<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10 - Q
(Mark One)

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

                  For the quarterly period ended July 26, 1998

                                       OR

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

       For the transition period from_______________ to________________ .

                         Commission file number 1-13740
                                                -------

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


               MICHIGAN                                  38-3196915
               --------                                  ----------
     (State or other jurisdiction                     (I.R.S. Employer
         of incorporation or                           Identification
            organization)                                   No.)


              500 East Washington Street, Ann Arbor, Michigan 48104
              -----------------------------------------------------
                    (Address of principal executive offices)
                                   (zip code)

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes   X    No
                                       -----    -----
     Title of Class                               Shares Outstanding As of
     --------------
      Common Stock                                     August 17, 1998
                                                     ------------------
                                                         76,776,134
                                                        ------------




<PAGE>   2
                               BORDERS GROUP, INC.



                                      INDEX



Part I - Financial Information

                                                                           Page

     Item 1.       Financial Statements                                      1

     Item 2.       Management's Discussion and Analysis of
                   Financial Condition and Results of
                   Operations                                               11

     Item 3.       Quantitative and Qualitative Disclosures about 
                   Market Risk                                             N/A

Part II - Other information

     Item 1.       Legal Proceedings                                        18

     Item 2.       Changes in Securities                                   N/A

     Item 3.       Defaults Upon Senior Securities                         N/A

     Item 4.       Submission of Matters to a vote of                      
                   Securityholders                                          19

     Item 5.       Other Information                                       N/A

     Item 6.       Exhibits and Reports on Form 8-K                         20


Signatures                                                                  21


<PAGE>   3
                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                              13 WEEKS ENDED
                                                                 JULY 26,                       JULY 27,
                                                                  1998                            1997
                                                              ---------------                ---------------- 
<S>                                                           <C>                           <C>

Sales                                                         $         546.0                $          466.3
Cost of merchandise sold, including                                     406.1                           351.1
occupancy costs
                                                              ---------------                ---------------- 

Gross margin                                                            139.9                           115.2
Selling, general and administrative expenses                            130.5                           111.1
Pre-opening expense                                                       0.8                             1.6
Goodwill amortization                                                     0.7                             0.2
                                                              ---------------                ---------------- 

Operating income                                                          7.9                             2.3
Interest expense                                                          4.0                             1.4
                                                              ---------------                ---------------- 

Income before income tax                                                  3.9                             0.9
Income tax expense                                                        1.5                             0.4
                                                              ---------------                ---------------- 

Net income                                                    $           2.4                $            0.5
                                                              ===============                ================  


EARNINGS PER COMMON SHARE DATA --
   Diluted earnings per common share                          $          0.03                $           0.01
                                                              ===============                ================ 
   Diluted weighted average common shares
   outstanding (in thousands)                                          83,449                          82,651
                                                              ===============                ================ 

   Basic earnings per common share                            $          0.03                $           0.01
                                                              ===============                ================ 
   Basic weighted average common shares
   outstanding (in thousands)                                          76,682                          76,286
                                                              ===============                ================ 
</TABLE>





           See accompanying Notes to Unaudited Condensed Consolidated
                              Financial Statements.

                                      (1)

<PAGE>   4


                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (DOLLARS IN MILLIONS EXCEPT COMMON SHARE DATA)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                            26 WEEKS ENDED
                                                                 JULY 26,                       JULY 27,
                                                                  1998                            1997
                                                            -----------------              ------------------
<S>                                                              <C>                            <C>

Sales                                                            $ 1,091.2                      $ 929.9 
Cost of merchandise sold, including                                  811.5                        701.9 
occupancy costs                                                                                         
                                                                 ---------                      ------- 
                                                                                                        
Gross margin                                                         279.7                        228.0 
Selling, general and administrative expenses                         260.3                        221.5 
Pre-opening expense                                                    1.1                          1.9 
Goodwill amortization                                                  1.4                          0.5 
                                                                 ---------                      ------- 
                                                                                                        
Operating income                                                      16.9                          4.1 
Interest expense                                                       6.7                          2.4 
                                                                 ---------                      ------- 
                                                                                                        
Income before income tax                                              10.2                          1.7 
Income tax expense                                                     4.0                          0.8 
                                                                 ---------                      ------- 
                                                                                                        
Net income                                                       $     6.2                      $   0.9 
                                                                 =========                      ======= 
                                                                                                        
                                                                                                        
EARNINGS PER COMMON SHARE DATA --                                                                       
   Diluted earnings per common share                             $    0.07                      $  0.01 
                                                                 =========                      ======= 
   Diluted weighted average common shares                           83,238                       82,260 
   outstanding (in thousands)                                                                           
                                                                 =========                      ======= 
                                                                                                        
   Basic earnings per common share                               $    0.08                      $  0.01 
                                                                 =========                      ======= 
   Basic weighted average common shares                                                                 
   outstanding (in thousands)                                       76,227                       76,061 
                                                                 =========                      ======= 

</TABLE>



           See accompanying Notes to Unaudited Condensed Consolidated
                              Financial Statements.


