SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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## FORM 10 - Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 27, 2003
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to

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Commission file number 1-13740

# BORDERS GROUP, INC.

(Exact name of registrant as specified in its charter)

---

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

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

---

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

Yes X       
  No

|               | Shares Outstanding As of
|-------------- | ------------------------
|Title of Class | June 3, 2003            
|Common Stock   | 77,313,870              

---

# 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 
|                               |                                                |     
|Item 4.                        | Controls and Procedures                        | 22  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Part II - Other information    |                                                |     
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Item 1.                        | Legal Proceedings                              | 23  
|                               |                                                |     
|Item 2.                        | Changes in Securities and Use of Proceeds      | N/A 
|                               |                                                |     
|Item 3.                        | Defaults Upon Senior Securities                | N/A 
|                               |                                                |     
|Item 4.                        | Submission of Matters to a vote of             | N/A 
|                               | Securityholders                                |     
|                               |                                                |     
|Item 5.                        | Other Information                              | N/A 
|                               |                                                |     
|Item 6.                        | Exhibits and Reports on Form 8-K               | 23  
|                               |                                                |     
|                               |                                                |     
|                               |                                                |     
|Signatures                     |                                                | 24  
|                               |                                                |     
|Certifications                 |                                                | 25  

ii

---

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

| |                                                     |                                                                   |       |        |   |   |       |        |  | 
| | --------------------------------------------------- | ----------------------------------------------------------------- | ----- | ------ | - | - | ----- | ------ |  | 
|
|
|
| |                                                     |                                                                   |       |        |   |   |       |        |  | 
| | Sales                                               |                                                                   | $     | 751.4  |   |   | $     | 751.7  |  | 
| | Other revenue                                       |                                                                   | 6.8   |        |   |   | 6.5   |        | 
| |                                                     |                                                                   |       |        |   |  
| | Total revenue                                       |                                                                   | 758.2 |        |   |   | 758.2 |        | 
| | Cost of merchandise sold, including occupancy costs |                                                                   | 569.6 |        |   |   | 559.4 |        | 
| |                                                     |                                                                   |       |        |   |  
| | Gross margin                                        |                                                                   | 188.6 |        |   |   | 198.8 |        | 
| | Selling, general and administrative expenses        |                                                                   | 192.6 |        |   |   | 189.3 |        | 
| | Pre-opening expense                                 |                                                                   | 1.5   |        |   |   | 0.8   |        | 
| |                                                     |                                                                   |       |        |   |  
| | Operating income (loss)                             |                                                                   | (5.5  | )      |   |   | 8.7   |        | 
| | Interest expense                                    |                                                                   | 2.2   |        |   |   | 2.4   |        | 
| |                                                     |                                                                   |       |        |   |  
| | Income (loss) before income tax                     |                                                                   | (7.7  | )      |   |   | 6.3   |        | 
| | Income tax provision (benefit)                      |                                                                   | (2.9  | )      |   |   | 2.4   |        | 
| |                                                     |                                                                   |       |        |   |  
| | Net income (loss)                                   | $                                                                 | (4.8  | )      |   | $ | 3.9   |        | 
| |                                                     |                                                                   |       |        |   |  
| | EARNINGS (LOSS) PER COMMON SHARE DATA --            |                                                                   |       |        |   |   |       |        | 
| |                                                     |                                                                   |       |        |   |   |       |        |  | 
| |                                                     | Diluted income (loss) per common share                            | $     | (0.06  | ) |   | $     | 0.05   |  | 
| |                                                     |                                                                   |       |        |   |  
| |                                                     | Diluted weighted average common shares outstanding (in thousands) |       | 78,443 |   |   |       | 84,091 |  | 
| |                                                     |                                                                   |       |        |   |  
| |                                                     | Basic income (loss) per common share                              | $     | (0.06  | ) |   | $     | 0.05   |  | 
| |                                                     |                                                                   |       |        |   |  
| |                                                     | Basic weighted average common shares outstanding (in thousands)   |       | 78,443 |   |   |       | 81,478 |  | 
| |                                                     |                                                                   |       |        |   |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

1

---

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

| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  |  | 
| | ------------------------------------ | ----------------------------------------------------------------- | -------------------------------------------------- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- |  |  | 
|
|
| | ASSETS                               |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |        
| | Current Assets:                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |        
| |                                      | Cash and cash equivalents                                         | $                                                  | 136.4   |         |  | $ | 60.1    |         |  | $ | 269.1   |         | 
| |                                      | Merchandise inventories                                           |                                                    | 1,189.5 |         |  |   | 1,194.0 |         |  |   | 1,183.3 |         | 
| |                                      | Accounts receivable and other current assets                      |                                                    | 99.0    |         |  |   | 55.9    |         |  |   | 88.9    |         | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Current Assets                               |         | 1,424.9 |  |   |         | 1,310.0 |  |   |         | 1,541.3 |  | 
| |                                      | Property and equipment, net of accumulated depreciation           |                                                    |         |         |  |   |         |         |  |   |         |         | 
| |                                      |                                                                   | of $677.3, $591.5 and $667.4 at April 27, 2003,    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | April 28, 2002, and January 26, 2003, respectively |         | 543.7   |  |   |         | 526.7   |  |   |         | 553.8   |  | 
| |                                      | Other assets and deferred charges                                 |                                                    | 92.3    |         |  |   | 116.4   |         |  |   | 76.6    |         | 
| |                                      | Goodwill                                                          |                                                    | 95.1    |         |  |   | 90.4    |         |  |   | 96.5    |         | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Assets                                       | $       | 2,156.0 |  |   | $       | 2,043.5 |  |   | $       | 2,268.2 |  | 
|
| | LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |        
| | Current Liabilities:                 |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |        
| |                                      | Short-term debt and capital lease obligations due within one year | $                                                  | 116.7   |         |  | $ | 86.9    |         |  | $ | 112.7   |         | 
| |                                      | Trade accounts payable                                            |                                                    | 574.3   |         |  |   | 611.7   |         |  |   | 565.4   |         | 
| |                                      | Accrued payroll and other liabilities                             |                                                    | 237.6   |         |  |   | 199.8   |         |  |   | 280.1   |         | 
| |                                      | Taxes, including income taxes                                     |                                                    | 54.0    |         |  |   | 48.8    |         |  |   | 120.7   |         | 
| |                                      | Deferred income taxes                                             |                                                    | 8.7     |         |  |   | 3.3     |         |  |   | 8.7     |         | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Current Liabilities                          |         | 991.3   |  |   |         | 950.5   |  |   |         | 1,087.6 |  | 
| |                                      | Long-term debt                                                    |                                                    | 50.0    |         |  |   | -       |         |  |   | 50.0    |         | 
| |                                      | Long-term capital lease and financing obligations                 |                                                    | 19.0    |         |  |   | 51.0    |         |  |   | 19.0    |         | 
| |                                      | Other long-term liabilities                                       |                                                    | 82.4    |         |  |   | 74.4    |         |  |   | 81.0    |         | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Liabilities                                  |         | 1,142.7 |  |   |         | 1,075.9 |  |   |         | 1,237.6 |  | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      | Stockholders' Equity:                                             |                                                    |         |         |  |   |         |         |  |   |         |         | 
| |                                      | Common stock; 200,000,000 shares authorized;                      |                                                    |         |         |  |   |         |         |  |   |         |         | 
| |                                      |                                                                   | 78,086,696, 81,802,893 and 78,731,922 issued and   |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | outstanding at April 27, 2003, April 28, 2002,     |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | and January 26, 2003, respectively                 |         | 646.5   |  |   |         | 714.9   |  |   |         | 657.0   |  | 
| |                                      | Deferred compensation                                             |                                                    | (0.5    | )       |  |   | (0.3    | )       |  |   | (0.2    | )       | 
| |                                      | Accumulated other comprehensive income (loss)                     |                                                    | 2.7     |         |  |   | (8.6    | )       |  |   | 4.4     |         | 
| |                                      | Retained earnings                                                 |                                                    | 364.6   |         |  |   | 261.6   |         |  |   | 369.4   |         | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Stockholders' Equity                         |         | 1,013.3 |  |   |         | 967.6   |  |   |         | 1,030.6 |  | 
| |                                      |                                                                   |                                                    |         |         |  |   |         |         |  |   |         |         |  | 
| |                                      |                                                                   | Total Liabilities & Stockholders' Equity           | $       | 2,156.0 |  |   | $       | 2,043.5 |  |   | $       | 2,268.2 |  | 
|

