0.6 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

15

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| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
the third quarter of 2003, Borders recognized as income an insurance
reimbursement of $1.5 million related to the September 11, 2001 loss of the
Borders store in the World Trade Center. Of this, $0.9
million was related to asset impairments and other writedowns,
$0.3 million was related to pre-opening expenses already incurred and $0.3 million
was related to business interruption coverage.
| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | Partially
offsetting the third quarter Borders reimbursement was $0.3 million in store
closure costs incurred by Waldenbooks.                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | Interest expense                                                                                                                                                                                                                                                                                                                                                                                           
| | Consolidated
interest expense decreased $1.7 million, or 19.5%, to $7.0 million in 2003 from
$8.7 million in 2002. This was primarily due to lower average debt levels in
2003 as compared to 2002, which primarily resulted from increased cash flow
generated by the Borders segment.                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | Taxes                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Companys effective
tax rate was 38.0% in 2003 and 2002.                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                            
| | Net income                                                                                                                                                                                                                                                                                                                                                                                                 
| | Due
to the factors mentioned above, net income as a percentage of sales decreased to
0.0% in 2003 from 0.2% in 2002, and net income dollars decreased to $0.2 million
in 2003 from $5.5 million in 2002.                                                                                                                                                                                                   

## Segment Results

The Company is organized
based upon the following operating segments: Borders stores, Waldenbooks stores,
International stores, and Corporate (consisting of interest expense, certain
corporate governance costs, and corporate incentive costs). Intercompany
interest charges (net of related taxes) relating to the former Company-owned and
-operated Borders.com web site have been included in the Corporate segment. 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 support costs to each segment. Interest income
and expense are allocated to segments based upon the funding required to meet
the operational needs of 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.

| |                           |   |       |   |  |   |       |   |  |   |         |   |  |   |         |   |  |  | 
| | ------------------------- | - | ----- | - |  | - | ----- | - |  | - | ------- | - |  | - | ------- | - |  |  | 
|
|
|
|
| | Sales                     | $ | 551.7 |   |  | $ | 511.8 |   |  | $ | 1,643.2 |   |  | $ | 1,559.9 |   | 
| | Net income                | $ | 7.4   |   |  | $ | 6.3   |   |  | $ | 22.8    |   |  | $ | 29.3    |   | 
| | Net income as % of sales  |   | 1.3   | % |  |   | 1.2   | % |  |   | 1.4     | % |  |   | 1.9     | % | 
| | Depreciation expense      | $ | 17.7  |   |  | $ | 16.6  |   |  | $ | 52.4    |   |  | $ | 49.2    |   | 
| | Interest (income) expense | $ | (0.1  | ) |  | $ | 1.4   |   |  | $ | (1.4    | ) |  | $ | 2.0     |   | 
| | Store openings            |   | 16    |   |  |   | 15    |   |  |   | 32      |   |  |   | 28      |   | 
| | Store closings            |   | -     |   |  |   | -     |   |  |   | -       |   |  |   | -       |   | 
| | Store count               |   | 436   |   |  |   | 391   |   |  |   | 436     |   |  |   | 391     |   | 

Comparison of the 13
weeks ended October 26, 2003 to the 13 weeks ended October 27, 2002

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Borders
sales increased $39.9 million, or 7.8%, to $551.7 million in 2003 from $511.8
million in 2002. This increase was comprised of non-comparable sales primarily
associated with 2003 and 2002 store openings of $36.4 million and comparable
store sales increases of $3.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Comparable
store sales increased 1.5% in 2003. Borders comparable store sales
measures, which are based upon a 52-week year, include all stores open more than
one year except those not offering music (of which there are fourteen,
representing approximately 3% of total sales). New stores are included in the
calculation of comparable store sales measures upon the 13th month of operation.
The comparable store sales increase for 2003 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. Sales of books improved on a comparable store basis as a
result of several factors including the improved retail

16

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | environment, more popular new
releases, and the Companys continued implementation of category plans. 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 decrease in the music category was primarily the result of the
sale of fewer popular releases in the current year as compared to the prior
year. The impact of price changes on comparable store sales was not significant.                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Gross
margin as a percentage of sales decreased 0.3% in 2003 compared to 2002. The
largest contributor to this decrease was a 0.6% increase in store occupancy
costs as a percentage of sales primarily as a result of the stores rent,
common area maintenance, property taxes, and insurance expenses representing a
higher percentage of sales. This was primarily due to new stores rent
costs representing a higher percentage of sales than older stores and the
increased lease costs related to the permanent refinancing of certain stores
previously financed through the Original Lease Facility.
In addition, the gross margin percentage decreased approximately 0.2% due to increased bestseller discounts.
Offsetting these items
was an increase in other revenues from third party café vendors of 0.3% and other decreased costs of 0.2%.
The overall mix of merchandise sold by Borders stores did not significantly
change, or affect margin rates significantly, in 2003 as compared to 2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Gross
margin dollars increased approximately 6.6% in 2003 primarily due to new store
openings, partially offset by the decrease in gross margin percentage noted
above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | SG&A
as a percentage of sales remained flat in 2003 compared to 2002. This was
primarily the result of a decrease of 0.4% of administrative costs as a
percentage of sales, offset by a 0.3% increase in store operating expenses and
an increase of 0.1% corporate administrative payroll costs as a percentage of
sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | SG&A
dollars increased approximately 7.9% in 2003 primarily due to new store openings
and the increased store payroll and operating expenses required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Asset impairments and other writedowns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In
the third quarter of 2003, Borders recognized as income an insurance
reimbursement of $1.5 million related to the September 11, 2001 loss of the
Borders store in the World Trade Center. Of this, $0.9
million related to asset impairments and other writedowns,
$0.3 million related to pre-opening expenses already incurred and $0.3 million
related to business interruption coverage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Depreciation
expense increased $1.1 million, or 6.6%, to $17.7 million in 2003 from $16.6
million in 2002. This was primarily the result of increased depreciation expense
recognized on new stores capital expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Interest (income) expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Interest
income increased $1.5 million, or 107.1%, to income of $(0.1) million in 2003
from an expense of $1.4 million in 2002. This was due to the generation of
positive cash flow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Net income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Due
to the factors mentioned above, net income as a percentage of sales increased to
1.3% in 2003 from 1.2% in 2002, and net income dollars increased to $7.4 million
in 2003 from $6.3 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Comparison of the 39
weeks ended October 26, 2003 to the 39 weeks ended October 27, 2002

