<PAGE>   1
                                                                   EXHIBIT 10.42

                                                                  EXECUTION COPY

                                                                    EXHIBIT F TO
                                                                CREDIT AGREEMENT




                              AMENDED AND RESTATED
                               GUARANTEE AGREEMENT


                                  BY AND AMONG


                              BORDERS GROUP, INC.,

                                 BORDERS, INC.,

                           WALDEN BOOK COMPANY, INC.,

                            BORDERS PROPERTIES, INC.,

                          WALDENBOOKS PROPERTIES, INC.,

                CERTAIN OTHER SUBSIDIARIES OF BORDERS GROUP, INC.

                                       AND

             PNC BANK, NATIONAL ASSOCIATION, as Administrative Agent
                       FOR THE BENEFIT OF CERTAIN LENDERS



                          DATED AS OF NOVEMBER 22, 1995

                   AMENDED AND RESTATED AS OF OCTOBER 17, 1997





<PAGE>   2




                                                                               

                                TABLE OF CONTENTS
                                                                       Page

ARTICLE I.          DEFINITIONS.........................................2
         1.01.      Defined Terms.......................................2
         1.02.      Accounting Principles...............................2

ARTICLE II.         GUARANTEE...........................................2

ARTICLE III.        RIGHT OF CONTRIBUTION...............................3

ARTICLE IV.         RIGHT OF SET-OFF....................................3

ARTICLE V.          NO SUBROGATION......................................4

ARTICLE VI.         AMENDMENTS, ETC. WITH RESPECT TO THE OBLIGATIONS;
                    WAIVER OF RIGHTS....................................4

ARTICLE VII.        GUARANTEE ABSOLUTE AND UNCONDITIONAL................5

ARTICLE VIII.       REINSTATEMENT.......................................5

ARTICLE IX.         PAYMENTS............................................6

ARTICLE X.          REPRESENTATIONS, WARRANTIES AND AGREEMENTS..........6

ARTICLE XI.         AFFIRMATIVE COVENANTS...............................6
         11.01.     Preservation of Existence, etc......................6
         11.02.     Payment of Liabilities, Including Taxes, etc........6
         11.03.     Maintenance of Insurance............................7
         11.04.     Maintenance of Properties...........................7
         11.05.     Maintenance of Patents, Trademarks, etc.............7
         11.06.     Visitation Rights...................................7
         11.07.     Keeping of Records and Books of Account.............7
         11.08.     Plans and Benefit Arrangements......................8
         11.09.     Compliance with Laws................................8
         11.10.     Subsequent Credit Terms.............................8
         11.11.     [Reserved]..........................................8
         11.12.     Subsidiary Guarantees...............................8

ARTICLE XII.        NEGATIVE COVENANTS..................................8
         12.01.     Indebtedness........................................9
         12.02.     Liens..............................................10
         12.03.     Contingent Obligations.............................10
         12.04.     Loans and Investments..............................11

                                                            

<PAGE>   3


                                                                   Page

         12.05.     Dividends and Related Distributions.............13
         12.06.     Liquidations, Mergers, Consolidations...........14
         12.07.     Dispositions of Assets or Subsidiaries..........14
         12.08.     Affiliate Transactions..........................14
         12.09.     Subsidiaries, Partnerships and Joint Ventures...15
         12.10.     Continuation of or Change in Business...........15
         12.11.     Plans and Benefit Arrangements..................15
         12.12.     Fiscal Year.....................................15
         12.13.     Issuance of Stock...............................15
         12.14.     Changes in Organizational Documents.............16
         12.15.     Minimum Fixed Charge Coverage Ratio.............16
         12.16.     Maximum Leverage Ratio..........................16
         12.17.     Minimum Tangible Net Worth......................16
         12.18.     Modifications of Other Documents................16
         12.19.     Prepayment of Note Put Agreement Obligations....16
         12.20.     Foreign Activities..............................16
         12.21.     Inconsistent Agreements.........................17

ARTICLE XIII.       REPORTING REQUIREMENTS..........................17
         13.01.     Quarterly Financial Statements..................17
         13.02.     Annual Financial Statements.....................17
         13.03.     Certificates of the Company.....................17
         13.04.     Notice of Default...............................18
         13.05.     Notice of Litigation............................18
         13.06.     Certain Events..................................18
         13.07.     Other Reports and Information...................18
         13.08.     Notices Regarding Benefit Arrangements..........19
         13.09.     Access to the Company's Auditors................19
         13.10.     Notices Regarding Corporate Credit Agreement....19
         13.11.     Notices Regarding Repurchases of Stock..........19

ARTICLE XIV.        AUTHORITY OF ADMINISTRATIVE AGENT...............20

ARTICLE XV.         NOTICES.........................................20

ARTICLE XVI.        COUNTERPARTS....................................20

ARTICLE XVII.       SEVERABILITY....................................20

ARTICLE XVIII.      INTEGRATION........ ............................21


                                     - ii -

<PAGE>   4



<TABLE>
<CAPTION> 
                                                                                       Page
<S>               <C>                                                                  <C>
ARTICLE XIX.        AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE REMEDIES.............  21

ARTICLE XX.         SECTION HEADINGS..................................................  21

ARTICLE XXI.        SUCCESSORS AND ASSIGNS............................................  21

ARTICLE XXII.       RELEASES OF GUARANTORS, ETC.......................................  21

ARTICLE XXIII.      JURY TRIAL; SUBMISSION TO JURISDICTION; WAIVERS...................  21

ARTICLE XXIV.       INDEMNITY.........................................................  22

ARTICLE XXV.        GOVERNING LAW.....................................................  23


SCHEDULE

Schedule 1        Existing Liens
Schedule 2        Existing Indebtedness
Schedule 5        Employee Benefit Plan Disclosures


EXHIBITS

Exhibit A         Form of Compliance Certificate
</TABLE>


                                     - iii -
<PAGE>   5





                  AMENDED AND RESTATED GUARANTEE AGREEMENT, dated as of November
22, 1995 and amended and restated as of October 17, 1997, made by BORDERS GROUP,
INC., a Michigan corporation (the "Company"),  and each of the corporations that
is a signatory  hereto or to a letter agreement  acknowledging  that it is bound
hereby (collectively, with the Company, the "Guarantors"), in favor of PNC BANK,
NATIONAL   ASSOCIATION,   as  administrative   agent  (in  such  capacity,   the
"Administrative  Agent") for the lenders  (the  "Lenders")  which are parties to
that certain  Amended and Restated  Credit  Agreement,  dated as of November 22,
1995 and amended and restated as of the date hereof (as  amended,  supplemented,
extended or otherwise modified from time to time, the "Credit Agreement"), among
WILMINGTON TRUST COMPANY,  not in its individual  capacity except as provided in
the Credit Agreement but solely as Owner Trustee (the "Borrower"),  the Lenders,
certain other agents and the Administrative Agent.


                            W I T N E S S E T H:

                  WHEREAS,  pursuant to the Credit  Agreement,  the Lenders have
severally  agreed to make or maintain  loans (the  "Loans") to the Borrower upon
the terms and subject to the conditions  set forth  therein,  to be evidenced by
the notes issued by the Borrower under the Credit Agreement;

                  WHEREAS,  each  Guarantor will derive  substantial  direct and
indirect benefit from the making and maintenance of the Loans; and

                  WHEREAS,  it is a condition precedent to the obligation of the
Lenders to make and maintain  their  respective  Loans to the Borrower under the
Credit  Agreement  that the  Guarantors  shall have executed and delivered  this
Guarantee to the Administrative Agent for the ratable benefit of the Lenders.

                  WHEREAS,  the Company and  certain of the  Guarantors  entered
into the Guarantee  Agreement  dated November 22, 1995 in favor of Bankers Trust
Company as agent for the Lenders (as heretofore amended, the "Prior Agreement");
and

                  WHEREAS,  those parties to the Prior Agreement desire to amend
and restate the Prior Agreement to (i) substitute PNC Bank, National Association
for  Bankers  Trust  Company  as the agent  for the  Lenders;  (ii) add  certain
Guarantors,  and (iii) amend  certain  other terms and  conditions  of the Prior
Agreement.

                  NOW, THEREFORE, in consideration of the premises and to induce
the  Administrative  Agent  and the  Lenders  to enter  into,  and to amend  and
restate,  the Credit  Agreement  and to induce the Lenders to make and  maintain
their  respective  Loans  to  the  Borrower  under  the  Credit  Agreement,  the
Guarantors hereby agree with the  Administrative  Agent, for the ratable benefit
of the Lenders, as follows:




<PAGE>   6


                  ARTICLE I.  DEFINITIONS

                  1.01. Defined Terms.  Capitalized terms used but not otherwise
defined  in this  Agreement  shall  have the  meanings  set forth in  Appendix A
hereto.

                  1.02. Accounting  Principles.  Except as otherwise provided in
this  Guarantee,  all  computations  and  determinations  as  to  accounting  or
financial matters and all financial  statements to be delivered pursuant to this
Guarantee  shall  be made  and  prepared  in  accordance  with  GAAP  (including
principles of consolidation where appropriate),  and all accounting or financial
terms shall have the meanings ascribed to such terms by GAAP; provided, however,
that if any change in GAAP or the application  thereof occurs  hereafter,  or if
the Company  adopts a change to its  accounting  principles  or methods with the
agreement  of its  independent  certified  public  accountants,  and such change
results in a change in the calculation of any financial  covenant or restriction
set forth  herein,  then the parties  hereto agree to enter into and  diligently
pursue  negotiations in order to amend such financial covenant or restriction so
as to equitably  reflect such change,  with the desired result that the criteria
for evaluating the financial  condition and results of operations of the Company
and its  Subsidiaries  shall be the same after such change as if such change had
not been made. Pending the resolution of any such  negotiations,  the Guarantors
agree to provide to each of the Lenders such unaudited financial information and
pro forma  statements  using the accounting  methods and principles  used in the
preparation  of the  audited  financial  statements  for the  fiscal  year ended
January 26, 1997,  as are  necessary to enable the Lenders to test the financial
covenants contained herein.

                  ARTICLE II. GUARANTEE. (a) Subject to the provisions of
Section 2(b), each of the Guarantors hereby, jointly and severally,
unconditionally and irrevocably, guarantees to the Administrative Agent, for the
ratable benefit of the Lenders and their respective successors, indorsees,
transferees and assigns, the prompt and complete payment by the Borrower when
due (whether at the stated maturity, by acceleration or otherwise) of the
Obligations.

                  (b)  Anything  herein or in any other  Credit  Document to the
contrary  notwithstanding,  (i) the Guarantors shall not at any time be required
to make any payment hereunder in respect of the principal of any Tranche B Loans
unless at such time a Lease Event of Default under any Lease has occurred and is
continuing,  and (ii) the maximum liability of each Guarantor hereunder shall in
no event  exceed the  maximum  amount  which can be validly  guaranteed  by such
Guarantor  under  applicable  Laws  relating to the  insolvency  of debtors.  An
acknowledgment  of such limit may be contained in the letter agreement  executed
after the Effective Date by any  additional  Guarantor if required by applicable
Law.