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2

---

# BORDERS
GROUP, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE 13 WEEKS ENDED APRIL 27, 2003(DOLLARS IN MILLIONS)
(UNAUDITED)

| |                                 |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   |         |       |   | 
| | ------------------------------- | ------------------------------- | -------- | - | - | ----- | ----- | - | - | ---- | ---- | - | - | ---- | --- |  | - | ----- | - |  | - | ------- | ----- | - | 
|
|
|
|
| | BALANCE AT JANUARY 26, 2003     | 78,731,922                      |          |   | $ | 657.0 |       |   | $ | (0.2 | )    |   | $ | 4.4  |     |  | $ | 369.4 |   |  | $ | 1,030.6 |       |  
| |                                 |                                 |          |   |   |       |       |   |   |      |      |   |   |     
| | Net loss                        | -                               |          |   |   | -     |       |   |   | -    |      |   |   | -    |     |  |   | (4.8  | ) |  |   | (4.8    | )     |  
| | Currency translation adjustment | -                               |          |   |   | -     |       |   |   | -    |      |   |   | (1.9 | )   |  |   | -     |   |  |   | (1.9    | )     |  
| | Change in fair value of         |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   |         |       |  
| |                                 | derivatives, net of tax of $0.1 | -        |   |   |       | -     |   |   |      | -    |   |   |      | 0.2 |  |   |       | - |  |   |         | 0.2   |   | 
| |                                 |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   |         |       |  
| | Comprehensive loss              |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   | (6.5    | )     |  
| | Issuance of common stock        | 227,125                         |          |   |   | 3.1   |       |   |   | -    |      |   |   | -    |     |  |   | -     |   |  |   | 3.1     |       |  
| | Repurchase and retirement of    |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   |         |       |  
| |                                 | common stock                    | (872,351 | ) |   |       | (13.8 | ) |   |      | -    |   |   |      | -   |  |   |       | - |  |   |         | (13.8 | ) | 
| | Change in deferred              |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   |         |       |  
| |                                 | compensation                    | -        |   |   |       | -     |   |   |      | (0.3 | ) |   |      | -   |  |   |       | - |  |   |         | (0.3  | ) | 
| | Tax benefit of equity           |                                 |          |   |   |       |       |   |   |      |      |   |   |      |     |  |   |       |   |  |   |         |       |  
| |                                 | compensation                    | -        |   |   |       | 0.2   |   |   |      | -    |   |   |      | -   |  |   |       | - |  |   |         | 0.2   |   | 
| |                                 |                                 |          |   |   |       |       |   |   |      |      |   |   |     
| | BALANCE AT APRIL 27, 2003       | 78,086,696                      |          |   | $ | 646.5 |       |   | $ | (0.5 | )    |   | $ | 2.7  |     |  | $ | 364.6 |   |  | $ | 1,013.3 |       |  
| |                                 |                                 |          |   |   |       |       |   |   |      |      |   |   |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3

---

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

| |                                                                     |                                                                     |                                                      |                                           |        |       |        |      |        |       |   | 
| | ------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------------- | ----------------------------------------- | ------ | ----- | ------ | ---- | ------ | ----- | - | 
|
|
|
|
| | CASH PROVIDED BY (USED FOR):                                        |                                                                     |                                                      |                                           |        |       |        |      |       
| | OPERATIONS                                                          |                                                                     |                                                      |                                           |        |       |        |      |       
| | Net income / (loss)                                                 | $                                                                   | (4.8                                                 | )                                         |        | $     | 3.9    |      |       
| | Adjustments to reconcile net income (loss) to operating cash flows: |                                                                     |                                                      |                                           |        |       |        |      |       
| |                                                                     | Depreciation                                                        |                                                      | 24.2                                      |        |       |        | 23.2 |        |      
| |                                                                     | Increase in other long-term assets and liabilities                  |                                                      | (14.3                                     | )      |       |        | (0.2 | )      |      
| |                                                                     | Asset impairments and other writedowns                              |                                                      | -                                         |        |       |        | 10.9 |        |      
| |                                                                     | Cash provided by (used for) current assets and current liabilities: |                                                      |                                           |        |       |        |      |        |      
| |                                                                     |                                                                     | Increase in inventories                              |                                           | (7.3   | )     |        |      | (12.9  | )     |  
| |                                                                     |                                                                     | Decrease in accounts receivable                      |                                           | 23.2   |       |        |      | 20.3   |       |  
| |                                                                     |                                                                     | Increase in prepaid expenses                         |                                           | (33.8  | )     |        |      | (2.6   | )     |  
| |                                                                     |                                                                     | Increase (decrease) in accounts payable              |                                           | 9.5    |       |        |      | (27.3  | )     |  
| |                                                                     |                                                                     | Decrease in taxes payable                            |                                           | (66.5  | )     |        |      | (46.5  | )     |  
| |                                                                     |                                                                     | Decrease in expenses payable and accrued liabilities |                                           | (42.1  | )     |        |      | (89.0  | )     |  
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash used for operations              | (111.9 | )     |        |      | (120.2 | )     |  
| | INVESTING                                                           |                                                                     |                                                      |                                           |        |       |        |      |       
| | Capital expenditures                                                |                                                                     | (16.4                                                | )                                         |        |       | (14.6  | )    |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash used for investing               |        | (16.4 | )      |      |        | (14.6 | ) | 
| | FINANCING                                                           |                                                                     |                                                      |                                           |        |       |        |      |       
| | Net funding from (repayment of) long-term capital lease obligations |                                                                     | (0.2                                                 | )                                         |        |       | 1.2    |      |       
| | Net funding from credit facility                                    |                                                                     | 6.9                                                  |                                           |        |       | 0.9    |      |       
| | Issuance of common stock                                            |                                                                     | 3.1                                                  |                                           |        |       | 13.6   |      |       
| | Repurchase of common stock                                          |                                                                     | (13.8                                                | )                                         |        |       | (10.7  | )    |       
| | Other                                                               |                                                                     | -                                                    |                                           |        |       | (2.6   | )    |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| |                                                                     |                                                                     |                                                      | Net cash provided by (used for) financing |        | (4.0  | )      |      |        | 2.4   |   | 
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Effect of exchange rates on cash and equivalents                    |                                                                     | (0.4                                                 | )                                         |        |       | 2.3    |      |       
| | NET DECREASE IN CASH AND EQUIVALENTS                                |                                                                     | (132.7                                               | )                                         |        |       | (130.1 | )    |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Cash and equivalents at beginning of year                           |                                                                     | 269.1                                                |                                           |        |       | 190.2  |      |       
| |                                                                     |                                                                     |                                                      |                                           |        |      
| | Cash and equivalents at end of period                               | $                                                                   | 136.4                                                |                                           |        | $     | 60.1   |      |       
| |                                                                     |                                                                     |                                                      |                                           |        |       |        |     