| | Sales                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Borders
sales increased $83.3 million, or 5.3%, to $1,643.2 million in 2003 from
$1,559.9 million in 2002. This increase was comprised of non-comparable sales
primarily associated with 2003 and 2002 store openings of $103.7 million and
comparable store sales decreases of $20.4 million.
| |                                                                                                                                                                                                                                                                                                
| | Comparable
store sales decreased 0.6% in 2003. The  comparable  store sales  decrease  for 2003 was due
primarily  to the war in Iraq  impacting  an already  slow economy and
difficult retail sales environment.  The resulting  reduction in customer traffic led to                        

17

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | decreased comparable sales across
most categories  including the two largest,  books and music.
Partially  offsetting  the weakness in the music and book  categories,
however,  were increased  comparable store sales in the movie and gifts and stationery  categories.  Sales of the movie category
improved on a comparable  store basis  primarily as the result of  increased  sales of DVDs.  This  increase  resulted  from the
increasing  popularity of the DVD format.  Sales of the gifts and stationery category also increased,  principally the result of
category  management  initiatives  resulting  in product  enhancements,  improved  placements,  and a slight  increase  in space
allocation.  The impact of price  changes on  comparable  store  sales was not
significant.                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Gross
margin as a percentage of sales decreased 1.0% in 2003 compared to 2002,
primarily due to higher store occupancy costs as a percentage of sales. Store
occupancy costs as a percentage of sales increased 0.7% as a result of the
stores rent expense representing a higher percentage of sales. This was
primarily due to rent expense for stores open more than one year remaining
essentially flat while comparable store sales declined. In addition,
stores rent costs represented a higher percentage of sales due to the
permanent refinancing in 2002 of certain stores previously financed through the
Original Lease Facility. In addition, gross margin as a percentage of sales declined
due to increased product costs of 0.5% as a result of increased bestseller discounts.
Offsetting these increased expenses was an increase in other revenues from third
party café vendors of 0.1% and a decrease in distribution costs of 0.1%.
The overall mix of merchandise sold by Borders stores did not significantly
change, or affect margin rates significantly, in 2003 as compared to 2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Gross
margin dollars increased $6.3 million, or 1.4%, to $440.7 million in 2003 from
$434.4 million in 2002, which was primarily due to the increase in sales dollars
partially offset by the decrease in the gross margin percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | SG&A
as a percentage of sales remained flat in 2003 compared to 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | SG&A
dollars increased approximately 5.2% in 2003 primarily due to new store openings
and the increased store payroll and operating expenses required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Asset impairments and other writedowns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In
the third quarter of 2003, Borders recognized as income an insurance
reimbursement of $1.5 million related to the September 11, 2001 loss of the
Borders store in the World Trade Center. Of this, $0.9
million related to asset impairments and other writedowns,
$0.3 million related to pre-opening expenses already incurred and $0.3 million
related to business interruption coverage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Depreciation
and amortization expense increased $3.2 million, or 6.5%, to $52.4 million in
2003 from $49.2 million in 2002. This was primarily the result of increased
depreciation expense recognized on new stores capital expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Interest (income) expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Interest
income increased $3.4 million, or 170.0%, to income of $(1.4) million in 2003
from an expense of $2.0 million in 2002. This was due to the generation of
positive cash flow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Net income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Due
to the factors mentioned above, net income as a percentage of sales decreased to
1.4% in 2003 from 1.9% in 2002, and net income dollars decreased to $22.8
million in 2003 from $29.3 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

18

---

| | 
| | 

| |                                 |   |       |   |  |   |       |    |  |   |       |   |  |   |       |   |  |  | 
| | ------------------------------- | - | ----- | - |  | - | ----- | -- |  | - | ----- | - |  | - | ----- | - |  |  | 
|
|
|
|
| | Sales                           | $ | 161.5 |   |  | $ | 164.6 |    |  | $ | 480.5 |   |  | $ | 502.9 |   | 
| | Other revenue                   | $ | 6.0   |   |  | $ | 6.3   |    |  | $ | 18.0  |   |  | $ | 18.9  |   | 
| | Net income (loss)               | $ | 0.7   |   |  | $ | (0.8  | )  |  | $ | 3.8   |   |  | $ | (0.2  | ) | 
| | Net income (loss) as % of sales |   | 0.4   | % |  |   | (0.5  | )% |  |   | 0.8   | % |  |   | 0.0   | % | 
| | Depreciation expense            | $ | 4.0   |   |  | $ | 4.5   |    |  | $ | 12.1  |   |  | $ | 13.6  |   | 
| | Interest income                 | $ | 9.7   |   |  | $ | 8.2   |    |  | $ | 28.3  |   |  | $ | 24.6  |   | 
| | Store openings                  |   | -     |   |  |   | 3     |    |  |   | 4     |   |  |   | 3     |   | 
| | Store closings                  |   | 9     |   |  |   | 5     |    |  |   | 32    |   |  |   | 21    |   | 
| | Store count                     |   | 750   |   |  |   | 809   |    |  |   | 750   |   |  |   | 809   |   | 