                  (c) Each Guarantor further agrees,  jointly and severally,  to
pay any and all reasonable expenses (including, without limitation, all fees and
disbursements  of  counsel)  which may be paid or  incurred  by any Agent or any
Lender in  enforcing,  or obtaining  advice of counsel in respect of, any rights
with respect to, or collecting,  any or all of the Obligations  and/or enforcing
any rights with respect to, or  collecting  against,  any  Guarantor  under this
Guarantee.  This  Guarantee  shall  remain in full  force and  effect  until the
Obligations and all amounts owing hereunder are paid in full and the Commitments
are  terminated,  notwithstanding  that  from  time to time  prior  thereto  the
Borrower may be free from any Obligations.



<PAGE>   7

                  (d) Each Guarantor agrees that the Obligations may at any time
and from time to time  exceed  the  amount of the  liability  of such  Guarantor
hereunder  without impairing this Guarantee or affecting the rights and remedies
of any Agent or any Lender hereunder.

                  (e) No payment or payments  made by the  Borrower,  any of the
Guarantors,  any other guarantor or any other Person or received or collected by
any Agent or any Lender  from the  Borrower,  any of the  Guarantors,  any other
guarantor  or any other  Person by virtue  of any  action or  proceeding  or any
set-off  or  appropriation  or  application  at any time or from time to time in
reduction of or in payment of the Obligations shall be deemed to modify, reduce,
release or otherwise  affect the  liability  of any  Guarantor  hereunder  which
shall,  notwithstanding any such payment or payments other than payments made by
such Guarantor in respect of the  Obligations or payments  received or collected
from such  Guarantor  in  respect  of the  Obligations,  remain  liable  for the
Obligations up to the maximum  liability of such Guarantor  hereunder  until the
Obligations and all amounts owing hereunder are paid in full and the Commitments
are terminated.

                  (f) Each Guarantor agrees that whenever,  at any time, or from
time to time, it shall make any payment to any Agent or any Lender on account of
its liability hereunder, it will notify the Administrative Agent in writing that
such payment is made under this Guarantee for such purpose.

                  ARTICLE III.  RIGHT OF  CONTRIBUTION.  Each  Guarantor  hereby
agrees  that to the  extent  that a  Guarantor  shall  have  paid  more than its
proportionate  share of any payment  made  hereunder,  such  Guarantor  shall be
entitled to seek and receive  contribution  from and against any other Guarantor
hereunder  who has not  paid  its  proportionate  share  of such  payment.  Each
Guarantor's  right of contribution  shall be subject to the terms and conditions
of Article V hereof.  The  provisions  of this  Article  III shall in no respect
limit the  obligations  and  liabilities  of any Guarantor to the Agents and the
Lenders,  and each  Guarantor  shall remain liable to the Agents and the Lenders
for the full amount guaranteed by such Guarantor hereunder.


                  ARTICLE IV. RIGHT OF SET-OFF. In addition to any rights now or
hereafter  granted  under  applicable  law  or  otherwise,  and  not  by  way of
limitation of any such rights,  upon the  occurrence of a Lease Event of Default
or an Event of Default  under the Credit  Agreement,  each of the  Agents,  each
Lender and each  Participant  is hereby  authorized  at any time or from time to
time, without  presentment,  demand,  protest or other notice of any kind to any
Guarantor or to any other Person, any such notice being hereby expressly waived,
to set off and to  appropriate  and  apply  any and  all  deposits  (general  or
special) and any other Indebtedness at any time held or owing by the such Agent,
such Lender or such Participant (including,  without limitation, by branches and
agencies of such Agent, such Lender or such Participant  wherever located) to or
for the credit or the  account of any  Guarantor  against  and on account of the
obligations  and  liabilities  of such  Guarantor  hereunder or under any of the
other  Operative  Agreements,  and all other claims of any nature or description
arising  out  of or  connected  with  this  Guarantee  or  any  other  Operative
Agreement,  irrespective  of  whether  or not such  Agent,  such  Lender or such
Participant  shall have made any demand hereunder and although said obligations,
liabilities or claims, or any of them, shall be contingent or unmatured.



<PAGE>   8


                  ARTICLE  V. NO  SUBROGATION.  Notwithstanding  any  payment or
payments made by any of the  Guarantors  hereunder or any set-off or application
of funds of any of the Guarantors by any Agent or any Lender, no Guarantor shall
be  entitled  to be  subrogated  to any of the rights of any Agent or any Lender
against the Borrower or any other Person or any collateral security or guarantee
or right of  offset  held by any  Agent or any  Lender  for the  payment  of the
Obligations,   nor  shall  any  Guarantor  seek  or  be  entitled  to  seek  any
contribution or  reimbursement  from the Borrower or any other Person in respect
of payments  made by such  Guarantor  hereunder,  until all amounts owing to the
Agents and the  Lenders by the  Borrower on account of the  Obligations  and all
amounts owing hereunder are paid in full and the Commitments are terminated.  If
any amount shall be paid to any Guarantor on account of such subrogation  rights
at any time when all of the  Obligations  and all amounts owing  hereunder shall
not have been paid in full or the  Commitments  shall not have been  terminated,
such  amount  shall be held by such  Guarantor  in trust for the  Agents and the
Lenders,  segregated  from other funds of such Guarantor,  and shall,  forthwith
upon receipt by such Guarantor,  be turned over to the  Administrative  Agent in
the exact form received by such  Guarantor  (duly  indorsed by such Guarantor to
the Administrative  Agent, if required),  to be applied against the Obligations,
whether  matured or  unmatured,  in such order as the  Administrative  Agent may
determine.


                  ARTICLE VI. AMENDMENTS,  ETC. WITH RESPECT TO THE OBLIGATIONS;
WAIVER  OF   RIGHTS.   Each   Guarantor   shall   remain   obligated   hereunder
notwithstanding  that,  without any  reservation of rights against any Guarantor
and without notice to or further assent by any Guarantor, any demand for payment
of any of the  Obligations  made by any Agent or any Lender may be  rescinded by
such party and any of the Obligations  continued,  and the  Obligations,  or the
liability  of any other party upon or for any part  thereof,  or any  collateral
security or  guarantee  therefor or right of offset with respect  thereto,  may,
from time to time, in whole or in part, be renewed, extended, amended, modified,
accelerated,  compromised,  waived,  surrendered or released by any Agent or any
Lender,  and the Credit  Agreement and the other  Operative  Agreements  and any
other documents  executed and delivered in connection  therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the Administrative
Agent (or the Required Lenders, as the case may be) may deem advisable from time
to time, and any collateral  security,  guarantee or right of offset at any time
held by any Agent or any Lender for the payment of the  Obligations may be sold,
exchanged,  waived,  surrendered  or released.  Neither any Agent nor any Lender
shall have any obligation to protect,  secure, perfect or insure any Lien at any
time held by it as security  for the  Obligations  or for this  Guarantee or any
property  subject thereto.  When making any demand hereunder  against any of the
Guarantors,  any Agent or any Lender may, but shall be under no  obligation  to,
make a similar demand on the Borrower or any other  Guarantor or guarantor,  and
any failure by any Agent or any Lender to make any such demand or to collect any
payments  from the  Borrower or any such other  Guarantor  or  guarantor  or any
release of the Borrower or such other  Guarantor or guarantor  shall not relieve
any of the  Guarantors in respect of which a demand or collection is not made or
any  of  the  Guarantors  not  so  released  of  their  several  obligations  or
liabilities  hereunder,  and shall not impair or affect the rights and remedies,
express or implied,  or as a matter of law,  of any Agent or any Lender  against
any of the  Guarantors.  For the  purposes  hereof  "demand"  shall  include the
commencement and continuance of any legal proceedings.




<PAGE>   9



                  ARTICLE VII.      GUARANTEE ABSOLUTE AND UNCONDITIONAL.
Each Guarantor waives any and all notice of the creation,  renewal, extension or
accrual  of any of the  Obligations  and notice of or proof of  reliance  by any
Agent or any Lender upon this  Guarantee or  acceptance of this  Guarantee;  the
Obligations, and any of them, shall conclusively be deemed to have been created,
contracted or incurred,  or renewed,  extended,  amended or waived,  in reliance
upon this  Guarantee;  and all  dealings  between  the  Borrower  and any of the
Guarantors,  on the one hand, and any Agent and the Lenders,  on the other hand,
likewise  shall be  conclusively  presumed  to have been had or  consummated  in
reliance upon this  Guarantee.  Each Guarantor  waives  diligence,  presentment,
protest,  demand for payment and notice of default or  nonpayment to or upon the
Borrower  or  any of the  Guarantors  with  respect  to  the  Obligations.  Each
Guarantor  understands  and agrees that this  Guarantee  shall be construed as a
continuing,  absolute and  unconditional  guarantee of payment without regard to
(a) the validity,  regularity or  enforceability  of the Credit Agreement or any
other  Operative  Agreement,  any of the  Obligations  or any  other  collateral
security  therefor or guarantee  or right of offset with respect  thereto at any
time or from  time to time  held by any Agent or any  Lender,  (b) any  defense,
set-off or counterclaim  (other than a defense of payment or performance)  which
may at any time be available to or be asserted by the Borrower against any Agent
or any Lender, or (c) any other circumstance  whatsoever (with or without notice
to or knowledge of the Borrower or such Guarantor) which  constitutes,  or might
be construed to constitute,  an equitable or legal discharge of the Borrower for
the Obligations,  or of such Guarantor under this Guarantee, in bankruptcy or in
any other instance.  When pursuing its rights and remedies hereunder against any
Guarantor,  any Agent and any Lender may, but shall be under no  obligation  to,
pursue such rights and remedies as it may have against the Borrower or any other
Person or against any  collateral  security or guarantee for the  Obligations or
any right of offset with  respect  thereto,  and any failure by any Agent or any
Lender to pursue such other rights or remedies or to collect any  payments  from
the  Borrower or any such other  Person or to realize  upon any such  collateral
security or guarantee or to exercise any such right of offset, or any release of
the Borrower or any such other Person or any such collateral security, guarantee
or right of offset, shall not relieve such Guarantor of any liability hereunder,
and shall not impair or affect the rights and remedies, whether express, implied
or  available  as a matter of law,  of the Agents and the Lenders  against  such
Guarantor.  This Guarantee  shall remain in full force and effect and be binding
in  accordance  with and to the extent of its terms upon each  Guarantor and the
successors and assigns thereof, and shall inure to the benefit of the Agents and
the  Lenders,  and  their  respective  successors,  indorsees,  transferees  and
assigns,  until all the  Obligations and the obligations of each Guarantor under
this Guarantee  shall have been satisfied by payment in full and the Commitments
shall be terminated,  notwithstanding  that from time to time during the term of
the Credit Agreement the Borrower may be free from any Obligations.           
  
                  ARTICLE VIII. REINSTATEMENT. This Guarantee shall continue to
be effective, or be reinstated, as the case may be, if at any time payment, or
any part thereof, of any of the Obligations is rescinded or must otherwise be
restored or returned by any Agent or any Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or any Guarantor, or
upon or as a result of the appointment of a receiver, intervenor or conservator
of, or trustee or similar officer for, the Borrower or any Guarantor or any
substantial part of its property, or otherwise, all as though such payments had
not been made.




<PAGE>   10


     ARTICLE IX. PAYMENTS. Each Guarantor hereby guarantees that payments
hereunder will be paid to the Administrative Agent without set-off or
counterclaim in U.S. Dollars at the Principal Office of the Administrative
Agent.