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4

---

# BORDERS
GROUP, INC.CONSOLIDATED
FINANCIAL STATEMENTS(Dollars in
millions except per common share data)

## NOTE 1 - BASIS
OF PRESENTATION

The accompanying unaudited condensed
consolidated financial statements of Borders Group, Inc. (the Company) have been
prepared in accordance with Rule 10-01 of Regulation S-X and do not include all
the information and notes required by accounting principles generally accepted
in the United States for complete financial statements. All adjustments,
consisting only of normal recurring adjustments, have been made which, in the
opinion of management, are necessary for a fair presentation of the results of
the interim periods. The results of operations for such interim periods are not
necessarily indicative of results of operations for a full year. The unaudited
condensed consolidated financial statements should be read in conjunction with
the Companys consolidated financial statements and notes thereto for the
fiscal year ended January 26, 2003.

The Companys fiscal
year ends on the Sunday immediately preceding the last Wednesday in January. At
April 27, 2003, the Company operated 445 superstores primarily under the Borders
name, including 20 in the United Kingdom, nine in Australia, two in Puerto Rico,
and one each in Singapore and New Zealand. The Company also operated 774
mall-based and other bookstores primarily under the Waldenbooks name, and 36
bookstores under the Books etc. name in the United Kingdom.

## NOTE 2 -
COMMITMENTS AND CONTINGENCIES

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

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

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

5

---

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

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

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

Certain states and private
litigants have sought to impose sales or other tax collection efforts on
out-of-jurisdiction companies that engage in e-commerce. The Company currently
is disputing a claim by the state of California relating to sales taxes that the
state alleges should have been collected on certain Borders.com sales in
California prior to implementation of the Companys Mirror Site Agreement
with Amazon. Also, the Company and Amazon have been named as defendants in an
action filed by a private litigant on behalf of the State of Tennessee under the
Tennessee False Claims Act relating to the failure to collect use taxes on
Internet sales in Tennessee for periods both before and after the implementation
of the Mirror Site Agreement. The Complaint seeks a judgment, jointly and
severally, against the defendants for, among other things, injunctive relief,
treble the amount of damages suffered by the State of Tennessee as a result of
the alleged violations of the defendants, penalties, costs and expenses,
including legal fees. Contrary to the claims in the Complaint, the Company did
collect taxes on Internet sales in Tennessee (as well as Michigan) prior to the
implementation of the Mirror Site Agreement.

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

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

Relationship with Kmart
-- General.Prior to its initial public offering in May 1995, the Company
was a subsidiary of Kmart Corporation (Kmart); Kmart currently owns no shares of
common stock of the Company. In January 2002, Kmart filed for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. Such filing has not affected the
operations of the Company.

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

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

6

---

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

Lease Guaranty
Agreement.Borders leases for 13 of its retail stores and its
distribution center in Harrisburg, Pennsylvania have been guaranteed by Kmart.
Under the terms of a lease guaranty, indemnification and reimbursement agreement
entered into upon completion of the IPO, as amended, (Lease Guaranty Agreement),
the underlying leases will be transferable by Borders, subject to a right of first refusal in favor
of Kmart with respect to sites within a three-mile radius of a Kmart store and,
with respect to all other sites, a right of first offer in favor of Kmart. The
Company and Borders are required to indemnify Kmart with respect to (i) any
liabilities Kmart may incur under the lease guarantees, except those liabilities
arising from the gross negligence or willful misconduct of Kmart, and (ii) any
losses incurred by Kmart after taking possession of any particular premises,
except to the extent such losses arise solely from the acts or omissions of
Kmart. Under the terms of the Lease Guaranty Agreement, in the event of (i) the
Companys or Borders failure to provide any required indemnity, (ii)
a knowing and material violation of the limitations on transfers of guaranteed
leases set forth in the agreement, or (iii) certain events of bankruptcy, Kmart
will have the right to assume any or all of the guaranteed leases and to take
possession of all of the premises underlying such guaranteed leases; provided,
that in the event of a failure or failures to provide required indemnities, the
remedy of taking possession of all of the premises underlying the guaranteed
leases may be exercised only if such failures relate to an aggregate liability
of $10.0 or more and only if Kmart has provided 100 days prior written
notice. In the event of a failure to provide required indemnities resulting in
losses of more than the equivalent of two months rent under a particular lease
but less than $10.0, Kmart may exercise such remedy of possession as to the
premises underlying the guaranteed lease or leases to which the failure to
provide the indemnity relates and one additional premise for each such premises
to which the failure relates, up to a maximum, in any event, of five additional
premises, and thereafter, with respect to such additional premises, Kmart
remedies and indemnification rights shall terminate. In the event of a failure
to provide required indemnities resulting in liabilities of less than the
equivalent of two months rent under a particular lease, Kmart may exercise such
remedy of possession only as to the premises underlying the guaranteed lease or
leases to which the failure to provide the indemnity relates. The Lease Guaranty
Agreement will remain in effect until the expiration of all lease guarantees,
which the Company believes will be in January 2020.

## NOTE 3 -
FINANCING

Credit Agreement.
The Company has a Multicurrency Revolving Credit Agreement (the Credit
Agreement), which was amended in May 2003 and will expire in June 2005.
The Credit Agreement provides for borrowings of up to $450.0. Borrowings under
the Credit Agreement bear interest at a variable base rate plus an increment or
LIBOR plus an increment at the Companys option. The Credit Agreement
contains covenants which limit, among other things, the Companys ability
to incur indebtedness, grant liens, make investments, consolidate or merge,
declare dividends, dispose of assets, repurchase its common stock in excess of
$225.0 over the term of the Agreement (plus any proceeds and tax benefits
resulting from stock option exercises and tax benefits resulting from restricted
shares purchased by employees from the Company), and requires the Company to
meet certain financial measures regarding fixed coverage, leverage, tangible net
worth and capital expenditures. The Company had borrowings outstanding under the
Credit Agreement (or a prior agreement) of $116.3 at April 27, 2003, $85.3 at
April 28, 2002 and $112.1 at January 26, 2003.