Comparison of the 13
weeks ended October 26, 2003 to the 13 weeks ended October 27, 2002

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Waldenbooks
sales decreased $3.1 million, or 1.9%, to $161.5 million in 2003 from $164.6
million in 2002. This decrease was comprised of increased comparable store sales
of $2.3 million and decreased non-comparable sales associated with 2003 and 2002
store closings of $5.4 million.                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Comparable
store sales increased 1.3% in 2003. 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 2003 was due primarily to the
success of the Companys strategy to optimize Waldenbooks store base
by closing underperforming stores. Sales of books also aided the improvement of
comparable store sales as a result of more popular new releases.             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Other revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Waldenbooks
other revenue consists of membership income from the Preferred Reader Program.
Other revenue dollars decreased 0.5% from $6.0 million in 2003 and $6.3 million
in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Gross
margin as a percentage of sales increased 0.1% in 2003 as compared to 2002,
primarily due to a decrease of 0.9% in store rent expense as a percentage of
sales, resulting from the optimization of the store base. Also contributing to
this improvement was a decrease of 0.4% in distribution costs, related to
Borders increased usage of Waldenbooks distribution facilities
(coupled with a corresponding decrease in Waldenbooks usage). This was
offset by a 1.2% increase in product costs as a percentage of sales, due to
increased bestseller discounts. Overall, Waldenbooks merchandise mix did not change
significantly, or affect margin rates significantly, in 2003 as compared to
2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Gross
margin dollars decreased approximately 1.6% in 2003, primarily due to store
closings, partially offset by the increase in gross margin percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Selling, general
and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | SG&A
as a percentage of sales decreased 0.7% in 2003 compared to 2002. This decrease
was primarily due to decreased store operating expenses of 0.6% and decreased
administrative expenses of 0.3%. Partially offsetting these factors was a 0.1%
increase in store payroll expenses and increased administrative payroll costs of
0.1% as a percentage of sales.                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | SG&A
dollars decreased 1.2% in 2003 primarily due to store closings and the decrease
in SG&A percentage discussed above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Asset impairments and other writedowns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In
the third quarter of 2003, Waldenbooks incurred $0.3 million in store closure
costs, while there were no charges incurred in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Depreciation
expense decreased $0.5 million, or 11.1%, to $4.0 million in 2003 from $4.5
million in 2002, primarily due to a lower fixed asset base resulting from asset
impairments and store closings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

19

---

| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Interest income                                                                                                                                                                                                                                
| | Interest
income increased $1.5 million, or 18.3%, to $9.7 million in 2003 from $8.2
million in 2002. This was the result of Waldenbooks continued positive
cash flow at fixed internal interest rates.                                        
| |                                                                                                                                                                                                                                                
| | Net income (loss)                                                                                                                                                                                                                              
| | Due
to the factors mentioned above, net income as a percentage of sales increased to
0.4% in 2003 from a loss of (0.5)% in 2002, while net income dollars increased
$1.5 million to $0.7 million in 2003 from a loss of $(0.8) million in 2002.

Comparison of the 39
weeks ended October 26, 2003 to the 39 weeks ended October 27, 2002

| | Sales                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Waldenbooks
sales decreased $22.4 million, or 4.5%, to $480.5 million in 2003 from $502.9
million in 2002. This decrease was comprised of decreased comparable store sales
of $6.5 million and decreased non-comparable sales associated with 2003 and 2002
store closings of $15.9 million.

| | Comparable
store sales decreased 1.3% in 2003. The comparable store sales decrease for 2003
was due primarily to decreased mall traffic and the impact of superstore
openings.                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Other revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Waldenbooks
other revenue, which consists of membership income from the Preferred Reader
Program, was largely consistent in 2003 with 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Other
revenue dollars were $18.0 million in 2003 and $18.9 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Gross
margin as a percentage of sales increased approximately 0.2% in 2003 as compared
to 2002. Contributing to this improvement was a decrease of 0.2% in distribution
costs, related to Borders increased usage of Waldenbooks
distribution facilities (coupled with a corresponding decrease in
Waldenbooks usage) and a decrease in store occupancy costs of 0.1% due to
store closures. These factors were partially offset by a 0.1% increase in
product costs. Overall, Waldenbooks merchandise mix did not change
significantly, or affect margin rates significantly, in 2003 as compared to
2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Gross
margin dollars decreased approximately 3.9% in 2003, primarily due to store
closings and the decrease in comparable store sales, partially offset by the
increase in gross margin percentage.                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Selling, general
and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | SG&A
as a percentage of sales decreased 0.4% in 2003 compared to 2002. This decrease
was primarily due to decreased store operating expenses of 0.5% and decreased
corporate administrative expenses of 0.3%. Partially offsetting these factors
was a 0.2% increase in store payroll expenses, an increase of 0.1% corporate
administrative payroll costs as a percentage of sales and decreased
vendor-advertising income of 0.1% as a percentage of sales.                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | SG&A
dollars decreased 5.8% in 2003 primarily due to store closings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Asset impairments and other writedowns                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | During
the first 39 weeks of 2003, Waldenbooks incurred store closure costs of $0.9
million, while there were no charges incurred during the first 39 weeks 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Depreciation
expense decreased $1.5 million, or 11.0%, to $12.1 million in 2003 from $13.6
million in 2002. This was primarily due to a lower fixed asset base resulting
from asset impairments and store closings.                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Interest
income increased $3.7 million, or 15.0%, to $28.3 million in 2003 from $24.6
million in 2002. This was the result of Waldenbooks continued positive
cash flow at fixed internal interest rates.                                                                                                                                                                                                                                                                                                                                                                                                      