                  ARTICLE X.  REPRESENTATIONS,  WARRANTIES  AND  AGREEMENTS.  In
order to induce the Lenders to enter into, and to amend and restate,  the Credit
Agreement  and to make and  maintain  the Loans as provided  for  therein,  each
Guarantor makes the representations and warranties  contained in Section 7.03 of
the Participation Agreement to, and agrees with, the Agents and the Lenders, all
of which shall survive the  execution  and delivery of the Credit  Documents and
the making of the Loans (with the occurrence of each borrowing  under the Credit
Agreement  being deemed to  constitute a  representation  and warranty  that the
matters  specified  in this  Article  X are true  and  correct  in all  material
respects on and as of, and after giving effect to, the Effective  Date and as of
the  date of  each  such  borrowing  unless  such  representation  and  warranty
expressly  indicates that it is being made as of any specific date in which case
such  representation  and  warranty  shall be true and  correct in all  material
respects as of such specific date).


                  ARTICLE XI. AFFIRMATIVE COVENANTS. Each Guarantor hereby
covenants and agrees that on the Effective Date and thereafter, for so long as
this Guarantee is in effect and until the Commitments have terminated and the
Obligations and all amounts owing hereunder are paid in full:

                  11.01.  Preservation of Existence,  etc. Each Guarantor shall,
and shall cause each of its Subsidiaries to maintain its corporate existence and
its license or qualification and good standing in each jurisdiction in which its
ownership or lease of property or the nature of its business  makes such license
or  qualification  necessary;  provided  that (a) the  Guarantors  may engage in
transactions permitted by Section 12.06, and (b) with respect to Subsidiaries of
the Guarantors  (other than the Guarantors  themselves),  such  Subsidiaries may
fail to do so to the extent that such failure  individually  or in the aggregate
could not reasonably be expected to have a Material Adverse Effect.

                  11.02.  Payment of  Liabilities,  Including  Taxes,  etc. Each
Guarantor  shall,  and shall  cause each of its  Subsidiaries  to,  duly pay and
discharge all  liabilities to which it is subject or which are asserted  against
it,  promptly as and when the same shall become due and payable,  including  all
taxes,  assessments and  governmental  charges upon it or any of its Properties,
income or profits,  prior to the date on which penalties attach thereto,  except
to the extent that such  liabilities,  including taxes,  assessments or charges,
are being  contested  in good faith and by  appropriate  and lawful  proceedings
diligently conducted and for which such reserve or other appropriate provisions,
if any,  as shall be  required  by GAAP shall have been made,  and except to the
extent that failure to discharge  any such  liabilities  individually  or in the
aggregate  could not reasonably be expected to have a Material  Adverse  Effect;
provided  that  the  Guarantors  and  their   Subsidiaries  will  pay  all  such
liabilities forthwith upon the commencement of proceedings to foreclose any Lien
which may have attached as security therefor.



<PAGE>   11



                  11.03.  Maintenance of Insurance.  Each Guarantor  shall,  and
shall cause each of its Subsidiaries  to, insure its Properties  against loss or
damage by fire and such  other  insurable  hazards as such  assets are  commonly
insured   (including  fire,   extended  coverage,   property  damage,   worker's
compensation,  public liability and business interruption insurance) and against
other  risks  (including  errors  and  omissions)  in such  amounts  as  similar
properties and assets are insured by prudent companies in similar  circumstances
carrying  on  similar  businesses,  and with  reputable  and  financially  sound
insurers,  including  self-insurance to the extent customary,  all as reasonably
determined by the  Administrative  Agent.  At the request of the  Administrative
Agent, the Company shall deliver from time to time a summary schedule indicating
all insurance then in force with respect to each of the Guarantors.

                  11.04.  Maintenance of Properties.  Each Guarantor  shall, and
shall cause each of its Subsidiaries to, maintain in good repair,  working order
and condition  (ordinary wear and tear excepted) in accordance  with the general
practice of other businesses of similar  character and size, all Property useful
or necessary to its business,  and from time to time,  each such  Guarantor will
make or cause to be made  all  appropriate  repairs,  renewals  or  replacements
thereof  except to the extent that the failure to do so  individually  or in the
aggregate could not reasonably be expected to have a Material Adverse Effect.

                  11.05. Maintenance of Patents, Trademarks, etc. Each Guarantor
shall,  and shall cause each of its  Subsidiaries to, maintain in full force and
effect all patents, trademarks, trade names, copyrights,  licenses,  franchises,
permits and other  authorizations  necessary  for the ownership and operation of
its  properties  and  business,  except to the  extent  that the  failure  so to
maintain the same  individually  or in the  aggregate  could not  reasonably  be
expected to have a Material Adverse Effect.

                  11.06.  Visitation  Rights.  Each Guarantor  shall,  and shall
cause each of its  Subsidiaries  to,  permit any of the  officers or  authorized
employees or representatives  of the Administrative  Agent or any of the Lenders
to visit and inspect any of its properties and to examine and make excerpts from
its books and records and discuss its  business  affairs,  finances and accounts
with its  officers,  all in such detail and at such times and as often as any of
the Lenders may  reasonably  request.  Each Lender shall provide the Company and
the  Administrative   Agent  with  reasonable  notice  prior  to  any  visit  or
inspection;  provided that no such notice shall be required after the occurrence
and during the  continuation of a Lease Default or a Lease Event of Default.  In
the event any Lender desires to conduct an audit of any  Guarantor,  such Lender
shall make a reasonable effort to conduct such audit  contemporaneously with any
audit  to be  performed  by the  Administrative  Agent.  At the  request  of the
Administrative  Agent,  but not more frequently than once a year, the Guarantors
and their respective Authorized Officers shall hold a meeting of the Lenders, at
which the  Guarantors  will present an analysis of the financial  performance of
the  Company  and  its  Subsidiaries  during  the  previous  Fiscal  Year  and a
discussion  of the expected  results of operations  for the then current  Fiscal
Year.

                  11.07.  Keeping of Records and Books of  Account.  The Company
shall,  and shall cause each  Subsidiary  of the Company to,  maintain  and keep
proper books of record and account which enable the Company and its Subsidiaries
to issue financial  statements in accordance with GAAP and as otherwise required
by applicable Laws or any Official Body having  jurisdiction over the Company or
any Subsidiary of the Company, and in which full, true and correct entries shall
be made in all material  respects of all its dealings and business and financial
affairs.


<PAGE>   12



                  11.08. Plans and Benefit Arrangements.  The Company shall, and
shall cause each of its Subsidiaries to, comply with ERISA, the Internal Revenue
Code and other applicable Laws applicable to Benefit  Arrangements  except where
failure to comply  individually  or in the  aggregate  could not  reasonably  be
expected to have a Material  Adverse Effect.  Without limiting the generality of
the  foregoing,  the Company shall make, and cause each of its  Subsidiaries  to
make, in a timely manner, all contributions due to Benefit Arrangements.

                  11.09.  Compliance with Laws. Each Guarantor  shall, and shall
cause each of its Subsidiaries  to, comply with all applicable  Laws,  including
all Environmental Laws, in all respects, provided that it shall not be deemed to
be a violation of this Section 11.09 if any failure to comply with any Law would
not result in fines, penalties,  remediation costs, other similar liabilities or
injunctive  relief which  individually or in the aggregate  could  reasonably be
expected to have a Material Adverse Effect.

                  11.10.  Subsequent  Credit Terms. The Company shall notify the
Administrative  Agent in writing not less than ten (10)  Business  Days prior to
any  Guarantor   entering  into  any  credit   agreement  or  any  amendment  or
modification  to any  existing  credit  agreement  in either  case as  otherwise
permitted hereunder,  pursuant to which any Guarantor agrees to representations,
warranties or covenants  which are more  restrictive,  as determined in the sole
discretion of the Administrative Agent, than the representations,  warranties or
covenants  contained  herein  (the  "More  Restrictive  Provisions").  Upon  the
execution  of  such  new  credit  agreement,   amendment  or  modification,  the
corresponding  covenants,  terms and conditions of this  Guarantee  shall be and
shall be deemed to be automatically and immediately  amended to conform with and
to  include  the  applicable  More  Restrictive  Provisions  of such new  credit
agreement, amendment or modification;  provided, that the foregoing shall not be
applicable to or be deemed to affect any provision of this  Guarantee if any new
credit  agreement,  amendment or modification is less  restrictive.  Each of the
Guarantors  hereby  agrees  promptly  to execute  and  deliver  any and all such
documents  and  instruments  and  to  take  all  such  further  actions  as  the
Administrative Agent may, in its sole discretion,  deem necessary or appropriate
to effectuate the provisions of this Section 11.10.

                  11.11.   [Reserved]

                  11.12.   Subsidiary   Guarantees.   If  (i)   any   Restricted
Subsidiary's  total assets  determined in accordance with GAAP at the end of any
Fiscal  Quarter  constitute  more than 10% of  Consolidated  Tangible  Net Worth
determined at the end of such Fiscal Quarter or (ii) any Restricted Subsidiary's
net income  determined  in  accordance  with GAAP for any  rolling  four  Fiscal
Quarter  period  exceeds  10% of  Consolidated  Net Income for such four  Fiscal
Quarters, the Company shall cause such Restricted Subsidiary to execute a letter
agreement  in  form  and  substance  satisfactory  to the  Administrative  Agent
pursuant to which such Restricted  Subsidiary shall become a Guarantor hereunder
and to deliver such legal  opinions and other  documents and  instruments as the
Administrative Agent may request. Such letter agreement may include a limitation
on amount or a limitation on scope of such  Guarantor's  obligations,  in a form
and substance satisfactory to the Administrative Agent to the extent required by
law or tax considerations.