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

Lease Financing
Facilities. The Company has two lease financing facilities (collectively,
the Lease Financing Facilities), which were amended in May 2003, to
finance new stores and other property owned by unaffiliated entities and leased
to the Company or its subsidiaries. The original facility (the Original
Lease Facility) will expire in June 2004 (2005 if certain conditions are
satisfied). In June of 2002, the Company established a new facility (the
New Lease Facility), which will expire in 2007. The aggregate amount
of borrowing permitted under the Lease Financing Facilities is $25.0. Properties
to be financed after the effective date of the New Lease Facility will be
financed under that Facility, and no additional properties will be financed
under the Original Lease Facility. The Lease Financing Facilities provide
financing to lessors of properties leased to the Company or its subsidiaries
through loans from lenders for up to 95% of a projects cost. Additionally,
under the New Lease Facility, the unaffiliated lessor will make equity
contributions approximating 5% of the cost of each project. The lessors under
the Original Lease Facility have made similar contributions.

7

---

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

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

There were 4, 33 and 7
properties financed through the Original Lease Facility at April 27, 2003, April
28, 2002 and January 26, 2003, respectively, with financed values of $22.6,
$119.0 and $36.3. The Company has recorded $19.0, $51.0 and $19.0 of the amounts
under the Original Lease Facility as capitalized leases under Other
assets (for the capital lease assets) and Long-term capital lease
and financing obligations (for the capital lease liabilities) on the
consolidated balance sheets at April 27, 2003, April 28, 2002 and January 26,
2003, respectively. These amounts have been treated as non-cash items on the
consolidated statements of cash flows. There were no borrowings under the New
Lease Facility as of April 27, 2003. In the first quarter of 2003, the Company permanently financed,
through long-term leases, three properties that had been financed through the
Original Lease Facility with a total value of approximately $13.7, none of which
had been capitalized.

As of April 27, 2003 the
Company was in compliance with all debt covenants contained within the Credit
Agreement, Notes and Lease Financing Facilities described above.

## NOTE 4 
STOCK-BASED BENEFIT PLANS

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

| |                                    |                                       |      |       |   |   |     |      |  |  |  |  |  |  |  |  |  |  | 
| | ---------------------------------- | ------------------------------------- | ---- | ----- | - | - | --- | ---- |  |  |  |  |  |  |  |  |  |  | 
|
|
|
| | Net income (loss), as reported     | $                                     | (4.8 | )     |   | $ | 3.9 |      |  |  |  |  |  |  |  |  | 
| | Add: Stock-based employee expense  |                                       |      |       |   |   |     |      |  |  |  |  |  |  |  |  | 
| |                                    | included in reported net income,      |      |       |   |   |     |      |  |  |  |  |  |  |  |  |  | 
| |                                    | net of related tax effects            |      | --    |   |   |     | --   |  |  |  |  |  |  |  |  |  | 
| | Deduct: Total stock-based employee |                                       |      |       |   |   |     |      |  |  |  |  |  |  |  |  | 
| |                                    | compensation expense determined under |      |       |   |   |     |      |  |  |  |  |  |  |  |  |  | 
| |                                    | fair value method for all awards,     |      |       |   |   |     |      |  |  |  |  |  |  |  |  |  | 
| |                                    | net of tax                            |      | 2.0   |   |   |     | 2.3  |  |  |  |  |  |  |  |  |  | 
| |                                    |                                       |      |       |   |   |     |      |  |  | 
| | Pro-forma net income (loss)        | $                                     | (6.8 | )     |   | $ | 1.6 |      |  |  |  |  |  |  |  |  | 
| |                                    |                                       |      |       |   |   |     |      |  |  | 
| | Earnings (loss) per share:         |                                       |      |       |   |   |     |      |  |  |  |  |  |  |  |  | 
| |                                    | Basic -- as reported                  | $    | (0.06 | ) |   | $   | 0.05 |  |  |  |  |  |  |  |  |  | 
| |                                    | Basic -- pro-forma                    | $    | (0.09 | ) |   | $   | 0.02 |  |  |  |  |  |  |  |  |  | 
| |                                    | Diluted -- as reported                | $    | (0.06 | ) |   | $   | 0.05 |  |  |  |  |  |  |  |  |  | 
| |                                    | Diluted -- pro-forma                  | $    | (0.09 | ) |   | $   | 0.02 |  |  |  |  |  |  |  |  |  | 

## NOTE 5-
SEGMENT INFORMATION

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

8

---

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

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

Total assets for the
Corporate segment include certain corporate headquarters property and equipment,
net of accumulated depreciation, of $73.3 and $66.2 at April 27, 2003 and April
28, 2002, respectively, whose related depreciation expense has been allocated to
the Borders and Waldenbooks segments. Depreciation expense allocated to the
Borders segment totaled $2.8 and $2.3 for the 13 weeks ended April 27, 2003 and
April 28, 2002, respectively. Depreciation expense allocated to the Waldenbooks
segment totaled $1.5 and $1.3 for the 13 weeks ended April 27, 2003 and April
28, 2002, respectively.

| |                         |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  |  |  | 
| | ----------------------- | ------------- | ------- | ------- | - | - | ------- | ------- | - |  |  |  |  |  |  |  |  |  | 
|
|
|
| | Sales                   |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  | 
| |                         | Borders       | $       | 521.5   |   |   | $       | 518.5   |   |  |  |  |  |  |  |  |  | 
| |                         | Walden        |         | 150.3   |   |   |         | 170.0   |   |  |  |  |  |  |  |  |  | 
| |                         | International |         | 79.6    |   |   |         | 63.2    |   |  |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total sales             | $             | 751.4   |         |   | $ | 751.7   |         |   |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Net income (loss)       |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  | 
| |                         | Borders       | $       | 4.8     |   |   | $       | 11.2    |   |  |  |  |  |  |  |  |  | 
| |                         | Walden        |         | 0.5     |   |   |         | 1.4     |   |  |  |  |  |  |  |  |  | 
| |                         | International |         | (4.2    | ) |   |         | (4.7    | ) |  |  |  |  |  |  |  |  | 
| |                         | Corporate     |         | (5.9    | ) |   |         | (4.0    | ) |  |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total net income (loss) | $             | (4.8    | )       |   | $ | 3.9     |         |   |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total assets            |               |         |         |   |   |         |         |   |  |  |  |  |  |  |  | 
| |                         | Borders       | $       | 1,337.2 |   |   | $       | 1,342.5 |   |  |  |  |  |  |  |  |  | 
| |                         | Walden        |         | 318.5   |   |   |         | 352.8   |   |  |  |  |  |  |  |  |  | 
| |                         | International |         | 314.5   |   |   |         | 258.9   |   |  |  |  |  |  |  |  |  | 
| |                         | Corporate     |         | 185.8   |   |   |         | 89.3    |   |  |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 
| | Total assets            | $             | 2,156.0 |         |   | $ | 2,043.5 |         |   |  |  |  |  |  |  |  | 
| |                         |               |         |         |   |   |         |         |   |  | 

## NOTE 6 - NEW
ACCOUNTING GUIDANCE

In November 2002, the
Emerging Issues Task Force issued Consensus No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor (EITF 02-16), which is effective prospectively for all vendor
arrangements entered into after December 31, 2002. The Consensus requires that
consideration received from a vendor be considered a reduction of the prices of
vendors products and shown as a reduction of cost of sales in the income
statement of the customer. If the consideration represents a reimbursement of
specific incremental identifiable costs incurred, these amounts should be offset
against the related costs with any excess consideration recorded in cost of
sales. In fiscal 2003, the Company has reclassified the prior years vendor
consideration to conform to current year presentation and EITF 02-16.
Additionally, the Company recorded $0.3 million of excess vendor consideration
as a reduction to its inventory balance at April 27, 2003.