20

---

| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net income (loss)                                                                                                                                                                                                                   
| | Due
to the factors mentioned above, net income as a percentage of sales increased to
0.8% in 2003 from 0.0% in 2002, while net income dollars increased $4.0 million,
to $3.8 million in 2003 from a loss of $(0.2) million in 2002.

| |                           |   |      |    |  |   |      |    |  |   |       |    |  |   |       |    |  |  | 
| | ------------------------- | - | ---- | -- |  | - | ---- | -- |  | - | ----- | -- |  | - | ----- | -- |  |  | 
|
|
|
|
| | Sales                     | $ | 94.7 |    |  | $ | 73.4 |    |  | $ | 262.5 |    |  | $ | 202.3 |    | 
| | Net loss                  | $ | (2.1 | )  |  | $ | (3.6 | )  |  | $ | (9.8  | )  |  | $ | (13.5 | )  | 
| | Net loss as % of sales    |   | (2.2 | )% |  |   | (4.9 | )% |  |   | (3.7  | )% |  |   | (6.7  | )% | 
| | Depreciation expense      | $ | 3.0  |    |  | $ | 2.3  |    |  | $ | 8.8   |    |  | $ | 6.9   |    | 
| | Interest expense          | $ | 4.7  |    |  | $ | 4.5  |    |  | $ | 14.0  |    |  | $ | 12.5  |    | 
| | Superstore store openings |   | 2    |    |  |   | 6    |    |  |   | 7     |    |  |   | 7     |    | 
| | Superstore store count    |   | 37   |    |  |   | 29   |    |  |   | 37    |    |  |   | 29    |    | 
| | Books etc. store openings |   | 1    |    |  |   | 1    |    |  |   | 1     |    |  |   | 1     |    | 
| | Books etc. store closings |   | -    |    |  |   | -    |    |  |   | 2     |    |  |   | -     |    | 
| | Books etc. store count    |   | 36   |    |  |   | 37   |    |  |   | 36    |    |  |   | 37    |    | 

Comparison of the 13
weeks ended October 26, 2003 to the 13 weeks ended October 27, 2002

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | International
sales increased $21.3 million, or 29.0%, to $94.7 million in 2003 from $73.4
million in 2002. This is primarily the result of new superstore openings, and to
a lesser extent, comparable store sales increases (which include all stores open
more than one year).                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The impact of price
changes on comparable store sales was also not significant.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Gross
margin as a percentage of sales decreased 0.6% in 2003 as compared to 2002, due
primarily to an increase in store occupancy costs of 1.3% as a percentage of
sales, offset by a decrease in product costs of 0.7% as a percentage of sales.
The
overall mix of book, music, cafe, and sideline merchandise sold by International
superstores, and the mix of books and sidelines offered by Books etc. stores,
did not change significantly, or affect margin rates significantly, in 2003 as compared to 2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Gross
margin dollars increased approximately 26.0% in 2003 primarily due to new store
openings.                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | SG&A
as a percentage of sales decreased 1.9% in 2003 compared to 2002. This
improvement was primarily the result of decreased store payroll costs of 1.3%,
store operating expenses of 0.5% and administrative payroll of 0.5% as a
percentage of sales. These decreases as a percentage of sales were due to the
aforementioned costs increasing at rates less than sales growth. Partially
offsetting these decreases was an increase in administrative expenses of 0.4% as
a percentage of sales.                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | SG&A
dollars increased 17.8% in 2003 primarily due to store openings and the
increased store payroll and operating expenses required.                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Depreciation
expense increased $0.7 million, or 30.4%, to $3.0 million in 2003 from $2.3
million in 2002. This was primarily due to depreciation expense recognized on
new stores capital expenditures.                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Interest
expense increased $0.2 million, or 4.4%, to $4.7 million in 2003 from $4.5
million in 2002. This was a result of higher average borrowing levels at fixed
internal interest rates.                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Net loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Due
to the factors mentioned above, net loss as a percentage of sales decreased to
2.2% in 2003 as compared to 4.9% in 2002, and net loss dollars decreased $1.5
million, or 41.7%, to $2.1 million in 2003 from $3.6 million in 2002.                                                                                                                                                                                                                                                                               

21

---

Comparison of the 39
weeks ended October 26, 2003 to the 39 weeks ended October 27, 2002