                  ARTICLE XII. NEGATIVE COVENANTS. The Guarantors, jointly and
severally, covenant and agree that until payment in full of the Loans and
interest thereon,


<PAGE>   13


satisfaction  of all of the  Obligations  under  the  Operative  Agreements  and
termination of the  Commitments,  the Guarantors  shall comply at all times with
the following negative covenants:

                  12.01.  Indebtedness.  Each of the  Guarantors  shall not, and
shall not permit any of its Subsidiaries to, at any time create,  incur,  assume
or suffer to exist any Indebtedness, except:

                           (a)      Indebtedness under the Operative Agreements;

                           (b)  Indebtedness  existing on the Effective  Date as
                  set forth on  Schedule  2,  including  Indebtedness  under the
                  Corporate  Credit  Agreement  (and any  extensions or renewals
                  thereof provided there is no increase in the amount thereof or
                  other significant change in the terms thereof unless otherwise
                  specified on Schedule 2);

                           (c)      Capitalized Lease Obligations;

                           (d)  interest  rate  swap,   cap,   collar  or  floor
                  agreements or other interest rate management  devices with any
                  Lender,  referencing  an  aggregate  notional  amount  not  to
                  exceed,  based  on the  reasonable  business  judgment  of the
                  Company,  the maximum principal amount outstanding at any time
                  of all  Indebtedness of the Company and its  Subsidiaries on a
                  consolidated  basis plus an amount equal to 50% of Capitalized
                  Rent Expense, with such interest rate management devices to be
                  entered   into  for   hedging   purposes   only  and  not  for
                  speculation;

                           (e)  Indebtedness  secured by Purchase Money Security
                  Interests, so long as the amount of such Indebtedness does not
                  exceed the purchase  price of the property which is subject to
                  such Purchase Money Security Interests;

                           (f) Indebtedness of an Unrestricted  Subsidiary which
                  is a Domestic  Subsidiary to another  Unrestricted  Subsidiary
                  which is a Domestic Subsidiary or to the Company;

                           (g)  Indebtedness  of the Company to an  Unrestricted
                  Subsidiary  which  is a  Domestic  Subsidiary  so long as such
                  Indebtedness is unsecured;

                           (h) Contingent Obligations as and to the extent
                  permitted under Section 12.03;

                           (i)  Indebtedness  of the  Company  and its  Domestic
                  Subsidiaries in addition to Indebtedness  otherwise  permitted
                  by clauses (a) to (h) above with an aggregate principal Dollar
                  Equivalent   amount   outstanding   not  to   exceed   20%  of
                  Consolidated Tangible Net Worth (determined as of the last day
                  of the Fiscal Quarter most recently ended);

                           (j) unsecured  Indebtedness  of Foreign  Subsidiaries
                  with  an  aggregate   principal   Dollar   Equivalent   amount
                  outstanding  not to exceed  $10,000,000 or Indebtedness of one
                  Foreign Subsidiary to another Foreign Subsidiary;



<PAGE>   14



                           (k) Permitted Sutro Refinancing Indebtedness, so long
                  as (A) the aggregate principal amount of any such Indebtedness
                  outstanding  does not exceed  $36,000,000,  (B) the  aggregate
                  principal  amount of any such  Indebtedness  incurred,  at the
                  date of  incurrence,  is at least 85% of the face value of the
                  amount of  "Notes"  (as  defined  in the Note Put  Agreements)
                  purchased  by Borders as  required  by Section 2.2 of the Note
                  Purchase Agreements,  (C) any such Indebtedness is incurred no
                  sooner than the relevant "Tenant Purchase Date" (as defined in
                  the Note Put Agreements), (D) the representations,  warranties
                  and covenants  contained in the documentation  with respect to
                  any such Indebtedness are no more  restrictive,  as determined
                  in the reasonable discretion of the Administrative Agent, than
                  the  representations,  warranties or covenants hereof, (E) the
                  maturity of any such  Indebtedness  is not less than two years
                  from the date of incurrence,  and (F) on or before the date of
                  incurrence, the Guarantors shall have delivered to the Lenders
                  proforma   financial   statements,   in  form  and   substance
                  satisfactory to the Lenders,  showing that, during the term of
                  such  Indebtedness,  based on  reasonable  projections  of the
                  financial  performance of the Guarantors,  the Guarantors will
                  not  be  in  violation  of  any  of  the  financial  covenants
                  contained in this Article XII;

                           (l) Any refinancing of any or all of the Indebtedness
                  of the  Guarantors  under the Guarantee on  substantially  the
                  terms  described in Section 21.1 of the Form of Lease attached
                  as Exhibit G to the Participation Agreement.

                  12.02.  Liens. Each of the Guarantors shall not, and shall not
permit any of its Subsidiaries to, at any time create,  incur,  assume or suffer
to exist any Lien on any of its  Property now owned or  hereafter  acquired,  or
agree or become liable to do so, except Permitted Liens.

                  12.03.  Contingent  Obligations.  Each of the Guarantors shall
not, and shall not permit any of its Subsidiaries  to, at any time,  directly or
indirectly, become or be liable in respect of any Contingent Obligations, except
for:

                           (a)  Contingent  Obligations  of the  Company  or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of  obligations  of the  Company  or any  Unrestricted
                  Subsidiary which is a Domestic Subsidiary;

                           (b) Permitted Lease Contingent Obligations,  provided
                  that  the  portion  of all  such  Permitted  Lease  Contingent
                  Obligations which constitute  current  liabilities  determined
                  and consolidated in accordance with GAAP (whether such amounts
                  are  fixed  or  percentage  rent,  fees,  costs,   accelerated
                  payments  or  otherwise),  shall not  exceed  Fifteen  Million
                  Dollars ($15,000,000) at any one time;

                           (c)  Contingent  Obligations  arising by operation of
                  any  applicable  law which  individually  or in the  aggregate
                  could not  reasonably  be  expected to have  Material  Adverse
                  Effect;

                           (d) any Contingent Obligations arising under the Note
                  Put Agreements;



<PAGE>   15



                           (e) any  Contingent  Obligations  arising  under  any
                  computer  leases with respect to which Kmart is the lessee and
                  any of the Guarantors is the user of such computer equipment;

                           (f) any Contingent  Obligations  arising under any of
                  the Kmart Agreements;

                           (g)   Contingent   Obligations   arising  under  this
                  Guarantee,  provided,  however,  that the aggregate  amount of
                  Contingent  Obligations  permitted  hereunder shall not exceed
                  $250,000,000;

                           (h) Contingent  Obligations  constituting a Permitted
                  Joint  Venture  Activity,  provided  no  Event of  Default  or
                  Default  has  occurred  and  is  continuing  or  would  result
                  therefrom and subject to Section 12.20;

                           (i) Contingent  Obligations  constituting a Permitted
                  Restricted  Subsidiary Activity,  provided no Event of Default
                  or Default has  occurred  and is  continuing  or would  result
                  therefrom and subject to Section 12.20;

                           (j)  Contingent  Obligations  of the  Company  or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect  of  any  obligations   (other  than  operating  lease
                  obligations) of any Unrestricted Subsidiary which is a Foreign
                  Subsidiary, subject to Section 12.20;

                           (k)  Contingent  Obligations  of the  Company  or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of operating  lease  obligations  of any  Unrestricted
                  Subsidiary  which is a Foreign  Subsidiary;  provided that the
                  portion of all such Contingent  Obligations  which constitutes
                  current liabilities  determined and consolidated in accordance
                  with GAAP is limited to lease  payments  (whether such amounts
                  are fixed or percentage rent, fees, costs, accelerated payment
                  requirements  or  otherwise)  not in excess of an aggregate of
                  $15,000,000   in  any   Fiscal   Year  with   respect  to  all
                  Unrestricted Subsidiaries which are Foreign Subsidiaries; and

                           (l)  Contingent   Obligations  of  any   Unrestricted
                  Subsidiary  which is a Foreign  Subsidiary  in  respect of the
                  obligations  of  another  Unrestricted  Subsidiary  which is a
                  Foreign Subsidiary.


                  12.04.  Loans and  Investments.  Each of the Guarantors  shall
not, and shall not permit any of its Subsidiaries to, at any time make or suffer
to remain  outstanding  any loan or advance to, or purchase,  acquire or own any
stock,  bonds,  notes or securities  of, or any  partnership  interest  (whether
general or limited)  in, or any other  investment  or  interest  in, or make any
capital  contribution to, any other Person, or agree, become or remain liable to
do any of the foregoing, (collectively, "Investments"), except:

                           (a) trade credit extended on usual and customary 
                  terms in the ordinary course of business;



<PAGE>   16



                  (b) advances to employees  to meet  expenses  incurred by such
         employees in the ordinary course of business;

                  (c) Permitted Investments;

                  (d) Investments by the Company in any Unrestricted  Subsidiary
         which is a Domestic Subsidiary or by any Unrestricted  Subsidiary which
         is a Domestic  Subsidiary in the Company or an Unrestricted  Subsidiary
         which is a Domestic  Subsidiary,  so long as any loans or advances  are
         unsecured;

                  (e)  Investments  by  the  Company  or  by  any   Unrestricted
         Subsidiary   which  is  a  Domestic   Subsidiary  in  any  Unrestricted
         Subsidiary  which  is a  Foreign  Subsidiary,  so long as any  loans or
         advances are unsecured;  provided,  however,  that any such Investments
         permitted  by this  clause (e) plus any Foreign  Purchases  pursuant to
         clause (h) below may not exceed in the  aggregate  15% of  Consolidated
         Tangible Net Worth (determined as of the last day of the Fiscal Quarter
         most recently ended) and subject to Section 12.20;

                  (f) a Purchase of Books Etc. and its  Subsidiaries  (including
         Books Etc.  Properties  Limited)  corporations  organized  and existing
         under  the  laws of  England  for a  total  purchase  price  (including
         Indebtedness assumed) not to exceed $75,000,000,  so long as no Default
         or Event of Default has  occurred  and is  continuing  or would  result
         therefrom;

                  (g) Domestic  Purchases  (i) so long as no Default or Event of
         Default has occurred and is continuing or would result therefrom,  (ii)
         so long as the assets or business subject to such Domestic  Purchase is
         in substantially  the same or a similar type of business as the Company
         and its  Subsidiaries,  (iii) so long as the Board of  Directors of any
         Person to be acquired has approved the terms of the Purchase,  and (iv)
         so long as the Company delivers to the Lenders on or before the date on
         which  it or any of  its  Subsidiaries  agrees  to or  consummates  any
         Domestic Purchase pro forma financial statements, in form and substance
         satisfactory to the  Administrative  Agent,  showing that no Default or
         Event of Default will occur under Sections  12.15,  12.16 or 12.17 over
         the 12 month period following the effective date of the Purchase, based
         on reasonable  projections of the financial  performance of the Company
         and its Subsidiaries;

                  (h)  Foreign  Purchases  (i) so long as no Default or Event of
         Default has occurred and is continuing or would result therefrom,  (ii)
         so long as the assets or business  subject to such Foreign  Purchase is
         in substantially  the same or a similar type of business as the Company
         and its  Subsidiaries,  (iii) so long as the Board of  Directors of any
         Person to be acquired has  approved the terms of the Foreign  Purchase,
         (iv) so long as the aggregate  purchase  amount payable in cash for all
         Foreign  Purchases  permitted  by this clause (h) plus all  Investments
         pursuant  to  clause  (e) above  does not  exceed  15% of  Consolidated
         Tangible Net Worth (determined as of the last day of the Fiscal Quarter
         most recently  ended) and subject to Section 12.20;  and (v) so long as
         the  Company  delivers to the Lenders on or before the date on which it
         or  any  of its  Subsidiaries  agrees  to or  consummates  any  Foreign
         Purchase  pro  forma  financial  statements,   in  form  and  substance
         satisfactory to the  Administrative  Agent,  showing that no Default or
         Event of Default will occur under Sections  12.15,  12.16 or 12.17 over
         the 12 month period following the effective date of


<PAGE>   17



          the Purchase, based on reasonable projections of the financial
          performance of the Company and its Subsidiaries;

                  (i) loans and advances,  in addition to those  permitted under
         Section 12.04(b),  to employees in an aggregate principal amount not to
         exceed $10,000,000;

                  (j)   Investments   constituting   Permitted   Joint   Venture
         Activities, provided no Event of Default or Default has occurred and is
         continuing or would result therefrom and subject to Section 12.20;

                  (k) Investments  constituting  Permitted Restricted Subsidiary
         Activities, provided no Event of Default or Default has occurred and is
         continuing or would result therefrom and subject to Section 12.20;

                  (l)  repurchases  of the Company's  common stock in accordance
         with Section 12.05; and

                  (m)  Investments by one Foreign  Subsidiary in another Foreign
         Subsidiary.