                                       (2)

<PAGE>   5
                               BORDERS GROUP, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
               (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)
                                  (UNAUDITED)
<TABLE>
<CAPTION>

                                                                       7/26/98             7/27/97              1/25/98
<S>                                                           <C>                <C>                 <C>

ASSETS
Current Assets                                                                     
Cash                                                            $         44.8     $          56.8     $           65.1
Merchandise inventories                                                  888.8               719.4                879.1   
Accounts receivable and other current                                                                                     
assets                                                                    54.9                50.5                 74.2   
                                                                --------------     ---------------     ----------------   
Total Current Assets                                                     988.5               826.7              1,018.4   
Property and equipment, net of                                                                                            
accumulated depreciation of $306.8,                                                                                       
$259.6 and $281.5, respectively                                          418.1               307.0                373.7   
Other assets and deferred charges                                         32.7                36.5                 33.3   
Goodwill, net of accumulated                                                                                              
amortization of $44.5, $42.0, and                                                                                         
$43.1, respectively                                                      107.5                43.9                109.5   
                                                                --------------     ---------------     ----------------   
Total Assets                                                    $      1,546.8     $       1,214.1     $        1,534.9   
                                                                ==============     ===============     ================   
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                      
Current Liabilities                                                                                                       
Short-term debt and capital lease                               
obligations due within one year                                 $        291.5     $         112.0     $          127.3   
Trade accounts payable                                                   382.8               326.7                480.7   
Accrued payroll and other liabilities                                    170.6               157.8                210.8   
Taxes, including income taxes                                               --                25.7                 62.6   
                                                                --------------     ---------------     ----------------   
Total Current Liabilities                                                844.9               622.2                881.4   
Long-term debt and capital lease                                                                                          
obligations                                                                5.1                 5.5                  5.2   
Other long-term liabilities                                               52.9                37.4                 50.2   
Commitments and contingencies (Note 2)                                      --                  --                   --   
                                                                --------------     ---------------     ----------------   
Total Liabilities                                                        902.9               665.1                936.8   
                                                                --------------     ---------------     ----------------   
Stockholders' Equity                                                                                                      
Common stock; 200,000,000 shares                                                                                          
authorized; 77,070,613, 76,460,53 and                                                                                     
75,395,988 issued and outstanding at July                                                                                 
26, 1998, July 27, 1997, and January 25,                                                                                  
1998, respectively                                                       700.1               685.2                661.0   
                                                                                                                          
Officers receivable and deferred                                                                       
compensation                                                              (5.0)               (1.2)                (6.3) 
Accumulated other comprehensive income                                    (1.7)                 --                 (0.9)
Accumulated deficit                                                      (49.5)             (135.0)               (55.7)
                                                                --------------     ---------------     ---------------- 
Total Stockholders' Equity                                               643.9               549.0                598.1 
                                                                --------------     ---------------     ---------------- 
                                                                $      1,546.8     $       1,214.1     $        1,534.9 
                                                                ==============     ===============     ================ 
</TABLE>                                                                      


See accompanying Notes to Unaudited Condensed Consolidated Financial 
Statements.                                        




                                      (3)                                      
<PAGE>   6
                               BORDERS GROUP, INC.
           CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE 26 WEEKS ENDED JULY 26, 1998
                              (DOLLARS IN MILLIONS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                  DEFERRED     ACCUMULATED     RETAINED
                                                                                 COMPENSATION     OTHER        EARNINGS
                                                           COMMON STOCK          AND OFFICERS  COMPREHENSIVE (ACCUMULATED
                                                      SHARES          AMOUNT      RECEIVABLES     INCOME       DEFICIT)      TOTAL
                                                   -----------       --------     -----------  -------------   --------   ---------
<S>                                                <C>               <C>            <C>          <C>           <C>         <C>

BALANCE AT 1/25/98                                  75,395,998       $  661.0       $ (6.3)      $ (0.9)       $ (55.7)    $  598.1

Net income                                                --             --            --           --             6.2          6.2

Issuance of common                                   1,734,615           41.0          --           --             --          41.0
stock

Repurchase and retirement of common stock              (60,000)          (1.9)         --           --             --          (1.9)

Currency translation adjustment                           --             --            --          (0.8)           --          (0.8)

Change in receivable
and deferred compensation                                 --             --            1.3          --             --           1.3
                                                   -----------       --------       ------       ------        -------     --------

BALANCE AT 7/26/98                                  77,070,613       $  700.1       $ (5.0)      $ (1.7)       $ (49.5)    $  643.9
                                                   ===========       ========       ======       ======        =======     ========
</TABLE>





See accompanying Notes to Unaudited Condensed Consolidated financial Statements.