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

9

---

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

The Company leases four
properties from unconsolidated variable interest entities (VIEs) that had
borrowings outstanding under the Original Lease Facility at January 26, 2003 and
April 27, 2003. Third parties have invested capital at risk equal to or in
excess of 5% of the assets of the VIEs, with the remainder being financed
through borrowings under the Original Lease Facility. This, and certain other
criteria, allow the Company not to consolidate the VIEs in the Companys
financial statements at April 27, 2003. Rather, the Company accounts for these
arrangements as capital leases. Accordingly, the capitalizable portion of the
leased facilities and the related borrowings are reported in the Companys
accompanying balance sheets. Independent of the Companys obligations
relating to these leases, the Company and certain of its subsidiaries guarantee
payment when due of all amounts required to be paid to the third-party lenders.
At April 27, 2003, the maximum loss that the Company could incur under these
guarantees approximated $22.6.

The Company also leases two
properties from unconsolidated VIEs that had borrowings outstanding under the
Original Lease Facility at January 26, 2003, but whose borrowings had been
permanently financed through long-term leases during the first quarter of 2003.
Third parties have invested capital at risk equal to 5% of the assets of the
VIEs, with the remainder being financed through borrowings unrelated to the
Lease Financing Facilities. This, and certain other criteria, allow the Company
not to consolidate the VIEs in the Companys financial statements at April
27, 2003. Rather, the Company accounts for these arrangements as operating
leases. Accordingly, neither the leased facilities nor the related debt is
reported in the Companys accompanying balance sheets. Independent of the
Companys obligations relating to these leases, the Company and certain of
its subsidiaries guarantee payment when due of all amounts required to be paid
to the third-party lenders. At April 27, 2003, the maximum loss that the Company
could incur under these guarantees approximated $6.0.

The Company anticipates
permanently refinancing two of the properties with borrowings outstanding under
the Original Lease Facility at January 26, 2003 and April 27, 2003 through
long-term leases. The Company expects to begin consolidating the remaining four
VIEs in the quarter ending October 26, 2003, because it believes it is the
VIEs primary beneficiary under FIN 46s requirements. At October 26,
2003, consolidation of these VIEs would have the effect of increasing property
and equipment by $7.1, net of accumulated depreciation of $1.5, and increasing
long-term capital lease and financing obligations by $6.9. Minority interests of
$1.7 would also be reported, and the Company would record a charge of $1.0, net
of tax, as a cumulative effect of change in accounting principle.

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

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

10

---

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

## General

Borders Group, Inc.,
through its subsidiaries, Borders, Inc. (Borders), Walden Book Company, Inc.
(Waldenbooks), Borders U.K. Limited, Borders Australia Pty Limited and others
(individually and collectively, the Company), is the second largest
operator of book, music and movie superstores and the largest operator of
mall-based bookstores in the world based upon both sales and number of stores.
At April 27, 2003, the Company operated 445 superstores under the Borders name,
including 20 in the United Kingdom, nine in Australia, two in Puerto Rico, and
one each in Singapore and New Zealand. The Company also operated 774 mall-based
and other bookstores primarily under the Waldenbooks name in the United States
and 36 bookstores under the Books etc. name in the United Kingdom.

The Companys business
strategy is to continue its growth and increase its profitability through (i)
expanding and refining its core domestic superstore business, (ii) driving
international growth by expanding established markets and leveraging
infrastructure investments, (iii) leveraging strategic alliances and in-store
web-based commerce technologies which enhance the customer experience, and (iv)
maximizing cash flow at Waldenbooks by containing costs. Specifically, the
Company expects to open 35 to 40 domestic Borders stores in 2003 and a reduced
number in 2004. International store growth over the next several years will
focus on existing markets, primarily in the United Kingdom and Australia, with
approximately six to eight international store openings annually. Full year
profitability is expected to be achieved by the International segment in 2004.
The Waldenbooks segment has experienced decreased comparable sales percentages
for the past several years primarily due to the overall decrease in mall traffic
and the impact of superstore openings. As a result, the Company is continuing to
implement its plan for the optimization of the Waldenbooks store base in
order to improve sales, net income and free cash flow. This plan could result in
further store closing costs or asset impairments over the next few years. The
Companys objectives with respect to these initiatives are to continue to
grow consolidated sales and earnings in 2003. In addition, the Company plans to
continue with its share repurchase program by utilizing free cash flow
generation by the business. In May 2003, the Board of Directors authorized an
increase in the amount of share repurchases to $150 million (plus any proceeds
and tax benefits resulting from stock option exercises and tax benefits
resulting from restricted shares purchased by employees from the Company).

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

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

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

Also in 2002, Borders
entered into an agreement with Amazon to allow customers ordering certain book,
music and movie products through certain of Amazons web sites to purchase
and pick up their merchandise at Borders stores in the United States
(Express In-Store Pick Up). Under this agreement, the Company is the
merchant of record for all sales made through this service, and determines all
prices and other terms and conditions applicable to such sales. The Company
fulfills all products sold through Express In-Store Pick Up. In addition, the
Company assumes all risk, cost and responsibility related to the sale and
fulfillment of all products sold. The Company recognizes revenue upon
customers pick up of the merchandise at the store, and classifies this
revenue as a component of Sales in the Companys consolidated
statements of operations. The Company also pays referral fees to Amazon pursuant
to this agreement. This service was offered to customers beginning November 27,
2002.

11

---

The Companys first
quarters of 2003 and 2002 consisted of the 13 weeks ended April 27, 2003 and
April 28, 2002, respectively.

## Results of
Operations

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

| |                                                |       |    |  |       |   |  |  |  |  |  |  | 
| | ---------------------------------------------- | ----- | -- |  | ----- | - |  |  |  |  |  |  | 
|
|
|
|
| | Sales                                          | 100.0 | %  |  | 100.0 | % |  |  |  |  |  |  | 
| | Other revenue                                  | 0.9   |    |  | 0.9   |   |  |  |  |  |  |  | 
| |                                                |       |    |  |       |   |  |  | 
| | Total revenue                                  | 100.9 |    |  | 100.9 |   |  |  |  |  |  |  | 
| | Cost of merchandise sold (including occupancy) | 75.8  |    |  | 74.4  |   |  |  |  |  |  |  | 
| |                                                |       |    |  |       |   |  |  | 
| | Gross margin                                   | 25.1  |    |  | 26.5  |   |  |  |  |  |  |  | 
| | Selling, general and administrative expenses   | 25.6  |    |  | 25.2  |   |  |  |  |  |  |  | 
| | Pre-opening expense                            | 0.2   |    |  | 0.1   |   |  |  |  |  |  |  | 
| |                                                |       |    |  |       |   |  |  | 
| | Operating income (loss)                        | (0.7  | )  |  | 1.2   |   |  |  |  |  |  |  | 
| | Interest expense                               | 0.3   |    |  | 0.4   |   |  |  |  |  |  |  | 
| |                                                |       |    |  |       |   |  |  | 
| | Income (loss) before income tax                | (1.0  | )  |  | 0.8   |   |  |  |  |  |  |  | 
| | Income tax provision (benefit)                 | (0.4  | )  |  | 0.3   |   |  |  |  |  |  |  | 
| |                                                |       |    |  |       |   |  |  | 
| | Net income (loss)                              | (0.6  | )% |  | 0.5   | % |  |  |  |  |  |  | 
| |                                                |       |    |  |       |   |  |  | 