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | International
sales increased $60.2 million, or 29.8%, to $262.5 million in 2003 from $202.3
million in 2002. This is primarily the result of new superstore openings. In
2003, the Company opened seven international superstores and one Books etc.
store in the United Kingdom.                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The impact of price
changes on comparable store sales was also not significant.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Gross
margin as a percentage of sales decreased 0.1% in 2003 as compared to 2002,
primarily the result of a 1.0% increase in store occupancy costs as a percentage
of sales, partially offset by an increase in third party café income of
0.9% as a percentage of sales. The
overall mix of book, music, cafe, and sideline merchandise sold by International
superstores, and the mix of books and sidelines offered by Books etc. stores,
did not change significantly, or affect margin rates significantly, in 2003 as compared to 2002.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Gross
margin dollars increased approximately 28.5% in 2003 primarily due to new store
openings.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Selling, general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | SG&A
as a percentage of sales decreased approximately 2.6% in 2003 compared to 2002.
This improvement was primarily the result of decreased store payroll costs of
1.1%, store operating expenses of 0.5%, administrative payroll of 0.6%, and
administrative expenses of 0.4% as a percentage of sales. These decreases as a
percentage of sales were due to the aforementioned costs increasing at rates
less than sales growth.                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | SG&A
dollars increased approximately 15.8% in 2003 primarily due to store openings
and the increased store payroll and operating expenses required.                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Depreciation
and amortization expense increased $1.9 million, or 27.5%, to $8.8 million in
2003 from $6.9 million in 2002. This was primarily due to depreciation expense
recognized on new stores capital expenditures.                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Interest
expense increased $1.5 million, or 12.0%, to $14.0 million in 2003 from $12.5
million in 2002. This was a result of higher average borrowing levels at fixed
internal interest rates.                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Net loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Due
to the factors mentioned above, net loss as a percentage of sales decreased to
3.7% in 2003 as compared to 6.7% in 2002, and net loss dollars decreased $3.7
million, or 27.4%, to $9.8 million in 2003 from $13.5 million in 2002.                                                                                                                                                                                                                                                                                                      

| |                  |   |      |   |  |   |      |   |  |   |       |   |  |   |       |   |  |  | 
| | ---------------- | - | ---- | - |  | - | ---- | - |  | - | ----- | - |  | - | ----- | - |  |  | 
|
|
|
|
| | Net loss         | $ | (5.5 | ) |  | $ | (3.7 | ) |  | $ | (16.6 | ) |  | $ | (10.1 | ) | 
| | Interest expense | $ | 7.3  |   |  | $ | 6.1  |   |  | $ | 22.7  |   |  | $ | 18.8  |   | 

Comparison of the 13
weeks ended October 26, 2003 to the 13 weeks ended October 27, 2002

| | Net
loss consists of various corporate governance costs and income. Net loss dollars
increased $1.8 million, or 48.6%, to $5.5 million in 2003 from $3.7 million in
2002. This was primarily due to increases in interest expense and various
governance costs as compared to the prior year. Interest expense represents
corporate-level interest costs not charged to the Companys operating
segments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Comparison of the 39
weeks ended October 26, 2003 to the 39 weeks ended October 27, 2002

| | Net
loss consists of various corporate governance costs and income. Net loss dollars
decreased $6.5 million, or 64.4%, to $16.6 million in 2003 from $10.1 million in
2002. This was primarily due to an increase in corporate general and
administrative payroll costs, an increase in various governance costs, and an
increase in interest as compared to the prior year. Interest expense represents
corporate-level interest costs not charged to the Companys operating
segments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

---

## 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 spending.

Net cash used for
operations was $84.3 million and $117.8 million for the 39 weeks ended October
26, 2003 and October 27, 2002, respectively. Operating cash inflows for the
period primarily reflects operating results net of non-cash depreciation, as
well as an increase in accounts payable and a decrease in accounts receivable.
Operating cash outflows for the period primarily resulted from increases in
inventory and prepaid expenses, as well as decreases in expenses payable,
accrued liabilities, other long-term assets and liabilities and taxes payable
during the period.

Net cash used for investing
was $79.5 million and $85.7 million for the 39 weeks ended October 26, 2003 and
October 27, 2002, respectively, which primarily funded capital expenditures for
new stores, the refurbishment of existing stores and technology investments.

Net cash  provided by  financing
was $2.8 million and $80.5  million for the 39 weeks ended  October 26, 2003 and October 27, 2002,
respectively,  resulting  primarily from borrowings on the Companys Credit
Agreement and proceeds from the exercise of employee stock options, partially
offset by the Companys repurchase of stock.

The Company expects capital
expenditures to be approximately $105.0 million to $115.0 million for the full
year of 2003, resulting primarily from new domestic superstore openings. In
addition, capital expenditures will result from international store openings,
refurbishment of a number of existing stores, and investment in information
technology spending. The Company has opened 32 domestic Borders superstores and
seven international stores in 2003. Average cash requirements for the opening of
a prototype Borders Books and Music superstore are $2.4 million, representing
capital expenditures of $1.1 million, inventory requirements (net of related
accounts payable) of $1.1 million, and $0.2 million of pre-opening costs.
Average cash requirements to open a new or expanded Waldenbooks store range from
$0.4 million to $0.7 million, depending on the size and format of the store. The
Company plans to lease new store locations predominantly under operating leases.

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

In May 2003, the Board of
Directors authorized an increase in the Companys share repurchase program
to $150.0 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). During the 39 weeks ended October 26, 2003 and
October 27, 2002, $31.5 million and $64.0 million of common stock was
repurchased, respectively. The Company currently has a share repurchase program
in place with remaining authorization to repurchase approximately $152.1
million. The Company plans to continue the repurchase of its common stock,
subject to the Companys market conditions and trading.

In November 2003, the
Board of Directors declared a quarterly dividend of $0.08 per share, which equals
approximately $6.0 million, on the Companys
common stock, payable January 28, 2004 to shareholders of record at the close of business January 7, 2004.
The Company intends to pay regular quarterly
dividends, subject to Board approval, going forward.