                  12.05. Dividends and Related Distributions.  The Company shall
not, and shall not permit any of its  Subsidiaries  to, make or pay, or agree to
become or remain  liable to make or pay, any dividend or other  distribution  of
any nature (whether in cash, property, securities or otherwise) on account of or
in respect of its shares of capital stock or partnership interests or on account
of the purchase, redemption,  retirement or acquisition of its shares of capital
stock (or warrants, options or rights therefor) (collectively, "Distributions"),
except:

                  (a) the Company may make open market  repurchases of shares of
         its common  stock,  and it may  receive  shares of its common  stock as
         payment  of the  exercise  price of  options,  or as  payment  of taxes
         associated  with the  exercise of options or the vesting of  restricted
         shares, which such delivered shares are deemed to be repurchased by the
         Company at fair market value (as defined in the Company's  stock option
         plan) on the date of delivery to the Company,  so long as the aggregate
         amount  paid  by the  Company  with  respect  to all  such  repurchases
         (including all such deemed repurchases) does not at any time exceed the
         Repurchase  Amount in effect  from time to time and no Event of Default
         or Default has occurred and is continuing or would result therefrom;

                  (b) the Company may engage in stock splits (including  reverse
         stock splits) or pay dividends in stock;

                  (c) Wholly-owned  Subsidiaries  may make  Distributions to the
         Company or another Wholly-owned Subsidiary;

                  (d) Subsidiaries other than Wholly-owned Subsidiaries may make
         Distributions so long as (i) the aggregate amount of Distributions made
         by any such  Subsidiary  to any  Person  other  than the  Company  or a
         Subsidiary  of the  Company in any  Fiscal  Year does not exceed 50% of
         such Person's pro rata share (based on the percentage of stock or other
         equity interests owned by such Person) of such  Subsidiary's net income
         for such Fiscal Year as determined in accordance  with GAAP and (ii) no
         later than ten (10) days prior to


<PAGE>   18



         any such  Distribution,  the Company shall have given written notice to
         the  Lenders  and  the  Agents  thereof,   together  with  calculations
         demonstrating that such Distribution complies with this clause (d); and

                  (e) the Company may pay  dividends on its  preferred  stock so
         long as the dividend  rate on such  preferred  stock (after taking into
         account all other fees and amounts payable on such preferred  stock) is
         less than the interest rate payable on the Loans.

                  12.06.  Liquidations,  Mergers,  Consolidations.  Each  of the
Guarantors shall not, and shall not permit any of its Subsidiaries to, dissolve,
liquidate  or  wind-up  its  affairs,  or  become  a  party  to  any  merger  or
consolidation,  provided  that  any  Guarantor  (other  than  the  Company)  may
consolidate  or merge into another  Guarantor and any  Subsidiary of a Guarantor
may consolidate or merge into any Guarantor or any Wholly-owned  Subsidiary of a
Guarantor  so long as (i) the  Guarantor  or a  Wholly-owned  Subsidiary  is the
surviving  corporation  of such  consolidation  or  merger  and (ii) no Event of
Default shall have occurred and be continuing or result therefrom.

                  12.07.  Dispositions  of Assets or  Subsidiaries.  Each of the
Guarantors  shall not,  and shall not permit any of its  Subsidiaries  to, sell,
convey,  assign, lease, abandon or otherwise transfer or dispose of, voluntarily
or involuntarily,  any of its property (including sale, assignment,  discount or
other  disposition of accounts,  contract  rights,  chattel paper,  equipment or
general  intangibles  with or without  recourse or any shares of capital  stock,
shares of beneficial  interest or partnership  interests of a Subsidiary of such
Guarantor), except:

                  (a) transactions involving the sale of inventory in the
         ordinary course of business;

                  (b) any sale, transfer or lease of property, including without
         limitation any store closures, in the ordinary course of business
         which are no longer necessary or required in the conduct of the
         Guarantor's business;

                  (c) any sale or transfer of property in order to concurrently
         or subsequently lease as lessee such property, so long as such sale and
         leaseback occurs in the ordinary course of business;

                  (d) any sale, transfer or lease of property, by any Subsidiary
         of an Unrestricted Subsidiary to such Unrestricted Subsidiary or to 
         another Unrestricted Subsidiary which is a Domestic Subsidiary;

                  (e) any sale, transfer or lease of property, in the ordinary
         course of business which is replaced by substitute property; and

                  (f) any transfers to Kmart of "Premises" pursuant to the Kmart
         Indemnity (as such term is defined therein) if and to the extent that
         any such transfer does not cause an Event of Default under Section 
         9(i)(i) of the Credit Agreement.

            12.08. Affiliate Transactions. Each of the Guarantors shall not, and
shall not permit any of its Subsidiaries to, enter into or carry out any 
transaction (including purchasing


<PAGE>   19



property or services  from or selling  property or services to any  Affiliate of
any  Guarantor  (other than  another  Guarantor)  or other  Person)  unless such
transaction (i) is not otherwise  prohibited by this Guarantee,  (ii) is entered
into in the ordinary  course of business upon fair and  reasonable  arm's-length
terms and conditions which are fully disclosed to the  Administrative  Agent and
(iii) is in accordance with all applicable Law.

                  12.09. Subsidiaries,  Partnerships and Joint Ventures. Each of
the  Guarantors  shall not,  and shall not permit  any of its  Subsidiaries  to,
become or agree to become a general or limited partner, joint venturer or member
in any partnership,  joint venture or limited liability company, as the case may
be, provided that the Company or any of its wholly-owned Subsidiaries may own or
create (a) any Wholly-owned Subsidiary, (b) any Unrestricted Subsidiary, (c) any
Restricted  Subsidiary  so long as (1) the  aggregate  of all  Purchases  by the
Company  and  its  Subsidiaries  of or  Investments  in or  to  such  Restricted
Subsidiary  is  otherwise  permitted  under  this  Guarantee,  and  (2) no  such
Restricted Subsidiary shall have Indebtedness which is recourse to or guaranteed
by the Company or any of its Subsidiaries  except as otherwise permitted by this
Guarantee  and (d) any Foreign Joint Venture so long as (1) the aggregate of all
Purchases by the Company and its  Subsidiaries  of or Investments by the Company
and its Subsidiaries in or to any such Joint Ventures is otherwise  permitted by
this Guarantee,  and (2) no such Joint Venture shall have Indebtedness  which is
recourse to or guaranteed by the Company or any of its  Subsidiaries,  except as
otherwise permitted by this Guarantee.

                  12.10.  Continuation  of or  Change in  Business.  Each of the
Guarantors shall not, and shall not permit any of its Subsidiaries to, engage in
any business  other than (a) with respect to the  Guarantors,  substantially  as
conducted  and  operated by such  Guarantor  during the Fiscal Year 1997 and (b)
with respect to any  Subsidiary of a Guarantor,  substantially  as conducted and
operated by a Guarantor or in a business reasonably incidental and complementary
thereto or in an education-related retail business.

                  12.11. Plans and Benefit Arrangements. Each of the Guarantors
shall not, and shall not permit any of its Subsidiaries to:

                  (a) adopt,  sponsor,  maintain  or make  contributions  to any
         Plan, any  Multiemployer  Plan, any Multiple Employer Plan or except as
         set forth on Schedule 5, any Benefit Arrangement that provides benefits
         to retirees; or

                  (b)  engage  in a  Prohibited  Transaction  with  any  Benefit
         Arrangement which, alone or in conjunction with any other circumstances
         or set of circumstances  resulting in liability under ERISA, would have
         a Material Adverse Effect.

                  12.12.  Fiscal  Year.  Each of the  Guarantors  shall not, and
shall not permit any of its Subsidiaries to, change its Fiscal Quarter or change
its Fiscal Year.

                  12.13.  Issuance of Stock.  Each of the Guarantors (other than
the Company and any Unrestricted Subsidiary) shall not, and shall not permit any
of its  Subsidiaries  (other  than  Unrestricted  Subsidiaries)  to,  issue  any
additional shares of its capital stock or any options,  warrants or other rights
in  respect  thereof,  except to the  Company  or any  Wholly-owned  Subsidiary,
provided,  however,  that the Company shall not issue any preferred stock unless
the dividend rate thereon is permitted by Section 12.05(e).


<PAGE>   20



                  12.14.  Changes  in  Organizational  Documents.  Each  of  the
Guarantors  shall not, and shall not permit any of its Subsidiaries to, amend in
any respect its  certificate  of  incorporation  (including  any  provisions  or
resolutions  relating  to  capital  stock),   by-laws  or  other  organizational
documents in the event such change would be adverse to the Lenders.

                  12.15.  Minimum Fixed Charge  Coverage  Ratio.  The Guarantors
shall not permit the Fixed Charge  Coverage  Ratio,  calculated as of the end of
each Fiscal Quarter for the previous four Fiscal Quarters then ended, to be less
than 1.50 to 1.0.

                  12.16. Maximum Leverage Ratio. The Guarantors shall not permit
the Leverage  Ratio (i)  calculated as of the end of the third and fourth Fiscal
Quarters  of Fiscal Year 1997 to exceed 60%,  (ii)  calculated  as of the end of
each Fiscal Quarter of the Fiscal Year 1998 to exceed 60%,  (iii)  calculated as
of the end of each Fiscal Quarter of the Fiscal Year 1999 to exceed 55%, or (iv)
calculated as of the end of each Fiscal Quarter thereafter to exceed 50%.

                  12.17. Minimum Tangible Net Worth. The Guarantors shall not at
any time permit  Consolidated  Tangible Net Worth to be less than the sum of (i)
$430,000,000  plus  (ii) 50% of the  Consolidated  Net  Income  for each  Fiscal
Quarter in which net income was earned (with no deduction for a net loss) during
the  period  from  July 28,  1997  through  the last day of the  Fiscal  Quarter
immediately preceding the date of determination, plus (iii) 100% of the net cash
proceeds to the Company of any public or private issuance of equity  securities,
minus  (iv)  the  aggregate  amount  paid by the  Company  with  respect  to any
repurchase  of its common stock and (v) in any event,  without  deduction of the
intangible assets arising from the Purchase permitted by Section 12.04(f).

                  12.18.  Modifications of Other Documents. The Guarantors shall
not permit or otherwise  consent to any amendment to or  modification  of any of
the Kmart Agreements or any of the Note Put Agreements which could reasonably be
expected  to have a  Material  Adverse  Effect,  which  would have the effect of
materially  increasing the obligations of or burdens on the Guarantors or any of
their  Subsidiaries  thereunder  or which would have the effect of shortening or
deleting any notice or cure period provided for therein.

                  12.19.  Prepayment of Note Put Agreement Obligations.  Each of
the Guarantors  shall not, and shall not permit any of its Subsidiaries to, make
any payment or  prepayment in respect of Border's  obligations  under any of the
Note Put  Agreements at any time before a "Tenant  Purchase  Date" as defined in
the Note Put Agreements.

                  12.20.  Foreign Activities.  Notwithstanding  anything in this
Article XII, the Company shall not, and shall not permit any of its Subsidiaries
to (i) incur any Contingent Obligation permitted under Section 12.03(j), or (ii)
make any Investment  permitted  under Section  12.04(e)  [Foreign  Investments],
Section 12.04(h) [Foreign  Purchases],  Section 12.04(j) in respect of a Foreign
Joint Venture [Foreign Joint Venture Activities], or Section 12.04(k) in respect
of a Foreign Restricted Subsidiary [Foreign Restricted Subsidiary Activities] if
immediately   after  incurring  such   Contingent   Obligation  or  making  such
Investment,  the  aggregate  amount  of  all  such  Contingent  Obligations  and
Investments would exceed 25% of Consolidated  Tangible Net Worth,  determined as
of the last day of the Fiscal Quarter most recently ended.