Consolidated Results --
Comparison of the 13 weeks ended April 27, 2003 to the 13 weeks ended April 28,
2002

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Consolidated sales decreased $0.3 million, or 0.0%, to $751.4 million in 2003 from $751.7
million in 2002. This resulted primarily from decreased sales in the Waldenbooks
segment. Partially offsetting this decrease were increased sales in the Borders
and International segments. See Segment Results for a detailed
discussion of the change in sales.                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Other revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Other revenue consists primarily of membership income from Waldenbooks Preferred
Reader Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Waldenbooks
sells memberships in its Preferred Reader Program, which offers members
discounts on purchases and other benefits. The Company recognizes membership
income on a straight-line basis over the 12-month term of the membership, and
categorizes the income as Other revenue in the Companys
consolidated statements of operations. Discounts on purchases are netted against
Sales in the Companys consolidated statements of operations.                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
Company had previously categorized membership income as an offset to Cost
of merchandise sold in the Companys consolidated statements of
operations, but has determined that categorization as Other revenue
is more appropriate. Accordingly, membership income has been reclassified for
all periods presented.                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Consolidated
gross margin decreased $10.2 million, or 5.1%, to $188.6 million in 2003 from
$198.8 million in 2002. As a percentage of sales, consolidated gross margin
decreased to 25.1% in 2003 from 26.5% in 2002. This was primarily due to Borders
and Waldenbooks gross margin as a percentage of sales decreasing, while
International remained flat. In the Borders and Waldenbooks
segments, the reductions were primarily due to occupancy costs for stores open
more than one year remaining essentially flat while comparable store sales
declined.                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
Company classifies the following items as Cost of merchandise sold
on its consolidated statements of operations: product costs and related
discounts, markdowns, freight, shrinkage, capitalized inventory costs,
distribution center costs (including payroll, rent, supplies, depreciation, and
other operating expenses), and store occupancy costs (including rent, common
area maintenance, depreciation, repairs and maintenance, taxes, insurance, and
others). The Companys gross margin may not be comparable to that of other
retailers, since some retailers exclude items such as their distribution and
occupancy costs from cost of sales and include them in other financial statement
lines.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

12

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Selling, general and
administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Consolidated
selling, general and administrative expenses (SG&A) increased $3.3 million,
or 1.7%, to $192.6 million in 2003 from $189.3 million in 2002. As a percentage
of sales, SG&A increased to 25.6% in 2003 from 25.2% in 2002. This increase
primarily resulted from an increase in SG&A expenses as a percentage of
sales for the Borders and Waldenbooks segments, while the International
percentage decreased. The increase in the Waldenbooks and Borders segments was
primarily due to store payroll costs representing a higher percentage of sales,
while the improvement in the International segment was primarily the result of
store and administrative payroll costs, along with the store operating expenses,
increasing at rates less than the sales growth.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
Company classifies the following items as Selling, general and
administrative expenses on its consolidated statements of operations:
store and administrative payroll, utilities, supplies and equipment costs,
credit card and bank processing fees, bad debt, legal and consulting fees,
advertising, referral fee income and other.                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Consolidated
interest expense decreased $0.2 million, or 8.3%, to $2.2 million in 2003 from
$2.4 million in 2002. This was primarily due to lower average debt levels in
2003 as compared to 2002, which primarily resulted from increased cash flow
generated by the Borders segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The
effective tax rate for the years presented differed from the federal statutory
rate primarily as a result of state income taxes. The Companys effective
tax rate used was 38.0% in 2003 compared to 38.1% in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Net income (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Due
to the factors mentioned above, net income (loss) as a percentage of sales
decreased to (0.6)% in 2003 from 0.5% in 2002, and net income (loss) dollars
decreased to $(4.8) million in 2003 from $3.9 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Segment Results --
Comparison of the 13 weeks ended April 27, 2003 to the 13 weeks ended April 28,
2002

The Company is organized
based upon the following operating segments: Borders stores, Waldenbooks stores,
International stores, and Corporate (consisting of interest expense, certain
corporate governance costs, and corporate incentive costs). Intercompany
interest charges (net of related taxes) relating to the former Company-owned
and -operated Borders.com web site have been included in the Corporate segment.
See Note 5 -- Segment Information in the notes to consolidated
financial statements for further information relating to these segments.

Segment data includes
charges allocating all corporate support costs to each segment. Interest income and expense are
allocated to segments based upon the funding required to meet the operational
needs of those segments. The Company utilizes fixed interest rates,
approximating the Companys medium-term borrowing and investing rates, in
calculating segment interest income and expense.

| |                          |   |       |   |  |   |       |   |  |  |  |  |  |  |  |  |  |  | 
| | ------------------------ | - | ----- | - |  | - | ----- | - |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Sales                    | $ | 521.5 |   |  | $ | 518.5 |   |  |  |  |  |  |  |  |  | 
| | Net income               | $ | 4.8   |   |  | $ | 11.2  |   |  |  |  |  |  |  |  |  | 
| | Net income as % of sales |   | 0.9   | % |  |   | 2.2   | % |  |  |  |  |  |  |  |  | 
| | Depreciation expense     | $ | 17.3  |   |  | $ | 16.4  |   |  |  |  |  |  |  |  |  | 
| | Interest income          | $ | 0.9   |   |  | $ | --    |   |  |  |  |  |  |  |  |  | 
| | Store openings           |   | 8     |   |  |   | 6     |   |  |  |  |  |  |  |  |  | 
| | Store count              |   | 412   |   |  |   | 369   |   |  |  |  |  |  |  |  |  | 

| | Sales                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Borders
sales increased $3.0 million, or 0.6%, to $521.5 million in 2003 from $518.5
million in 2002. This increase was comprised of non-comparable sales primarily
associated with 2003 and 2002 store openings of $32.8 million and comparable
store sales decreases of $29.8 million.