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 October 26, 2003 the Company was in
compliance with all covenants contained within this agreement.

23

---

On July 30, 2002, the
Company issued $50.0 million of senior guaranteed notes (the Notes)
due July 30, 2006 and bearing interest at 6.31% (payable semi-annually). The
proceeds of the sale of the Notes are being used to refinance existing
indebtedness of the Company and its subsidiaries and for general corporate
purposes. The note purchase agreement relating to the Notes contains covenants
which limit, among other things, the Companys ability to incur
indebtedness, grant liens, make investments, engage in any merger or
consolidation, dispose of assets or change the nature of its business, and
requires the Company to meet certain financial measures regarding net worth,
total debt coverage and fixed charge coverage. As of October 26, 2003 the
Company was in compliance with all covenants contained within this agreement.

In August 2003, the Company
entered into an interest rate swap,  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, and it expires  concurrently  with
the due date of the Notes.

The Company has two lease
financing facilities (collectively, the Lease Financing Facilities),
which were amended in May 2003, to finance new stores and other property owned
by unaffiliated entities and leased to the Company or its subsidiaries. The
original facility (the Original Lease Facility) will expire in June
2004 (2005 if certain conditions are satisfied). In June 2002, the Company
established a new facility (the New Lease Facility), which will
expire in 2007. The aggregate amount of borrowings permitted 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. The Company is in compliance with these
covenants. 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.

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

Substantially all of the
Companys capital lease assets are related to properties financed under the
Original Lease Facility. 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 of operating
leases.

There were 2, 21 and 7
properties financed through the Original Lease Facility at October 26, 2003,
October 27, 2002 and January 26, 2003, respectively, with financed values of
$13.8 million, $93.8 million and $36.3 million. The Company has recorded
$12.9 million, $48.7 million and $19.0 million of the
amounts under the Original Lease Facility as capitalized leases under
Other assets (for the capital lease assets) and Long-term
capital lease and financing obligations (for the capital lease
liabilities) on the consolidated balance sheets at October 26, 2003, October 27,
2002 and January 26, 2003, respectively. These amounts have been treated as
non-cash items on the consolidated statements of cash flows. There were no
borrowings under the New Lease Facility as of October 26, 2003. In the third
quarter of 2003, the Company permanently financed, through long-term leases, two
properties that had been financed through the Original Lease Facility with a
total value of approximately $6.1 million, which had been capitalized.

Management believes that
the rental payments for properties financed through the Lease Financing
Facilities 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

24

---

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
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 October 26, 2003:

| |                              |   |       |  |   |       |  |   |       |  |   |         |  |   |         | 
| | ---------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | ------- |  | - | ------- | 
|
|
|
|
| | Credit Agreement borrowings  | $ | 136.9 |  | $ | --    |  | $ | --    |  | $ | --      |  | $ | 136.9   | 
| | Capital lease obligations    |   | --    |  |   | 2.1   |  |   | 2.1   |  |   | --      |  |   | 4.2     | 
| | Operating lease obligations  |   | 81.0  |  |   | 613.9 |  |   | 574.2 |  |   | 2,452.4 |  |   | 3,721.5 | 
| | Senior guaranteed notes      |   | --    |  |   | --    |  |   | 50.7  |  |   | --      |  |   | 50.7    | 
| |                              |   |       |  |   |       |  |   |       |  |   |         | 
| | Total                        | $ | 217.9 |  | $ | 616.0 |  | $ | 627.0 |  | $ | 2,452.4 |  | $ | 3,913.3 | 
|
| | Lease Facility guarantees(1) | $ | 13.8  |  | $ | --    |  | $ | --    |  | $ | --      |  | $ | 13.8    | 

(1) Includes $12.9 million
treated as capital lease and financing obligations.

## 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. The Company believes that
the following discussion addresses the Companys most critical accounting
policies and estimates. There have been no significant changes in these during
2003 as compared to the prior year, other than the policy addressing advertising
and vendor incentive programs, as noted below.

| | Asset Impairments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
carrying value of long-lived assets is evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount and the estimated fair value. Expected
future cash flows, which are estimated over each stores remaining lease
term, contain estimates of sales and the impact those future sales will have
upon cash flows. Future sales are estimated based upon a projection of each
stores sales trend of the past several years. Additionally, each
stores future cash contribution is based upon the most recent years
actual cash contribution, but is adjusted based upon projected sales trends.
Fair value is estimated using expected discounted future cash flows, with the
discount rate approximating the Companys borrowing rate. Significant
deterioration in the performance of the Companys stores compared to
projections could result in significant additional asset impairments.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Goodwill Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Upon
adoption of FAS 142 on January 28, 2002, the Companys goodwill was tested
for impairment, and no impairment existed. The carrying amounts of the net
assets of the applicable reporting units (including goodwill) were compared to
the estimated fair values of those reporting units. Fair value was estimated
using a discounted cash flow model which depended on, among other factors,
estimates of future sales and expense trends, liquidity, and capitalization. The
discount rate used approximated the weighted average cost of capital of a
hypothetical third party buyer. Changes in any of the assumptions underlying
these estimates may result in the future impairment of goodwill. The
Companys annual tests of goodwill impairment are based upon the
methodology described above and are subject to the same risks and uncertainties.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
carrying value of the Companys inventory is affected by reserves for
shrinkage and non-returnable inventory. Projections of shrinkage are based upon
the results of regular, periodic physical counts of the Companys
inventory. The Companys shrinkage reserve is adjusted as warranted based
upon the trends yielded by the physical counts. Reserves for non-returnable
inventory are based upon the Companys history of liquidating
non-returnable inventory. The markdown percentages utilized in developing the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