                                      (4)

<PAGE>   7
                              BORDERS GROUP, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN MILLIONS)
                                  (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                              26 WEEKS ENDED
                                                                                     JULY 26,                 JULY 27,
                                                                                       1998                     1997
<S>                                                                      <C>                      <C>

CASH PROVIDED BY (USED FOR):
OPERATIONS
Net income                                                                      $          6.2          $            0.9
Adjustments to reconcile net income
to operating cash flows:
 Depreciation and goodwill amortization                                                   30.1                      24.5
 Change in other long-term                                                                 
 assets and liabilities                                                                    3.3                      (4.3)
 Cash provided by (used for) current
 assets and current liabilities:
    (Increase)/Decrease in inventories                                                    (9.7)                     19.3
    Decrease in accounts payable                                                         (97.9)                    (23.4)
    Other, net                                                                           (82.5)                    (42.5)
                                                                         ----------------------   -----------------------
Net cash used for operations                                                            (150.5)                    (25.5)
                                                                         ----------------------   -----------------------
INVESTING
Capital expenditures                                                                     (72.7)                    (41.0)
                                                                         ----------------------   -----------------------
Net cash used for investing                                                              (72.7)                    (41.0)
                                                                         ----------------------   -----------------------
FINANCING
Net funding from credit facility                                                         164.2                      75.0
Issuance of common stock                                                                  23.8                       6.4
Repurchase of common stock                                                                (1.9)                     (5.9)
Other, net                                                                                16.8                       5.2
                                                                         ----------------------   -----------------------
Net cash provided by financing                                                           202.9                      80.7
                                                                         ----------------------   -----------------------
NET INCREASE/(DECREASE) IN CASH AND                                                      (20.3)                     14.2
EQUIVALENTS
Cash and equivalents at beginning of                                                      65.1                      42.6
year
                                                                         ----------------------   -----------------------
Cash and equivalents at end of period                                           $         44.8          $           56.8
                                                                         ======================   =======================
</TABLE>




    See and accompanying Notes to Unaudited Condensed Consolidated Financial
                                  Statements.




                                      (5)

<PAGE>   8
                               BORDERS GROUP, INC.
                          NOTES TO UNAUDITED CONDENSED
                        CONSOLIDATED FINANCIAL STATEMENTS
               (DOLLARS IN MILLIONS EXCEPT PER COMMON SHARE DATA)

NOTE 1 - BASIS OF PRESENTATION

         The accompanying unaudited condensed consolidated financial statements
of Borders Group, Inc. (the Company) have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and notes
required by generally accepted accounting principles for complete financial
statements. All adjustments, consisting only of normal recurring adjustments,
have been made which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods. The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year. The unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements and notes thereto for the fiscal year ended January 25, 1998 (the
1997 consolidated financial statements).

         The Company's fiscal year ends on the Sunday immediately preceding the
last Wednesday in January. At July 26, 1998, the Company operated 213
superstores under the Borders name, including one in Singapore, 899 mall-based
and other bookstores primarily under the Waldenbooks name and 23 bookstores
under the Books etc. name in the United Kingdom.  

NOTE 2 - COMMITMENTS AND CONTINGENCIES

         There are various claims, lawsuits, and actions pending against the
Company and its subsidiaries which are incident to their operations. It is the
opinion of management that the ultimate resolution of these matters will not
have a material effect on the Company's liquidity, financial position or results
of operations.

         During 1994, the Company entered into an agreement in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. These mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart to maintain required investment
grade ratings or the termination of the guarantee by Kmart of the Company's
obligations under the related leases (which would require mutual consent of
Kmart and Borders). In the event the Company is required to repurchase all of
the underlying mortgage notes, the Company would be obligated to pay
approximately $36.6. Since February 1995, Kmart has failed to maintain
investment grade ratings and therefore these notes are now subject to put by the
holder. To date, the holder has not exercised its rights to put the notes. The
Company does not believe that the note purchase, if required, would have a
material effect on the Company's financial position or earnings.







                                      (6)


<PAGE>   9


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



         In March 1998, the American Booksellers Association ("ABA") and
twenty-six independent bookstores filed a lawsuit in the United States District
Court for the Northern District of California against the Company and Barnes &
Noble Inc. alleging violations of the Robinson-Patman Act, the California Unfair
Trade Practice Act and the California Unfair Competition Law. The Complaint
seeks injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18,1994 until the action
is completed and prejudgement interest on any amounts awarded in the action, as
well as attorney fees and costs. The Company intends to vigorously defend the
action.

         In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace
Kuralt, have filed a lawsuit in the United States District Court for the
Southern District of New York against the Company, Barnes & Noble, Inc., Amazon,
Inc., certain publishers and others alleging violation of the Robinson-Patman
Act and other federal law, New York statutes governing trade practices and
common law. The Complaint seeks certification of a class consisting of all
retail booksellers in the United States, whether or not currently in business,
which were in business and were members of the American Booksellers Association
("ABA") at any time during the four year period preceding the filing of the
Complaint. The Complaint alleges that the named plaintiffs have suffered damages
of $11,250,000 or more and requests treble damages on behalf of the named
plaintiffs and each of the purported class members, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Complaint are similar to
those contained in an action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble in March of 1998. The Company intends
to vigorously defend the action.