<PAGE>   21



                  12.21.  Inconsistent Agreements.  Each of the Guarantors shall
not, and shall not permit any of its  Subsidiaries  to, become or remain subject
to any dividend  restriction  either in its  organizational  documents or in any
agreement or contract to which it is a party (other than restrictions in Section
12.05 hereof and in the Corporate Credit  Agreement) nor shall any of them enter
into any  indenture,  agreement,  instrument  or other  arrangement  which,  (a)
directly or indirectly prohibits or restrains,  or has the effect of prohibiting
or restraining,  or could  reasonably be expected to impose  materially  adverse
conditions  upon,  the  performance  of  the  Obligations  under  the  Operative
Agreements,  any  provisions  of this  Guarantee  or the  amending of any of the
Operative  Agreements or (b) contains any  provision  which would be violated or
breached by the  performance by any Guarantor or any of its  Subsidiaries of any
of its obligations under any Operative Agreement.


                  ARTICLE XIII. REPORTING REQUIREMENTS. The Guarantors, jointly
and severally, covenant and agree that until payment in full of the Loans and
interest thereon, satisfaction of all of the Obligations and termination of the
Commitments, the Guarantors will furnish or cause to be furnished to the Agents
and each of the Lenders:

                  13.01.  Quarterly Financial  Statements.  As soon as available
and in any event within  forty-five  (45) calendar days after the end of each of
the first three  Fiscal  Quarters in each Fiscal  Year,  consolidated  financial
statements of the Company and its  Subsidiaries,  consisting  of a  consolidated
balance  sheet as of the end of such Fiscal  Quarter  and  related  consolidated
statements of income, stockholders' equity and cash flows for the Fiscal Quarter
then ended and the Fiscal Year through that date,  all in reasonable  detail and
certified  (subject  to normal  year-end  audit  adjustments)  by an  Authorized
Officer  of the  Company  as having  been  prepared  in  accordance  with  GAAP,
consistently  applied,  and setting  forth in  comparative  form the  respective
financial  statements  for the  corresponding  date and  period in the  previous
Fiscal  Year.  As soon as  available  and in any event  within  forty-five  (45)
calendar days after the end of each Fiscal Year of the Company, a certificate of
the Company  signed by an  Authorized  Officer of the Company  setting forth the
calculation  of the Fixed  Charge  Coverage  Ratio as of the end of such  Fiscal
Year.

                  13.02. Annual Financial  Statements.  As soon as available and
in any event  within  ninety  (90) days after the end of each Fiscal Year of the
Company,  consolidated  financial statements of the Company and its Subsidiaries
consisting  of a  consolidated  balance sheet as of the end of such Fiscal Year,
and related  consolidated  statements of income,  stockholders'  equity and cash
flows for the Fiscal Year then ended, all in reasonable detail and setting forth
in  comparative  form  the  financial  statements  as of the  end of and for the
preceding Fiscal Year, and certified by independent certified public accountants
of nationally  recognized standing satisfactory to the Administrative Agent. The
certificate or report of accountants shall be free of qualifications (other than
any consistency  qualification  that may result from a change in the method used
to prepare the  financial  statements as to which such  accountants  concur) and
shall not  indicate  the  occurrence  or  existence  of any event,  condition or
contingency which would materially impair the prospect of payment or performance
of any  covenant,  agreement or duty of any of the  Guarantors  under any of the
Operative Agreements.

                  13.03.  Certificates  of the  Company.  Concurrently  with the
financial  statements of the Company  furnished to the Agents and to the Lenders
pursuant to Sections  13.01 and 13.02, a certificate of the Company signed by an
Authorized Officer of the Company, in the form of


<PAGE>   22



Exhibit A, (i) to the effect that,  the  representations  and  warranties of the
Guarantors contained in Section 7.03 of the Participation  Agreement are true on
and as of the date of such  certificate  with the same  effect  as  though  such
representations  and  warranties  had been made on and as of such  date  (except
representations  and warranties which expressly relate solely to an earlier date
or time),  the  Guarantors  have  performed  and complied with all covenants and
conditions  hereof,  and no Event of Default or Default exists and is continuing
on the date of such  certificate and (ii) containing  calculations in sufficient
detail to demonstrate compliance as of the date of the financial statements with
all  financial  covenants  contained in Article XII,  and (iii)  describing  any
Permitted Joint Venture  Activity or Permitted  Restricted  Subsidiary  Activity
engaged in, or any Purchase  made,  during the period  covered by such financial
statements.

                  13.04.  Notice of Default.  Promptly  after any officer of any
Guarantor  has learned of the  occurrence  of an Event of Default or Default,  a
certificate  signed by an  Authorized  Officer of the Company  setting forth the
details of such Event of Default or Default and the action which the  Guarantors
propose to take with respect thereto.

                  13.05.  Notice of Litigation.  Promptly after the commencement
thereof, notice of all actions,  suits,  proceedings or investigations before or
by any Official  Body,  arbitrator or any other Person  against any Guarantor or
Subsidiary of any Guarantor  which involve a claim or series of claims in excess
of $10,000,000 or which if adversely  determined could reasonably be expected to
have a Material Adverse Effect.

                  13.06. Certain Events.  Written notice of:

                  (a) promptly after the adoption thereof, any amendment to the
organizational documents of any Guarantor;

                  (b) promptly, the enactment or adoption of any Law which could
         reasonably be expected to have a Material Adverse Effect;

                  (c) promptly, and in any event within two (2) Business Days
         after any Guarantor's receipt thereof, a copy of any notice received by
         the Guarantors that a default (whether matured or unmatured) has
         occurred under the Kmart Indemnity (as distinct from a request for
         reimbursement under Section 2(a) thereof); and

                  (d) promptly, and in any event within two (2) Business Days
         after any Guarantor's receipt thereof, a copy of any notice received by
         the Guarantors under any of the Note Put Agreements.

                  13.07. Other Reports and Information. Promptly upon their
becoming available to the Company:

                  (a) any reports,  including  management letters,  submitted to
         the Company by independent  accountants in connection  with any annual,
         interim or special audit;

                  (b)  any  reports,   notices  or  proxy  statements  generally
         distributed by the Company to its  stockholders on a date no later than
         the date supplied to the stockholders;



<PAGE>   23



                  (c) regular or periodic  reports,  including  Forms 10-K, 10-Q
         and 8-K, registration statements and prospectuses, filed by the Company
         with the Securities and Exchange Commission; and

                  (d) such other reports and information as the Lenders may from
         time to time reasonably request.

                  13.08. Notices Regarding Benefit  Arrangements.  Promptly upon
becoming aware of the occurrence  thereof,  notice  (including the nature of the
event and, when known,  any action taken or  threatened by the Internal  Revenue
Service or the PBGC with respect thereto) of:

                  (a) any Reportable Event with respect to the Company or any of
         its  Subsidiaries  (regardless of whether the obligation to report said
         Reportable Event to the PBGC has been waived),

                  (b) any Prohibited  Transaction that could subject the Company
         or any of its  Subsidiaries  to a civil  penalty  assessed  pursuant to
         Section  502(i)  of  ERISA  or a tax  imposed  by  Section  4975 of the
         Internal Revenue Code in connection with any Benefit Arrangement or any
         trust created thereunder,

                  (c)  any  change  in the  coverage  or  terms  of any  Benefit
         Arrangement,  where the effect of such change is to materially increase
         the  unfunded  liability  of  any  of the  Guarantors  or any of  their
         Subsidiaries under such Benefit Arrangement, or

                  (d) any claim or lawsuit is commenced  or, to the knowledge of
         any  of  the   Guarantors,   threatened   with  respect  to  any  Plan,
         Multiemployer Plan or Benefit Arrangement,  which, if successful, could
         result  in  a  material   liability  of  the  Company  or  any  of  its
         Subsidiaries.

                  13.09.  Access to the Company's  Auditors.  The Company hereby
irrevocably authorizes all accountants and third parties to disclose and deliver
to the Lenders,  upon the reasonable request of the Administrative Agent, and at
the  Company's  expense,  all  financial  information,  books and records,  work
papers, management reports and other information in their possession relating to
the financial  condition of the Company and its  Subsidiaries  (other than those
subject  to  attorney-client  privilege  or written  confidentiality  agreements
furnished to the Administrative Agent).

                  13.10.   Notices Regarding Corporate Credit Agreement.

                  (a) promptly,  and in any event within five (5) days after the
execution  thereof,  a copy of any  amendment  or  modification  to or waiver in
respect to the Corporate Credit Agreement; and

                  (b) promptly,  and in any event within five (5) days after the
occurrence thereof, written notice of any matured or unmatured default under the
Corporate Credit Agreement.

                  13.11. Notices Regarding Repurchases of Stock. Promptly, and
in any event within five (5) Business Days, after the repurchase by the Company
of any of its common stock, written


<PAGE>   24


notice thereof (including the number of shares  repurchased,  the amount paid by
the Company with respect to such repurchase and the date of such repurchase).


                  ARTICLE XIV. AUTHORITY OF ADMINISTRATIVE AGENT. Each Guarantor
acknowledges that the rights and  responsibilities  of the Administrative  Agent
under this  Guarantee  with  respect to any action  taken by the  Administrative
Agent or the exercise or non-exercise by the Administrative Agent of any option,
right,  request,  judgment  or other  right or  remedy  provided  for  herein or
resulting or arising out of this Guarantee shall, as between the  Administrative
Agent and the  Lenders,  be governed by the Credit  Agreement  and by such other
agreements  with respect thereto as may exist from time to time among them, but,
as between the Administrative Agent and such Guarantor, the Administrative Agent
shall be  conclusively  presumed  to be acting as  Administrative  Agent for the
Lenders with full and valid  authority so to act or refrain from acting,  and no
Guarantor  shall be under any obligation,  or  entitlement,  to make any inquiry
respecting such authority.


                  ARTICLE XV. NOTICES. All notices, requests and demands to or
upon any Agent, any Lender or any Guarantor shall be in writing (including by
telecopy), and, unless otherwise expressly provided herein, shall be deemed to
have been duly given or made when delivered, or three (3) Business Days after
being deposited in the mail, postage prepaid, or, in the case of telecopy
notice, when received, addressed as follows:

                  (a) if to any Agent or any Lender, at its address or
          transmission number for notices provided in Section 12.02 of the
          Credit Agreement; and

                  (b) if to any Guarantor, at its address or transmission number
          for notices set forth opposite its signature below.

                  Each  Agent,  each  Lender and each  Guarantor  may change its
address and transmission numbers for notices by notice in the manner provided in
this Article XV.


                  ARTICLE XVI. COUNTERPARTS. This Guarantee may be executed by
one or more of the Guarantors on any number of separate counterparts, and all of
said counterparts taken together shall be deemed to constitute one and the same
instrument. A set of the counterparts of this Guarantee signed by all the
Guarantors shall be lodged with the Administrative Agent.


                  ARTICLE XVII. SEVERABILITY. Any provision of this Guarantee
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.