25

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | reserve are evaluated against actual, ongoing markdowns of non-returnable
inventory to ensure that they remain consistent. Significant differences between
future experience and that which was projected (for either the shrinkage or
non-returnable inventory reserves) could affect the recorded amounts of
inventory and cost of sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The
Company includes certain distribution and other expenses in its inventory costs,
particularly freight, distribution payroll, and certain occupancy expenses. In
addition, certain selling, general and administrative expenses are included in
inventory costs. These amounts totaled approximately $81.4 million and $83.4
million as of October 26, 2003 and October 27, 2002, respectively. The extent to
which these costs are included in inventory is based on certain estimates of
space and labor allocation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | All
leases, including those for properties financed through the Lease Financing
Facilities, are reviewed for capital or operating classification at their
inception under the guidance of Statement of Financial Accounting Standards No.
13, Accounting for Leases (FAS 13), as amended. The leases of
certain properties financed through the Original Lease Facility were capitalized
based upon this and other guidance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Furthermore,
properties financed through the Lease Financing Facilities are evaluated under
various accounting literature including EITF 92-1, Allocation of Residual
Value or First-Loss Guarantee to Minimum Lease Payments in Leases Involving Land
and Buildings, EITF 97-1, Implementation Issues in Accounting for
Lease Transactions Including those Involving Special Purpose Entities,
and EITF 97-10, The Effect of Lessee Involvement in Asset Construction,
among others. Based on the results of analysis performed by the Company, leases
of the properties financed through the Original Lease Facility at October 26,
2003 are recorded as capital leases in the consolidated financial statements of
the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Advertising
and Vendor Incentive Programs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
Company receives payments and credits from vendors pursuant to co-operative
advertising programs, shared markdown programs, purchase volume incentive
programs and magazine slotting programs. These programs continue to be
beneficial for both the Company and vendors, and the Company expects continued
participation in these types of programs. Changes in vendor participation
levels, as well as changes in the volume of merchandise purchased, among other
factors, could adversely impact the Companys results of operations and
liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Pursuant
to co-operative advertising programs offered by vendors, the Company contracts
with vendors to promote merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor (EITF 02-16), which the Company adopted effective January 1, 2003,
vendor consideration which represents a reimbursement of specific, incremental,
identifiable costs is included in the Selling, general and
administrative line on the consolidated statements of operations, along
with the related costs, in the period the promotion takes place. Consideration
which exceeds such costs is classified as a reduction of the Cost of
merchandise sold line on the consolidated statements of operations. Prior
to the adoption of EITF 02-16, all consideration and costs pursuant to
co-operative advertising programs were included in the Selling, general
and administrative expenses line of the consolidated statements of
operations. The Company has reclassified the prior years vendor
consideration to conform to current year presentation and EITF 02-16.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The
Company also receives credits from vendors pursuant to shared markdown programs,
purchase volume programs, and magazine slotting programs. Credits received
pursuant to these programs are classified in the Cost of merchandise
sold line on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product placements
occurring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

## New Accounting
Guidance

In November 2002, the
Emerging Issues Task Force issued Consensus No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor (EITF 02-16), which is effective prospectively for all vendor
arrangements entered into after December 31, 2002. The Consensus requires that
consideration received from a vendor be considered a reduction of the prices of
vendors products and shown as a reduction of cost of sales in the income
statement of the customer. If the consideration represents a reimbursement of
specific incremental identifiable costs incurred, these amounts should be offset
against the related costs with any excess consideration recorded in cost of
sales. In fiscal 2003, the Company has reclassified the prior years vendor
consideration to conform to current year presentation and EITF 02-16.
Additionally, the Company recorded $0.3 million of excess vendor consideration
as a reduction to its inventory balance in the first quarter of 2003.

26

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In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46
requires the consolidation of variable interest entities in which an enterprise
absorbs a majority of the entitys expected losses, receives a majority of
the entitys expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise that has a controlling financial
interest through ownership of a majority voting interest in the entity.

The Company leases two
properties from unconsolidated variable interest entities (VIEs) that had
borrowings outstanding under the Original Lease Facility at October 26, 2003.
Third parties have invested capital at risk equal to or in excess of 5% of the
assets of the VIEs, with the remainder being financed through borrowings under
the Original Lease Facility. This, and certain other criteria, allow the Company
not to consolidate the VIEs in the Companys financial statements at
October 26, 2003. Rather, the Company accounts for these arrangements as capital
leases. Accordingly, the capitalizable portion of the leased facilities and the
related borrowings are reported in the Companys accompanying balance
sheets. Independent of the Companys obligations relating to these leases,
the Company and certain of its subsidiaries guarantee payment when due of all
amounts required to be paid to the third-party lenders. At October 26, 2003, the
maximum loss that the Company could incur under these guarantees approximated
$13.8 million.