         The Company has not included any liability in its financial statements
in connection with the lawsuits described above.

NOTE 3 - FINANCING

Credit Facility: The Company has a multicurrency credit agreement which provides
a $425.0, five-year working capital facility. Borrowings under the credit
facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The credit agreement contains operating covenants which limit
the Company's ability to incur indebtedness, make acquisitions, dispose of
assets, issue or repurchase its common stock in excess of $100 million (plus any
proceeds and tax benefits resulting from stock option exercises and tax 
benefits resulting from restricted shares purchased by employees from the 
Company), pay dividends on its common stock, and require the Company to meet
certain financial measures regarding fixed charge coverage, leverage and
tangible net worth. The Company had borrowings outstanding under the credit
facility of $291.0 at July 26, 1998 and $122.5 at January 25, 1998.



                                      (7)



<PAGE>   10


Lease Financing Facility: The Company has a five-year, $250.0 lease financing
facility ("the Facility") to finance new stores and other property through
operating leases. The Facility will provide financing to lessors through loans
from a third party lender for up to 95% of a project cost. It is expected that
Lessors will make equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company will guarantee payment
when due of all amounts required to be paid to the third party lender. The
principal amount guaranteed will be limited to approximately 89% of the original
cost of a project so long as the Company is not in default under the lease
relating to such project. There was $180.5 outstanding under the lease facility
at July 26, 1998 and $157.9 at January 25, 1998.




















                                      (8)
<PAGE>   11


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


NOTE 4 - CHANGES IN ACCOUNTING PRINCIPLES

Effective January 26, 1998, the Company adopted Statement of Financial
Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income." This
statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other annual financial statements.
This statement also requires that an entity classify items of other
comprehensive income by their nature in an annual financial statement.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by or distributions to shareholders. For the Company,
comprehensive income for all periods presented consisted solely of net earnings
and foreign currency translation adjustments pursuant to FAS No. 52, "Foreign
Currency Translation", as follows:

<TABLE>
<CAPTION>

                                                                                Three Months Ended
                                                                           July 26,             July 27,
                                                                             1998                 1997
                                                                       -----------------    -----------------
<S>                                                                    <C>                  <C>

Net earnings                                                                      $ 2.4                $ 0.5
                                                                       -----------------    -----------------
Other comprehensive income:
  Foreign currency translation adjustments                                         (2.5)                   -
  Related tax effect                                                                0.9                    -
                                                                       -----------------    -----------------
                                                                                   (1.6)                   -
                                                                       -----------------    -----------------
Total comprehensive income                                                        $ 0.8                $ 0.5
                                                                       =================    =================
</TABLE>


<TABLE>
<CAPTION>

                                                                                 Six Months Ended
                                                                           July 26,             July 27,
                                                                             1998                 1997
                                                                       -----------------    -----------------
<S>                                                                    <C>                  <C>

Net earnings                                                                      $ 6.2                $ 0.9
                                                                       -----------------    -----------------
Other comprehensive income:
  Foreign currency translation adjustments                                         (1.3)                   -
  Related tax effect                                                                0.5                    -
                                                                       -----------------    -----------------
                                                                                   (0.8)                   -
                                                                       -----------------    -----------------
Total comprehensive income                                                        $ 5.4                $ 0.9
                                                                       =================    =================
</TABLE>



Effective January 26, 1998, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This SOP
provides guidance on when costs incurred for internal-use computer software are
and are not capitalized. Costs incurred as part of the preliminary project stage
or post-implementation/operation stage of computer software development must be
expensed as incurred. Costs incurred as part of the application development
stage of computer software development must be capitalized. This SOP does not
permit restatement of amounts recorded prior to the adoption of the SOP;
however, adoption of this SOP did not have a 



                                      (9)



<PAGE>   12

material impact on the Company's financial position, results of operations, or
liquidity in the second quarter of 1998.



















                                      (10)

<PAGE>   13
         ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

GENERAL

         The Company, through its subsidiaries, is the second largest operator
of book superstores and the largest operator of mall-based bookstores in the
world based upon both sales and number of stores. At July 26, 1998, the Company
operated 213 superstores under the Borders name, including one in Singapore, 899
mall-based and other bookstores primarily under the Waldenbooks name and  23
bookstores under the Books etc. name in the United Kingdom. 