<PAGE>   25



                  ARTICLE XVIII. INTEGRATION. This Guarantee represents the
agreement of each Guarantor with respect to the subject matter hereof and there
are no promises or representations by any Agent or any Lender relative to the
subject matter hereof not reflected herein.


                  ARTICLE XIX. AMENDMENTS IN WRITING; NO WAIVER; CUMULATIVE
REMEDIES. (a) None of the terms or provisions of this Guarantee may be waived,
amended, supplemented or otherwise modified except as provided in Section 12.01
of the Credit Agreement.

                  (b) Neither any Agent nor any Lender  shall by any act (except
by a written instrument pursuant to Section XIX(a) hereof),  delay,  indulgence,
omission or otherwise be deemed to have waived any right or remedy  hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any of
the terms and  conditions  hereof.  No  failure  to  exercise,  nor any delay in
exercising,  on the  part of any  Agent  or any  Lender,  any  right,  power  or
privilege  hereunder  shall  operate as a waiver  thereof.  No single or partial
exercise of any right, power or privilege  hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by any Agent or any Lender of any right or remedy  hereunder on any one
occasion shall not be construed as a bar to any right or remedy which such Agent
or such Lender would otherwise have on any future occasion.

                  (c) The rights and remedies  herein  provided are  cumulative,
may be  exercised  singly or  concurrently  and are not  exclusive  of any other
rights or remedies provided by law.


                  ARTICLE XX. SECTION HEADINGS. The section headings used in
this Guarantee are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.


                  ARTICLE XXI. SUCCESSORS AND ASSIGNS. This Guarantee shall be
binding upon the successors and assigns of each Guarantor and shall inure to the
benefit of the Agents and the Lenders and their successors and assigns.


                  ARTICLE XXII.  RELEASES OF GUARANTORS,  ETC. Any Guarantor may
be released  from its  obligations  hereunder  with the consent of the  Required
Lenders or all the Lenders,  as the case may be, as provided in Section 12.01 of
the Credit  Agreement.  At the time of any such sale or  disposition or release,
the respective  Guarantor shall cease to be a Guarantor hereunder and shall have
no further liability or obligations arising from this Guarantee.


                  ARTICLE XXIII. JURY TRIAL; SUBMISSION TO JURISDICTION;
WAIVERS.

                  (a)      EACH GUARANTOR HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR


<PAGE>   26



PROCEEDING RELATING TO THIS GUARANTEE OR ANY OTHER OPERATIVE
AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN.

                  (B) Each Guarantor hereby irrevocably and unconditionally:

                        (I)  submits  for itself and its  property  in all legal
         action or proceeding  relating to this guarantee or any other operative
         agreement to which it is a party, or for recognition and enforcement of
         any  judgment  in  respect  thereof,   to  the  non-exclusive   general
         jurisdiction  of the courts of the State of New York, the courts of the
         United  States for the  Southern  District of New York,  and  appellate
         courts from any thereof;

                       (II) consents  that any such action or proceeding  may be
         brought in such courts and waives trial by jury and any objection  that
         it may now or  hereafter  have  to the  venue  of any  such  action  or
         proceeding  in any such  court or that such  action or  proceeding  was
         brought in any inconvenient  court and agrees not to plead or claim the
         same;
                        
                      (III) agrees that service of process in any such action or
         proceeding  may be effected by mailing a copy thereof by  registered or
         certified  mail (or any  substantially  similar form of mail),  postage
         prepaid, to it at its address set forth herein or at such other address
         of which the  administrative  agent shall have been  notified  pursuant
         thereto;

                       (IV) agrees that nothing herein shall affect the right to
         effect service of process in any other manner permitted by law or shall
         limit the right to sue in any other jurisdiction; and

                        (V) waives, to the maximum extent not prohibited by law,
         any  right it may  have to claim or  recover  in any  legal  action  or
         proceeding  referred to in this Article  XXIII any special,  exemplary,
         punitive or consequential damages.


                  ARTICLE XXIV. INDEMNITY.  The Guarantors jointly and severally
agree  to (a)  indemnify  the  Administrative  Agent,  each  Lender,  and  their
respective officers, directors,  employees,  representatives and agents from and
hold each of them  harmless  against  any and all losses,  liabilities,  claims,
damages or  expenses  incurred by any of them as a result of, or arising out of,
or in any way  related  to, or by reason of, any  investigation,  litigation  or
other  proceeding  (whether  or not any Agent or any Lender is a party  thereto)
related to the entering into and/or  performance  of any Operative  Agreement or
the  use  of the  proceeds  of  any  Loans  or  the  consummation  of any  other
transactions  contemplated  in  any  Operative  Agreement,   including,  without
limitation,  the  reasonable  fees and  disbursements  of  counsel  incurred  in
connection  with any such  investigation,  litigation or other  proceeding  (but
excluding  any such  losses,  liabilities,  claims,  damages or  expenses to the
extent incurred by reason of the gross  negligence or willful  misconduct of the
Person  to be  indemnified)  and (b)  reimburse  each  Lender  for any  payments
required to be made by such  Lender to the  Administrative  Agent in  accordance
with Section 10.07 of the Credit Agreement.  The agreements in this Article XXIV
shall survive  repayment of the Notes and all other amounts payable hereunder or
under the other Credit Documents.


<PAGE>   27



                  ARTICLE XXV. GOVERNING LAW. This Guarantee shall be governed
by, and construed and interpreted in accordance with, the law of the State of
New York.





<PAGE>   28


                  IN WITNESS  WHEREOF,  each of the  undersigned has caused this
Guarantee to be duly executed and delivered by its duly authorized officer as of
the day and year first above written.


                                             Address for any Guarantor:
                                             -------------------------
                                             c/o Borders Group, Inc.
                                             500 East Washington Street
                                             Ann Arbor, Michigan  48104
                                             Telecopier No.:  (313) 995-8265
                                             Attention:  Thomas D. Carney
                                             Telephone No.:  (313) 913-1977


                                             BORDERS GROUP, INC.
                                             BORDERS, INC.
                                             WALDEN BOOK COMPANY, INC.
                                             BORDERS PROPERTIES, INC.
                                             WALDENBOOKS PROPERTIES, INC.
                                             PLANET MUSIC, INC.
                                             BORDERS ONLINE, INC.
                                             BORDERS OUTLET, INC.
                                             THE LIBRARY, LTD.


                                             By
                                               -------------------------
                                                Title:
                                                      ------------------

                                             BORDERS FULFILLMENT, INC.


                                             By
                                               -------------------------
                                                Title:
                                                      ------------------

                                             BGP (UK) LIMITED


                                             By
                                               -------------------------
                                                Title:
                                                      ------------------



<PAGE>   29









                                                                      Exhibit A
                                                               to the Guarantee
                                                               ----------------




                                          FORM OF COMPLIANCE CERTIFICATE

                                       [For the quarter ended ____________]



                  Reference  is  made  to  that  certain  Amended  and  Restated
Guarantee Agreement (as amended,  the "Guarantee") dated as of November 22, 1997
and amended and restated  October ____,  1997 by and among Borders  Group,  Inc.
(the  "Company"),  Borders,  Inc.,  Walden Book Company,  Inc. and certain other
subsidiaries  of Borders  Group,  Inc., as Guarantors,  the Lenders,  as defined
therein, and PNC Bank, National Association, as Administrative Agent.

                  Capitalized  terms used but not defined  herein shall have the
meanings given to them in the  Guarantee.  This  certificate is being  delivered
pursuant to the requirements of Section 13.03 of the Guarantee.

                  The undersigned,  an Authorized Officer of the Company, hereby
certifies that:

                  1. The undersigned has reviewed the terms of the Guarantee and
         the other Operative Agreements and has made, or caused to be made under
         his  supervision,  a review of the  transactions  and conditions of the
         Guarantors  during  the  accounting  period  covered  by the  financial
         statements being delivered simultaneously herewith;

                  2. Such review has not  disclosed  the  existence  during such
         accounting  period,  and the undersigned does not have knowledge of the
         existence  as of the  date  hereof,  of any  Event  of  Default  or any
         Default; and

                  3. The representations  and warranties  contained in Article X
         of  the  Guarantee  are  true  on and as of  the  date  hereof  (except
         representations  and  warranties  that  expressly  relate  solely to an
         earlier date or time, which representations and warranties were true on
         and as of the specific date referred to therein).


The  undersigned  hereby  further  certifies  that  the  following  calculations
demonstrate  for the Fiscal Quarter ending  ____________,  _____ (the "Period"),
which is the [First] [Second] [Third] [Fourth] Fiscal Quarter, compliance by the
Guarantors  with  the  financial  covenants  contained  in  Article  XII  of the
Guarantee.


<PAGE>   30




                                                                               
<TABLE>
<S>      <C>                                                                    <C>                                      <C>
1.       Indebtedness

         a.       Aggregate outstanding principal amount of
                  all Indebtedness                                                                                       $__________

         b.       Capitalized Rent Expense

                  (i)       Rent Expense                                        $__________

                  (ii)      Lease Financing Rent Expense                        $__________

                  (iii)    4 x ((I) + (ii))                                                                              $__________

         c.       Maximum  aggregate   notional  amount  of  all  interest  rate
                  management devices permitted
                  byss.12.01(b) [a + (b x 50%)]                                                                          $__________

         d.       Actual aggregate notional amount of all
                  interest rate management devices.                                                                      $__________

         e.       Consolidated Tangible Net Worth (see
                  8(b)(iii) below                                                                                        $__________

         f.       Maximum  aggregate  amount of additional  Indebtedness  of the
                  Company and its Domestic Subsidiaries permitted by
                ss. 12.01(i) [e x 20%]                                                                                   $__________

         g.       Actual aggregate amount of additional
                  Indebtedness of the Company and its Domestic
                  Subsidiaries                                                                                           $__________

         h.       Maximum aggregate amount of Indebtedness of
                  Foreign Subsidiaries to third      parties permitted byss.12.01(j)                                     $10,000,000

         i.       Actual aggregate amount of Indebtedness of
                  Foreign Subsidiaries to third parties                                                                  $__________

2.       Permitted Liens

         a.       Consolidated Tangible Net Worth (See 8(b)(iii) below)                                                  $__________

</TABLE>


<PAGE>   31

<TABLE>
<S>     <C>       <C>                                                                                                    <C>

 

         b.       Maximum aggregate fair market value of all property secured by
                  Liens permitted under clause (xi) of the definition
                  of "Permitted Liens" [a x 10%]                                                                         $__________

         c.       Actual  aggregate fair market value of all property secured by
                  Liens permitted under clause (xi) of the definition
                  of "Permitted Liens"                                                                                   $__________

3.       Contingent Obligations

         a.       Maximum aggregate amount of current portion
                  of Permitted Lease Contingent Obligations
                  permitted byss.12.03(b)                                                                              $15,000,000

         b.       Actual aggregate amount of current portion of
                  Permitted Lease Contingent Obligations                                                                 $__________

         c.       Maximum  aggregate  amount of  Contingent  obligations  of the
                  Company  or any  Unrestricted  Subsidiary  which is a Domestic
                  Subsidiary in respect of operating  lease  obligations  of any
                  Unrestricted Subsidiary
                  which is a Foreign Subsidiary                                                                        $15,000,000

         d.       Actual  aggregate  amount  of  Contingent  Obligations  of the
                  Company  or any  Unrestricted  Subsidiary  which is a Domestic
                  Subsidiary in respect of operating  lease  obligations  of any
                  Unrestricted Subsidiary which
                  is a Foreign Subsidiary                                                                                $__________