13

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Comparable
store sales decreased 5.0% in 2003. Borders comparable store sales
measures, which are based upon a 52-week year, include all stores open more than
one year except those not offering music (of which there are 14, representing
approximately 3% of total sales). New stores are included in the calculation of
comparable store sales measures upon the 13th month of operation. The comparable
store sales decrease for 2003 was due primarily to the war in Iraq impacting an
already slow economy and difficult retail sales environment. The resulting
reduction in customer traffic led to decreased comparable sales across most
categories including the two largest, books and music. Partially offsetting the
weakness in the music and book categories, however, were increased comparable
store sales in the movie and gifts and stationery categories. Sales of the movie
category improved on a comparable store basis primarily as the result of
increased sales of DVDs. This increase resulted from the increasing popularity
of the DVD format. Sales of the gifts and stationery category also increased,
principally the result of category management initiatives resulting in product
enhancements, improved placements, and a slight increase in space allocation.
However, the overall mix of book, music, movie, café, and gifts and
stationery merchandise sold by Borders stores did not change significantly in
2003 as compared to 2002. The impact of price changes on comparable store sales
was not significant.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Gross
margin as a percentage of sales decreased to 26.4% in 2003 from 28.1% in 2002,
primarily due to higher store occupancy costs as a percentage of sales. Store
occupancy costs as a percentage of sales increased 1.2% as a result of the
stores rent expense representing a higher percentage of sales. This was
primarily due to rent expense for stores open more than one year remaining
essentially flat while comparable store sales declined. In addition,
stores rent costs represented a higher percentage of sales due to the
permanent refinancing in 2002 of certain stores previously financed through the
Original Lease Facility, as discussed below. Also affecting the decrease in
gross margin as a percentage of sales were an increase in markdowns, freight
and product costs of 0.5%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Gross
margin dollars decreased $8.0 million, or 5.5%, to $138.0 million in 2003 from
$146.0 million in 2002, which was primarily due to increased store occupancy
costs as a result of new store openings, the decrease in comparable store sales
and the decrease in the gross margin percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Selling, general and
administrative                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | SG&A
as a percentage of sales increased to 24.9% in 2003 from 24.4% in 2002. This was
primarily due to an increase of 0.5% in store payroll as a percentage of sales
and an increase in corporate payroll of 0.1% as a percentage of sales, partially
offset by a 0.1% decrease in advertising expenses as a percentage of sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | SG&A
dollars increased $3.4 million, or 2.6%, to $129.9 million in 2003 from $126.5
million in 2002 primarily due to increased store payroll expenses resulting from
new store openings, the decrease in comparable store sales and the increase in
the SG&A percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Depreciation
expense increased $0.9 million, or 5.5%, to $17.3 million in 2003 from $16.4
million in 2002. This was primarily the result of increased depreciation expense
recognized on new stores capital expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Borders
generated interest income of $0.9 million in 2003 due to the generation of
positive cash flow.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Net income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Due
to the factors mentioned above, net income as a percentage of sales decreased to
0.9% in 2003 from 2.2% in 2002, and net income dollars decreased to $4.8 million
in 2003 from $11.2 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

14

---

| |                          |   |       |   |  |   |       |   |  |  |  |  |  |  |  |  |  |  | 
| | ------------------------ | - | ----- | - |  | - | ----- | - |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Sales                    | $ | 150.3 |   |  | $ | 170.0 |   |  |  |  |  |  |  |  |  | 
| | Other revenue            | $ | 6.0   |   |  | $ | 6.3   |   |  |  |  |  |  |  |  |  | 
| | Net income               | $ | 0.5   |   |  | $ | 1.4   |   |  |  |  |  |  |  |  |  | 
| | Net income as % of sales |   | 0.3   | % |  |   | 0.8   | % |  |  |  |  |  |  |  |  | 
| | Depreciation expense     | $ | 4.1   |   |  | $ | 4.5   |   |  |  |  |  |  |  |  |  | 
| | Interest income          | $ | 9.3   |   |  | $ | 8.3   |   |  |  |  |  |  |  |  |  | 
| | Store openings           |   | 2     |   |  |   | --    |   |  |  |  |  |  |  |  |  | 
| | Store closings           |   | 6     |   |  |   | 7     |   |  |  |  |  |  |  |  |  | 
| | Store count              |   | 774   |   |  |   | 820   |   |  |  |  |  |  |  |  |  | 

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Waldenbooks
sales decreased $19.7 million, or 11.6%, to $150.3 million in 2003 from $170.0
million in 2002. This decrease was comprised of decreased comparable store sales
of $14.5 million and decreased non-comparable sales associated with 2003 and
2002 store closings of $5.2 million.                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Comparable
store sales decreased 8.8% in 2003. Waldenbooks comparable store sales
measures, which are based upon a 52-week year, include all stores open more than
one year. New stores are included in the calculation of comparable store sales
measures upon the 13th month of operation. The Companys seasonal
mall-based kiosks are also included in Waldenbooks comparable store sales
measures. The comparable store sales decrease for 2003 was due primarily to
decreased mall traffic and the impact of superstore openings. Overall, the
merchandise mix did not change significantly in 2003 as compared to 2002, nor
was the impact of price changes on comparable store sales significant.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Other revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Waldenbooks
other revenue, which consists of membership income from the Preferred Reader
Program, was largely consistent in 2003 with 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Other
revenue dollars were $6.0 million in 2003 and $6.3 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Gross
margin as a percentage of sales decreased to 23.1% in 2003 from 23.6% in 2002.
This was primarily due to a 1.5% increase in store occupancy expenses as a
percentage of sales, as a result of rent expense for stores remaining open more
than one year remaining essentially flat while comparable stores sales declined.
This was partially offset by lower product costs of 0.5% as a percentage of
sales. In addition, distribution and other costs as a percentage of sales
improved 0.5% as a percentage of sales.                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Gross
margin dollars decreased $5.5 million, or 13.7%, to $34.7 million in 2003 from
$40.2 million in 2002, primarily due to store closings, the decrease in
comparable store sales, and the decrease in gross margin percentage.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Selling,
general and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | SG&A
as a percentage of sales increased to 28.8% in 2003 from 27.3% in 2002. This was
primarily due to increased store payroll costs of 0.9%, increased corporate
payroll costs of 0.4%, increased store operating expenses of 0.3% and decreased
vendor advertising income of 0.2% as a percentage of sales, partially offset by
decreased corporate non-payroll costs of 0.3% as a percentage of sales.                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | SG&A
dollars decreased $3.1 million, or 6.7%, to $43.3 million in 2003 from $46.4
million in 2002 primarily due to store closings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Depreciation
expense decreased $0.4 million, or 8.9%, to $4.1 million in 2003 from $4.5
million in 2002. This was primarily due to a lower fixed asset base resulting
from prior year asset impairments and store closings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Interest income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Interest
income increased $1.0 million, or 12.0%, to $9.3 million in 2003 from $8.3
million in 2002. This was the result of Waldenbooks continued positive
cash flow at fixed internal interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

15

---

| | Net income                                                                                                                                                                                                                        
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Due
to the factors mentioned above, net income as a percentage of sales decreased to
0.3% in 2003 from 0.8% in 2002, while net income dollars decreased $0.9 million,
or 64.3%, to $0.5 million in 2003 from $1.4 million in 2002.