         The Company's second quarters of 1998 and 1997 consisted of the 13
weeks ended July 26, 1998 and July 27, 1997, respectively.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>

                                                     13 WEEKS ENDED                       26 WEEKS ENDED

                                                JULY 26,          JULY 27,         JULY 26,           JULY 27,
                                                 1998              1997              1998               1997
                                                 ------            ------            ------            ------
<S>                                              <C>               <C>               <C>               <C>

Sales                                            100.0 %           100.0 %           100.0 %           100.0 %


Cost of merchandise sold, including               74.4              75.3              74.4              75.5
occupancy costs                                  ------            ------            ------            ------
                                                 

Gross margin                                      25.6              24.7              25.6              24.5
Selling, general and administrative               
expenses                                          23.9              23.8              23.9              23.8
Pre-opening expense                                0.1               0.3               0.1               0.2
Goodwill amortization                              0.1               --                0.1               0.1
                                                 ------            ------            ------            ------


Operating income                                   1.4               0.5               1.5               0.4
Interest expense                                   0.7               0.3               0.6               0.3
                                                 ------            ------            ------            ------

Income before income taxes                         0.7               0.2               0.9               0.2
Income tax expense                                 0.3               0.1               0.3               0.1
                                                 ------            ------            ------            ------

Net income                                         0.4 %             0.1 %             0.6 %             0.1 %
                                                 ======            ======            ======            ======
</TABLE>



                                      (11)

<PAGE>   14


STORE ACTIVITY

The Company's store activity is summarized below:

<TABLE>
<CAPTION>

                                            QUARTER ENDED                  SIX MONTHS ENDED            YEAR ENDED         
                                        JULY 26,       JULY 27,        JULY 26,       JULY 27,     JANUARY 25, 1998     
                                          1998           1997           1998            1997                                       
                                    -------------   -------------   ------------    -----------    -----------------
<S>                                 <C>               <C>            <C>           <C>             <C>
BORDERS SUPERSTORES                                                                                                          
Beginning number of stores                206             163             203             157            157 
Openings                                    7               8              10              14             46 
                                    ----------      ----------      ----------      ----------     ----------
                                                                                                                         
                                                                                                                         
Ending number of stores                   213             171             213             171            203 
                                    ==========      ==========      ==========      ==========     ==========
                                                                                                                         
                                                                                                                         
WALDEN MALL BOOKSTORES                                                                                                   
Beginning number of stores                903             930             923             961            961 
Openings                                    1               4               5               5              8 
Closings                                   (5)             (5)            (29)            (37)           (46)
                                    ----------      ----------      ----------      ----------     ----------
                                                                                                                         
Ending number of stores                   899             929             899             929            923 
                                    ==========      ==========      ==========      ==========     ==========
</TABLE>



13 WEEKS ENDED JULY 26, 1998 AND JULY 27, 1997

         Sales in the second quarter of 1998 were $546.0 million, a $79.7
million, or 17.1%, increase over second quarter 1997 sales of $466.3 million.
This increase reflects a $69.7 million, or 25.8%, increase in Borders' sales
resulting from new store openings and a comparable store sales increase of 5.4%.
This increase was offset in part by a decline in Walden sales of $7.6 million
due to store closings and a comparable store sales decrease of 2.5%.

         Cost of merchandise sold, including occupancy costs, was $406.1 million
in the second quarter of 1998, as compared with $351.1 million in the second
quarter of 1997. Gross margin as a percentage of sales was 25.6% in 1998 versus
24.7% in 1997. The 0.9% increase in gross margin primarily reflects buying
improvements resulting in a higher initial product margin, and tighter control
of inventory shrinkage.

         Selling, general and administrative ("SG&A") expenses in the second
quarter of 1998 were up $19.4 million, or 17.5%, over SG&A expenses in the
second quarter of 1997 ($130.5 million versus $111.1 million). As a percentage
of sales, SG&A expenses were 23.9% in 1998 versus 23.8% in the second quarter of
1997. The 0.1% increase in SG&A expenses is due to increased spending on
strategic initiatives which offset operating leverage in the Company's core
business.






                                      (12)


<PAGE>   15
Pre-opening expense in the second quarter of 1998 was $0.8 million
versus $1.6 million from the same period in 1997. Pre-opening expense consists
principally of grand-opening advertising expense and store payroll related to
the opening, and is expensed in the first full fiscal month of a store's
operations. Pre-opening expense per store varies primarily as a result of
differing levels of grand opening advertising, depending on the presence of the
Company and its competitors in the market and differing levels of labor costs
associated with merchandising the store. The Company opened 7 Borders
superstores and 1 Walden store in the second quarter of 1998 as compared to 8
Borders superstores and 4 Walden stores in the second quarter of 1997.

         Goodwill amortization was $0.7 million in the second quarter of 1998
versus $0.2 million from the same period in 1997. The increase of $0.5 is a
result of the higher goodwill balance due to the acquisition of Books etc. in
October 1997.

         Interest expense was $4.0 million in the second quarter of 1998 as
compared to $1.4 million in 1997. The increase of $2.6 million is primarily
related to interest on borrowings for the repurchase of common stock and the
acquisition of Books etc.

         Income tax expense in the second quarter of 1998 was $1.5 million as
compared to $0.4 million in 1997.