The Company also leases two
properties from unconsolidated VIEs that had borrowings outstanding under the
Original Lease Facility at January 26, 2003, but whose borrowings had been
permanently financed by the VIE through long-term leases during the first
quarter of 2003. Third parties have invested capital at risk equal to 5% of the
assets of the VIEs, with the remainder being financed through borrowings
unrelated to the Lease Financing Facilities. This, and certain other criteria,
allow the Company not to consolidate the VIEs in the Companys financial
statements at October 26, 2003. Rather, the Company accounts for these
arrangements as operating leases. Accordingly, neither the leased facilities nor
the related debt is reported in the Companys accompanying balance sheets.
Independent of the Companys obligations relating to these leases, the
Company and certain of its subsidiaries guarantee payment when due of all
amounts required to be paid to the third-party lenders. At October 26, 2003, the
maximum loss that the Company could incur under these guarantees approximated
$6.0 million.

The Company expects to
begin consolidating the four VIEs mentioned above in the quarter ending January
25, 2004, because it believes it is the VIEs primary beneficiary under FIN
46s requirements. At January 25, 2004, consolidation of these VIEs would
have the effect of increasing property and equipment by $7.0 million, net of
accumulated depreciation of $1.6, and increasing long-term capital lease and
financing obligations by $6.9. Minority interests of $1.7 million would also be
reported, and the Company would record a charge of $1.0 million, net of tax, as
a cumulative effect of change in accounting principle.

In April 2003, the FASB
issued Statement of Financial Accounting Standards No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities (FAS
149). In general, this statement amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. The adoption of FAS 149 is not expected to have an
impact on the Companys consolidated financial position or disclosures.

In May 2003, the FASB
issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity (FAS 150). This statement affects the
classification, measurement and disclosure requirements of the following three
types of freestanding financial instruments: 1) manditorily redeemable shares,
which the issuing company is obligated to buy back with cash or other assets; 2)
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets, which includes put options and forward
purchase contracts; and 3) obligations that can be settled with shares, the
monetary value of which is fixed, tied solely or predominantly to a variable
such as a market index, or varies inversely with the value of the issuers
shares. In general, FAS 150 is effective for all financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of FAS
150 is not expected to have an impact on the Companys consolidated
financial position or disclosures.

## 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.

27

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## Forward Looking Statements

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

## ITEM 4.
CONTROLS AND PROCEDURES

## Controls and
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 the end of the period covered by
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 26, 2003, describes pending
lawsuits and claims against the Company. The status of such litigation and
claims has not changed in any significant respect since the filing of the
Companys Form 10-Q Report for the fiscal quarter ended July 27, 2003
except as follows:

With respect to the claims
of certain states and private litigants attempting to impose sales or other tax
collection efforts on out-of-jurisdiction companies that engage in e-commerce,
the Company and Amazon have been named as defendants in an action filed by a
private litigant on behalf of the State of Illinois under the Illinois False
Claims Act relating to the failure to collect use taxes on Internet sales in
Illinois for periods both before and after the implementation of the
Companys Mirror Site Agreement with Amazon. The action, including the
relief sought, is similar to the actions in Tennessee and Nevada described in
the Companys Form 10-K Annual Report for the fiscal year ended January 26,
2003 and its 10-Q Report for the fiscal quarter ended July 27, 2003,
respectively. Also, the Tennessee action has been dismissed by the court, but
the appeal period has not yet expired.

On September 30, 2003, the
Court in the Intimate Bookshop litigation granted the Motion For Summary
Judgment of the Company and Barnes & Noble, Inc. and subsequently dismissed
the case. Intimate has filed a Notice of Appeal.

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

In addition to the matters
described or referred to above, the Company is from time to time involved in or
affected by other litigation and claims incidental to the conduct of its
businesses. While some of such matters may involve claims for large sums
(including, from time to time, action 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.

28

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## 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.                              | 
| |     |                      | 99.2                                                                                                                                                                                                                                                                                                       | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 | 
| |     |                      | 99.3                                                                                                                                                                                                                                                                                                       | 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   | 
| |     |                      | 99.4                                                                                                                                                                                                                                                                                                       | 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 | 
| |     |                      | 99.5                                                                                                                                                                                                                                                                                                       | 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   | 
| |     |                      |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                      | 
| | (b) | Reports on Form 8-K: |                                                                                                                                                                                                                                                                                                           
| |     |                      | Subsequent
to the 13 weeks ended October 26, 2003 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 November 20, 2003, furnished a press release with earnings information
for the quarter ended October 26, 2003. |                                                                                                                                                                      | 

29

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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:        December 10, 2003 | By: /s/ Edward W. Wilhelm
|------------------------------ | -------------------------
|                               | Edward W. Wilhelm        
|                               | Senior Vice President and
|                               | Chief Financial Officer  
|                               | (Principal Financial and 
|                               | Accounting Officer)      

30

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## EXHIBIT INDEX

## DESCRIPTION OF EXHIBITS

EXHIBITS:

| |     |                      |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                      | 
| | --- | -------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                     
| |     |                      | 99.1                                                                                                                                                                                                                                                                                                       | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                              | 
| |     |                      | 99.2                                                                                                                                                                                                                                                                                                       | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 | 
| |     |                      | 99.3                                                                                                                                                                                                                                                                                                       | 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   | 
| |     |                      | 99.4                                                                                                                                                                                                                                                                                                       | 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 | 
| |     |                      | 99.5                                                                                                                                                                                                                                                                                                       | 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   | 
| |     |                      |                                                                                                                                                                                                                                                                                                            |                                                                                                                                                                      | 
| | (b) | Reports on Form 8-K: |                                                                                                                                                                                                                                                                                                           
| |     |                      | Subsequent
to the 13 weeks ended October 26, 2003 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 November 20, 2003, furnished a press release with earnings information
for the quarter ended October 26, 2003. |                                                                                                                                                                      | 

31

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