4.       Loans and Investments

         a.       Consolidated Tangible Net Worth (see 8(b)(iii) below)                                                  $__________

         b.       Maximum  aggregate  amount of all  Investments  by Company and
                  Domestic  Subsidiaries  in Foreign  Unrestricted  Subsidiaries
                  permitted by ss. 12.04(e)
                  plus Foreign Purchases [a x 15%]                                                                       $__________

         c.       Actual  aggregate  amount of all Investments  permitted by ss.
                  12.04(e) by Company and Domestic
                  Subsidiaries in Foreign Unrestricted Subsidiaries                                                      $__________

</TABLE>


<PAGE>   32



<TABLE>
 
<S>      <C>      <C>                                                                                                 <C>


         d.       Actual aggregate amount of all Foreign Purchases
                  by Company and Domestic Subsidiaries                                                                   $__________

         e.       c + d                                                                                                  $__________

         f.       Maximum aggregate principal amount of all
                  loans to employees                                                                                     $10,000,000

         g.       Actual aggregate principal amount of all
                  loans to employees                                                                                     $__________

5.       Dividends and Distributions

         a.       Maximum permitted aggregate amount of repurchases
                  of the Company's stock

                  i.       aggregate amount paid by
                           officers, employees, and
                           directors in connection with the
                           exercise of options                         $__________

                  ii.      realized tax benefit                        $__________

                  iii.     ($100,000 + i + ii )                                                                          $__________

         b.       Actual aggregate amounts paid for repurchases of
                  the Company's stock                                                                                    $__________

         c.       See Schedule 1 hereto


6.       Minimum Fixed Charge Coverage Ratio

         a.       Minimum Fixed Charge Coverage Ratio                                                                    1.50 to 1.0

         b.       Actual Fixed Charge Coverage Ratio:

                  (i)      Consolidated Cash Flow from Operations:

                           (A)      Consolidated Net income
                                    for the preceding four
                                    Fiscal Quarters           $_________

</TABLE>


<PAGE>   33



<TABLE>
<S>                    <C>      <C>                              <C>
                       (B)      Less Extraordinary gains          ($________)

                       (C)      Plus Income (minus loss)
                                of minority investments            $_________

                       (D)      Plus Depreciation and
                                amortization                       $_________

                       (E)      Plus Interest expense              $_________

                       (F)      Plus Rent Expense                  $_________

                       (G)      Plus Lease Financing
                                Rent Expense                       $_________

                       (H)      Plus Income Tax expense            $_________
         
                       (I)      Exclude Losses 
                                attributable to use of 
                                fair value
                                methodology for
                                recognition and
                                measurement of
                                impairment of goodwill
                                in accordance with
                                Accounting Principles
                                Board Opinion No. 17               $_________

                       (J)      Consolidated Cash Flow
                                from Operations [A-B-C+
                                D+E+F+G+H-I]                       $_________

              (ii)     Fixed Charges:

                       (A)      Interest Expense                   $_________

                       (B)      Rent Expense                       $_________

                       (C)      Lease Financing
                                Rent Expense                       $_________

                       (D)      Scheduled principal
                                installments on
                                Indebtedness                       $_________
</TABLE>

<PAGE>   34

<TABLE>
<S>      <C>               <C>                                         <C>                                           <C>

 

                           (E)      Fixed charges
                                    [A+B+C+D]                          $_________

         c.       Ratio of (i)(J) to (ii)(E)                                                                           ______ to 1.0

7.       Maximum Leverage Ratio (expressed as a percentage)

         a.       Required Leverage Ratio

                  I.       third and fourth Fiscal Quarter in
                           Fiscal Year 1997                   60%

                  ii.      each Fiscal Quarter in
                           Fiscal Year 1998                   60%

                  iii.     each Fiscal Quarter in
                           Fiscal Year 1999                   55%

                  iv.      each Fiscal Quarter after
                           Fiscal Year 1999                   50%

         b.       Actual Leverage Ratio:

                  (i)      Consolidated Funded
                              Indebtedness (Indebtedness
                              for borrowed money, including
                              Capitalized Lease Obligations
                              ($__________) plus Contingent
                              Obligations in respect of
                              borrowed money or Capitalized
                              Lease Obligations ($__________)
                              plus Contingent Obligations arising under
                              ----
                              the Lease Financing Guarantee ($__________)                                              $__________


                  (ii)     Consolidated Total Capital:

                      (A)  Total stockholders equity          $__________
                      (B)  Consolidated Funded
                               Indebtedness (see (I)
                               above)                                  $__________
                      (C)  (A) + (B)                                                                                   $__________
</TABLE>


<PAGE>   35




<TABLE>
<S>      <C>                                                           <C>                                               <C>




                  (iii)    Ratio of (i) to (ii)(C)                                                                             ____%

8.       Minimum Tangible Net Worth

         a.       Required Consolidated Tangible Net Worth:

                  (i)                                                  $430,000,000

                  (ii)(A) Consolidated Net Income for
                              the period from July 28,
                              1997 through the end of the
                              Fiscal Quarter immediately
                              preceding the date hereof                $_________

                      (B) 50% x (A)                           $_________

                  (iii)   Net cash proceeds of any
                              issuance of equity
                              securities                               $_________

                  (iv)        the aggregate amount paid
                              to repurchase stock             $_________

                  (v)         (i) + (ii)(B) + (iii) - (iv)                                                               $__________

         b.       Actual Consolidated Tangible Net Worth:

                  (i)         Total stockholders' equity
                              as of the end of the Period     $_________

                  (ii)        Intangible   assets   of  the   Company   and  its
                              Subsidiaries on a consolidated basis as of the end
                              of the Period  (excluding  intangible  assets from
                              the Books Etc. Limited  Purchase  permitted by ss.
                              12.04(f)) $_________

                  (iii)   (i) - (ii)                                                                                     $__________

9.       Foreign Activities

         a.       Consolidated Tangible Net Worth
                  (See 8(b)(iii)above)                                                                                   $__________
</TABLE>
<PAGE>   36





<TABLE>
<S>      <C>      <C>                                                                                                  <C>




         b.       Maximum permitted  aggregate amount of Contingent  Obligations
                  permitted under ss.  12.03(j) and Investments  permitted under
                  ss.ss.  12.04(e),  12.04(h),  12.04(j) in respect of a Foreign
                  Joint  Venture,  and ss.  12.04(k)  in  respect  of a  Foreign
                  Restricted
                  Subsidiary [a x 25%]                                                                                   $__________

         c.       Actual  aggregate amount of Contingent  Obligations  permitted
                  under ss.  12.03(j)  and  Investments  permitted  under ss.ss.
                  12.04(e),  12.04(h),  12.04(j)  in respect of a Foreign  Joint
                  Venture, and ss. 12.04(k) in respect of a Foreign Restricted
                  Subsidiary                                                                                             $__________

10.      Permitted Joint Venture Activity

         a.       Consolidated Tangible Net Worth
                  (See 8(b)(iii) above)                                                                                  $__________

         b.       Maximum permitted aggregate amount of all Investments in Joint
                  Ventures  and  Contingent  Obligations  of the  Company or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of Indebtedness of Joint Ventures
                  [a x 15%]                                                                                              $__________

         c.       Actual  aggregate  amount of all Investments in Joint Ventures
                  ($________)  and Contingent  Obligations of the Company or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of Indebtedness of
                  Joint Ventures($________)                                                                              $__________


         d.       Maximum permitted  aggregate amount of Contingent  Obligations
                  of the Company or any Unrestricted Subsidiary which is a
                  Domestic Subsidiary relating to Leases of Joint Ventures                                               $15,000,000
</TABLE>


<PAGE>   37





<TABLE>
<S>      <C>                                                                                                             <C>

         e.       Actual  aggregate  amount  of  Contingent  Obligations  of the
                  Company or any Unrestricted Subsidiary which is a
                  Domestic Subsidiary relating to Leases of Joint Ventures                                               $__________

11.      Permitted Restricted Subsidiary Activity

         a.       Consolidated Tangible Net Worth
                  (See 8(b)(iii) above)                                                                                  $__________

         b.       Maximum  permitted  aggregate amount of all Investments by the
                  Company or  Unrestricted  Domestic  Subsidiary  in  Restricted
                  Subsidiaries and Contingent  Obligations of the Company or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of Indebtedness of Restricted
                  Subsidiaries [a x 20%]                                                                                 $__________

         c.       Actual  aggregate  amount of all Investments by the Company or
                  Unrestricted  Domestic  Subsidiary in Restricted  Subsidiaries
                  ($_________) and Contingent  Obligations of the Company or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of Indebtedness of Restricted
                  Subsidiaries ($________)                                                                               $__________

         d.       Maximum  permitted  aggregate amount of all Investments by the
                  Company or  Unrestricted  Domestic  Subsidiary  and Contingent
                  Obligations  of the  Company  or any  Unrestricted  Subsidiary
                  which is a Domestic  Subsidiary in respect of  Indebtedness of
                  Restricted Subsidiaries which are Foreign
                  Subsidiaries [a x 15%]                                                                                 $__________

         e.       Actual aggregate amount of
                  all  Investments  by  the  Company  or  Unrestricted  Domestic
                  Subsidiary  and  Contingent  Obligations of the Company or any
                  Unrestricted  Subsidiary  which is a  Domestic  Subsidiary  in
                  respect of Indebtedness of Restricted  Subsidiaries  which are
                  Foreign
                  Subsidiaries                                                                                           $__________

</TABLE>


<PAGE>   38





<TABLE>
<S>      <C>                                                                                                             <C>



         f.       Maximum permitted  aggregate amount of Contingent  Obligations
                  of the  Company  or any  Unrestricted  Subsidiary  which  is a
                  Domestic
                  Subsidiary relating to Leases of Restricted Subsidiaries                                               $15,000,000

         g.       Actual  aggregate  amount  of  Contingent  Obligations  of the
                  Company  or any  Unrestricted  Subsidiary  which is a Domestic
                  Subsidiary relating
                  to Leases of Restricted Subsidiaries                                                                   $__________

11.      Description of any Permitted Joint Venture Activity
         or Permitted Restricted Subsidiary Activity engaged
         in, or any Purchase Made, During the Period

                                         [Describe transactions, including amounts involved]

                  IN WITNESS WHEREOF, the undersigned has caused this Compliance
Certificate to be executed and delivered this _____ day of _____________, _____.

                                            BORDERS GROUP, INC.

                                            By:

                                            Title:
                                                     [Authorized Officer]

</TABLE>

<PAGE>   39



<TABLE>
<CAPTION>


                                                    Schedule 1


                                                                   
                                                                                                  Maximum    
                                                                                                 Distribution
                                                                              Minority            to Minority   Actual Distributions
                                                                        Shareholders pro         Shareholders   Made to Minority
                  Minority                              Net Income      rata Share of Net        (50% of pro    Shareholders
Subsidiary     Shareholders      Percent Ownership     Year to Date           Income             rata share)    During Fiscal Year
----------     ------------      -----------------     ------------     ---------------------    -----------    ------------------
<S>            <C>               <C>                   <C>              <C>                      <C>            <C>
                                                                                                             
                                                                                                             
                                                                                                             
</TABLE>