26 WEEKS ENDED JULY 26, 1998 AND JULY 27, 1997

         Sales in the 26 weeks ended July 26, 1998 were $1,091.2 million, a
$161.3 million, or 17.3%, increase over 26 weeks ended July 27, 1997 sales of
$929.9 million. This increase reflects a $141.2 million, or 26.5%, increase in
Borders' sales resulting from new store openings and a comparable store sales
increase of 5.2%. This increase was offset in part by a decline in Walden sales
of $13.2 million due to store closings and a comparable store sales decrease of
1.7%.

         Cost of merchandise sold, including occupancy costs, was $811.5 million
in the 26 weeks ended July 26, 1998, as compared with $701.9 million in the same
1997 period. Gross margin as a percentage of sales was 25.6% in 1998 versus
24.5% in 1997. The 1.1% increase in gross margin primarily reflects buying
improvements resulting in a higher initial product margin, and tighter control
of inventory shrinkage.

         Selling, general and administrative ("SG&A") expenses in the 26 weeks
ended July 26, 1998 were up $38.8 million, or 17.5%, over SG&A expenses in the
same period in 1997 ($260.3 million versus $221.5 million). As a percentage of
sales, SG&A expenses were 23.9% in 1998 versus 23.8% in 1997. The 0.1% increase
in SG&A expenses is due to increased spending on strategic initiatives which
offset operating leverage in the Company's core business.


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<PAGE>   16


         Pre-opening expense in the 26 weeks ended July 26, 1998 was $1.1
million versus $1.9 million in the same period in 1997. The Company opened 10
Borders superstores and 5 Walden stores in 1998 as compared to 14 Borders
superstores and 5 Walden store in 1997.

         Goodwill amortization was $1.4 million in the 26 weeks ended July 26,
1998 versus $0.5 million in the same period in 1997. The increase of $0.9 is a
result of the higher goodwill balance due to the acquisition of Books etc. in
October 1997.

         Interest expense was $6.7 million in the 26 weeks ended July 26, 1998
as compared to $2.4 million in 1997. The increase of $4.3 million is primarily
related to interest on borrowings for the repurchase of common stock and the
acquisition of Books etc.

         Income tax expense in the 26 weeks ended July 26, 1998 was $4.0 million
as compared to $0.8 million in 1997.

LIQUIDITY AND CAPITAL RESOURCES

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

         Net cash used for operations for the 26 weeks ended July 26, 1998 was
$150.5 million as compared to $25.5 million in the corresponding period in the
prior year. The current year operating cash inflows primarily reflect net
income and non-cash depreciation and amortization expense of $30.1 million. 
Operating cash outflows for the period were primarily the result of the timing 
of inventory purchases and a decrease in taxes payable during the period. 

         Net cash used for investing for the first 26 weeks of 1998 was $72.7
million as compared to $41.0 million in the first 26 weeks of 1997, and
primarily represents capital expenditures for new stores, existing store
refurbishments, the addition of the new Nashville fulfillment center, and the
new west coast distribution center. 

         Net cash provided by financing in the first 26 weeks of 1998 was $202.9
million versus $80.7 million in the first 26 weeks of 1997. Net cash provided by
financing resulted primarily from net borrowings under the credit facility.

         On a consolidated basis, the Company expects its working capital
requirements to increase as a result of its expansion program for its Borders
books and music superstores and international expansion programs.

         The Company believes funds generated from operations, borrowings under
the credit facility and financing through the lease facility will be sufficient
to fund its anticipated capital requirements for at least two to three years.

         The Company has a multicurrency credit agreement which provides a
$425.0 million, five-year working capital facility. Borrowings under the credit
facility bear interest at a base rate or an increment over LIBOR at the
Company's option. The credit agreement contains operating covenants which limit
the Company's ability to incur indebtedness, make acquisitions, dispose of
assets, issue or repurchase its common stock in excess of $100 million (plus any
proceeds and tax benefits resulting from stock option exercises and tax benefits
resulting from restricted shares purchased by employees from the Company), pay
dividends on its common stock, and require the Company to meet certain financial
measures regarding fixed charge coverage, leverage and tangible net worth. The
Company had borrowings outstanding under the credit facility of $291.0 at July
26, 1998 and $122.5 at January 25, 1998.


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<PAGE>   17


         The Company has a five year, $250.0 million lease financing facility
("the Lease Facility") to finance new stores and other property through
operating leases. The Lease Facility will provide financing to lessors through
loans from a third party lender for up to 95% of a project cost. It is expected
that lessors will make equity contributions approximating 5% of each project.
Independent of its obligations as lessee, the Company guarantees payment when
due of all amounts required to be paid to the third party lender. The principal
amount guaranteed will be limited to approximately 89% of the original cost of a
project, so long as the Company is not in default under the lease relating to
such project. There were 46 properties financed through the lease facility, with
a financed value of $180.5 million, at July 26, 1998. Management believes that
the rental payments for properties financed through the lease facility may be
lower than those which the Company could obtain elsewhere due to, among other
factors, (i) the lower borrowing rates available to the Company's landlords
under the facility, and (ii) the fact the rental payments for properties
financed through the facility do not include amortization of the principal
amounts of the landlords' indebtedness related to the properties. Rental
payments relating to such properties will be adjusted when permanent financing
is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal.

         During 1994, the Company entered into agreements in which leases with
respect to four Borders' locations serve as collateral for certain mortgage
pass-through certificates. The mortgage pass-through certificates include a
provision requiring the Company to repurchase the underlying mortgage notes in
certain events, including the failure by the Company to make payments of rent
under the related leases, the failure by Kmart to maintain required investment
grade ratings or the termination of the guarantee by Kmart of the Company's
obligations under the related leases (which would require mutual consent of
Kmart and Borders). In the event the Company is required to repurchase all of
the underlying mortgage notes, the Company would be obligated to pay
approximately $36.6 million. Since February 1995, Kmart has failed to maintain
investment grade ratings, and, therefore, these notes are now subject to put by
the holder. To date, the holder has not exercised its right to put the notes.
The Company does not believe that the note purchase, if required, would have a
material effect on the Company's financial position or earnings.

         The Company currently has a program in place to repurchase its common
stock up to a limit of $100 million plus the aggregate exercise price of options
that are exercised from time to time and the aggregate tax benefits to the
Company from the exercise of options and the vesting of restricted shares
purchased by employees from the Company. As of July 26, 1998, the aggregate
limit on repurchases under the program was approximately $146.4 million. It is
the Company's intention to repurchase its common stock through a combination of
market purchases, share withholding to pay taxes associated with the exercise of
options and the vesting of restricted shares, and the acceptance of previously
owned shares to pay such taxes or the exercise price of options. As of July 26,
1998, the Company had repurchased $88.7 million of common stock under this
program. Subsequent to the second quarter of 1998, $14.5 million of common
stock was repurchased under the program.




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<PAGE>   18


OTHER MATTERS

    The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define a specific year.  Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000.  This could result
in system failures or miscalculations causing disruptions to various activities
and operations.

    The Company initiated assessments in prior years to identify the work
efforts required to assure that systems supporting the business successfully
operate beyond the turn of the century.  The scope of this work effort
encompasses information technology systems and systems utilizing 
embedded technology, such as microcontrollers.

    Plans for achieving Year 2000 compliance were finalized during 1998, and
implementation work is underway.  The initial phases of this work, an inventory
and assessment of potential problem areas, have been essentially completed.
Modification and testing phases continue, with most required system
modifications to mission critical systems planned for completion by the end of
fiscal 1998.  The company will utilize both internal and external resources to
reprogram, replace and test the modifications made for the Year 2000 compliance.
Attention has also been focused on compliance attainment efforts of vendors and
others, including key system interfaces with customers and suppliers.  Most key
suppliers and business partners have been contacted for clarification of their
year 2000 plans. Notwithstanding the substantive work efforts described above,
the Company could potentially experience disruptions to some aspects of its
various activities and operations, including those resulting from non-compliant
systems utilized by unrelated third party governmental and business entities.
The Company is beginning the process of developing business contingency plans 
in order to attempt to mitigate the extent of potential disruption to business 
operations.

    Costs of addressing the Year 2000 issues have not been material to date
and, based on preliminary information gathered to date from the Company and its
vendors, are not currently expected to have a material adverse impact on the
Company's financial position, results of operations or cash flows in future
periods.  However, if the Company or its vendors are unable to resolve such
processing issues in a timely manner, it could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions.  
  
    In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18,1994 until the action
is completed and prejudgement interest on any amounts awarded in the action, as
well as attorney fees and costs. The Company intends to vigorously defend the
action.

    In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
have filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, Barnes & Noble, Inc., Amazon, Inc.,
certain publishers and others alleging violation of the Robinson-Patman Act and
other federal law, New York statutes governing trade practices and common law.
The Complaint seeks certification of a class consisting of all retail
booksellers in the United States, whether or not currently in business, which
were in business and were members of the American Booksellers Association
("ABA") at any time during the four year period preceding the filing of the
Complaint. The Complaint alleges that the named plaintiffs have suffered damages
of $11,250,000 or more and requests treble damages on behalf of the named
plaintiffs and each of the purported class members, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Complaint are similar to
those contained in an action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble in March of 1998. The Company intends 
to vigorously defend the action.



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<PAGE>   19




SAFE HARBOR STATEMENT

This document includes forward looking statements, as defined in the Private
Securities Litigation Reform Act of 1995 including information with respect to
the Company's Year 2000 compliance. Such statements are based upon
management's estimates, assumptions and projections and are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward looking statements. Factors that could cause actual
results to differ materially from those in the forward looking statements
include, among other things, consumer demand for the Company's products, which
is believed to be related to overall consumer spending patterns and, with
respect to the mall business, overall mall traffic; an unexpected increase in
competition; higher than anticipated interest, occupancy, labor, distribution
and inventory shrinkage costs; unanticipated adverse litigation results;
unanticipated work stoppages; higher than anticipated costs associated with the
closing of underperforming stores; unanticipated increases in the cost of the
merchandise sold by the Company; the performance of the Company's new strategic
initiatives, including the Internet and international expansion; the stability
and capacity of the Company's information systems; unanticipated costs or
problems relating to the Company's Year 2000 compliance; changes in foreign
currency exchange rates; and the continued ability of the Company to locate and
develop suitable sites for its superstore expansion program.



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<PAGE>   20
                           PART II - OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

    The Company is from time to time involved in or affected by litigation
incidental to the conduct of its respective businesses. The Company believes
that no currently pending litigation to which it is a party will have a material
adverse effect on its liquidity, financial position or results of operations.

    In March 1998, the American Booksellers Association ("ABA") and twenty-six
independent bookstores filed a lawsuit in the United States District Court for
the Northern District of California against the Company and Barnes & Noble Inc.
alleging violations of the Robinson-Patman Act, the California Unfair Trade
Practice Act and the California Unfair Competition Law. The Complaint seeks
injunctive and declaratory relief; treble damages on behalf of each of the
bookstore plaintiffs, and, with respect to the California bookstore plaintiffs,
any other damages permitted by California law; disgorgement of money, property
and gains wrongfully obtained in connection with the purchase of books for
resale, or offered for resale, in California from March 18, 1994 until the
action is completed and pre-judgment interest on any amounts awarded in the
action, as well as attorney fees and costs. The Company intends to vigorously
defend the action.

    In August 1998, The Intimate Bookshop, Inc. and its owner, Wallace Kuralt,
have filed a lawsuit in the United States District Court for the Southern
District of New York against the Company, Barnes & Noble, Inc., Amazon, Inc.,
certain publishers and others alleging violation of the Robinson-Patman Act and
other federal law, New York statutes governing trade practices and common law.
The Complaint seeks certification of a class consisting of all retail
booksellers in the United States, whether or not currently in business, which
were in business and were members of the American Booksellers Association
("ABA") at any time during the four year period preceding the filing of the
Complaint. The Complaint alleges that the named plaintiffs have suffered damages
of $11,250,000 or more and requests treble damages on behalf of the named
plaintiffs and each of the purported class members, as well as of injunctive and
declaratory relief (including an injunction requiring the closure of all of
defendants' stores within 10 miles of any location where plaintiff either has or
had a retail bookstore during the four years preceding the filing of the
Complaint, and prohibiting the opening by defendants of any bookstore in such
areas for the next 10 years), disgorgement of alleged discriminatory discounts,
rebates, deductions and payments, punitive damages, interest, costs, attorneys
fees and other relief. Many of the allegations in the Complaint are similar to
those contained in an action instituted by the ABA and 26 bookseller plaintiffs
against the Company and Barnes & Noble in March of 1998. The Company intends
to vigorously defend the action.



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<PAGE>   21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

The following actions were taken at the Annual Meeting of Stockholders of the
Company held on May 14, 1998, with the votes on such matters being as indicated
below:

1.   The following individuals were elected to serve as directors for one
     year terms expiring in 1999:

     Name                             For                         Authority
     ----                             ---                         Withheld
                                                                  ---------

     Robert F. DiRomualdo             63,794,504 shares            95,825
     Peter R. Formanek                63,791,100 shares            99,229
     Amy B. Lane                      63,792,357 shares            97,972
     Victor L. Lund                   63,779,436 shares           110,893
     George R. Mrkonic                63,791,183 shares            99,146
     Larry Pollock                    63,781,191 shares           109,138
     Leonard A. Schlesinger           63,791,710 shares            98,619








                                      (19)
<PAGE>   22




ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

Exhibits:

(a)   Exhibits:

                  10.25    Borders Group, Inc. Stock Option Plan for
                           International Employees
                  27.0     Financial Data Schedule

(b)   Reports on Form 8-K:

                        Subsequent to the 13 week period ended July 26, 1998,
                        one report was filed on form 8-K under Item 5 - Other
                        Events. This report related to The Intimate Bookshop,
                        Inc. lawsuit filed in the United States District Court
                        for the Southern District of New York. This report was
                        dated August 7, 1998 and filed on August 10, 1998.



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<PAGE>   23


                                   SIGNATURES

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

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




Date:    September 9, 1998                By: /s/ Kenneth E. Scheve   
                                              ----------------------------------
                                              Kenneth E. Scheve 
                                              Senior Vice President and Chief
                                              Financial Officer
                                              (Principal Financial and
                                               Accounting Officer)








                                     (21)
<PAGE>   24


                                 Exhibit Index
                                 -------------



Exhibit No.              Description
-----------              -----------
   10.25                 Borders Group, Inc. Stock Option Plan for
                         International Employees
   27                    Financial Data Schedule