| |                           |   |      |   |  |   |      |   |  |  |  |  |  |  |  |  |  |  | 
| | ------------------------- | - | ---- | - |  | - | ---- | - |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Sales                     | $ | 79.6 |   |  | $ | 63.2 |   |  |  |  |  |  |  |  |  | 
| | Net loss                  | $ | 4.2  |   |  | $ | 4.7  |   |  |  |  |  |  |  |  |  | 
| | Net loss as % of sales    |   | 5.3  | % |  |   | 7.4  | % |  |  |  |  |  |  |  |  | 
| | Depreciation expense      | $ | 2.8  |   |  | $ | 2.3  |   |  |  |  |  |  |  |  |  | 
| | Interest expense          | $ | 4.6  |   |  | $ | 3.8  |   |  |  |  |  |  |  |  |  | 
| | Superstore store openings |   | 3    |   |  |   | --   |   |  |  |  |  |  |  |  |  | 
| | Superstore store count    |   | 33   |   |  |   | 22   |   |  |  |  |  |  |  |  |  | 
| | Books etc. store closings |   | 1    |   |  |   | --   |   |  |  |  |  |  |  |  |  | 
| | Books etc. store count    |   | 36   |   |  |   | 36   |   |  |  |  |  |  |  |  |  | 

| | Sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | International
sales increased $16.4 million, or 25.9%, to $79.6 million in 2003 from $63.2
million in 2002. This was primarily the result of new superstore openings. In
2003, the Company opened three international stores in the United Kingdom. Also
contributing to the increase in sales was a positive impact from the translation
of foreign currencies to U.S. dollars.
The overall mix of book, music, movie, cafe, and sideline merchandise sold by
international superstores, and the mix of books and sidelines offered by Books
etc. stores, did not change significantly in 2003 as compared to 2002. The
impact of price changes on comparable store sales was also not significant.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Gross margin                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Gross
margin as a percentage of sales remained essentially flat at 20.0% in 2003 as
compared to 2002. The International segment experienced a 0.8% increase in third
party vendor income from café operations as a percentage of sales, due to
the agreement with Starbucks Coffee Company (U.K.) Limited which began in June
of 2002. In addition, gross margin as a percentage of sales was impacted by decreases
of 0.4% in shrink and 0.1% in distribution costs as a
percentage of sales. Offsetting these factors was a 1.3% increase in occupancy costs as a
percentage of sales.                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Gross
margin dollars increased $3.3 million, or 26.2%, to $15.9 million in 2003 from
$12.6 million in 2002, primarily due to new
superstore openings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Selling, general
and administrative expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | SG&A
as a percentage of sales decreased to 22.5% in 2003 from 24.1% in 2002. This
improvement was primarily the result of decreases in store payroll costs of
0.8%, corporate payroll costs of 0.5%, store operating expenses of 0.2% and
advertising costs of 0.1% as a percentage of sales. Although these expenses
increased in dollars, they increased at rates less than sales growth.                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | SG&A
dollars increased $2.7 million, or 17.8%, to $17.9 million in 2003 from $15.2
million in 2002, primarily due to store openings and the increased store payroll
and operating expenses required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Depreciation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Depreciation
expense increased $0.5 million, or 21.7%, to $2.8 million in 2003 from $2.3
million in 2002. This was primarily due to depreciation expense recognized on
new stores capital expenditures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Interest
expense increased $0.8 million, or 21.1%, to $4.6 million in 2003 from $3.8
million in 2002. This was a result of higher average borrowing levels at fixed
internal interest rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | Net loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Due
to the factors mentioned above, net loss as a percentage of sales decreased to
5.3% in 2003 as compared to 7.4% in 2002, and net loss dollars decreased $0.5
million, or 10.6%, to $4.2 million in 2003 from $4.7 million in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

16

---

| |                  |   |     |  |  |   |     |  |  |  |  |  |  |  |  |  |  |  | 
| | ---------------- | - | --- |  |  | - | --- |  |  |  |  |  |  |  |  |  |  |  | 
|
|
|
|
| | Interest expense | $ | 7.8 |  |  | $ | 6.9 |  |  |  |  |  |  |  |  |  | 
| | Net loss         | $ | 5.9 |  |  | $ | 4.0 |  |  |  |  |  |  |  |  |  | 

| | The
Corporate segment includes unallocated interest expense, various corporate
governance costs and corporate incentive costs.                                                                                                                                                                                                                                                                                                                                           
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Net
loss dollars increased $1.9 million, or 47.5%, to $5.9 million in 2003 from $4.0
million in 2002. This was primarily due to increased interest expense for this
segment primarily resulting from increased borrowings to fund corporate stock
repurchases in 2003, partially offset by a reduction in various governance costs
as compared to the prior year. Interest expense represents corporate-level
interest costs not charged to the Companys other segments.

## Liquidity and
Capital Resources

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

Net cash used for
operations was $111.9 million and $120.2 million for the 13 weeks ended April
27, 2003 and April 28, 2002, respectively. Operating cash outflows for the
period resulted from decreases in taxes payable and expenses payable and accrued
liabilities, as well as increases in prepaid expenses and other long-term assets
and liabilities. The most significant of these was the decrease in taxes
payable, which resulted from payment of the Companys estimated fiscal 2002
taxes. The current year operating cash inflows primarily reflect operating
results net of non-cash charges for depreciation, as well as a decrease in
accounts receivable and an increase in accounts payable.

Net cash used for investing
was $16.4 million, which primarily funded capital expenditures for new stores
and the refurbishment of existing stores. Capital expenditures in 2003 reflect
the opening of 11 new superstores and two new airport stores, operated by the
Waldenbooks segment. In fiscal 2002, capital expenditures were $14.6 million,
which primarily funded new stores and the refurbishment of existing stores.
Capital expenditures in 2002 reflected the opening of 6 new superstores.
Additional capital spending in 2003 and 2002 reflected the development and
installation of in-store web-based technology and spending on corporate
information technology streamlining.

Net cash used for financing
was $4.0 million, resulting primarily from the repurchase of common stock,
offset by funding from the credit facility and the issuance of common stock. Net
cash provided by financing in 2002 was $2.4 million, resulting primarily the
issuance of common stock under the Companys employee benefit plans,
partially offset by repurchase of common stock.

The Company expects capital
expenditures to be approximately $110.0 million to $120.0 million for the full
year of 2003, resulting primarily from new domestic superstore openings. In
addition, capital expenditures will result from international store openings,
refurbishment of a number of existing stores, and investment in information
technology streamlining. The Company currently plans to open approximately 35 to
40 domestic Borders superstores and six to eight international stores in 2003.
Average cash requirements for the opening of a prototype Borders Books and Music
superstore are $2.4 million, representing capital expenditures of $1.1 million,
inventory requirements (net of related accounts payable) of $1.1 million, and
$0.2 million of pre-opening costs. Average cash requirements to open a new or
expanded Waldenbooks store range from $0.4 million to $0.7 million, depending on
the size and format of the store. The Company plans to lease new store locations
predominantly under operating leases.

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

In May 2003, the Board of
Directors authorized an increase in the Companys share repurchase program
to $150.0 million (plus any proceeds and tax benefits resulting from stock
option exercises and tax benefits resulting from restricted shares purchased by
employees from the Company). During the 13 weeks ended April 27, 2003 and April
28, 2002, $13.8 million and $10.7 million of common stock was repurchased,
respectively. The Company currently has a share repurchase program in place with
remaining authorization to repurchase approximately $141.4 million. The Company
plans to continue the repurchase of its common stock throughout fiscal 2003,
subject to the Companys market conditions and trading.

17

---

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

On July 30, 2002, the
Company issued $50.0 million of senior guaranteed notes (the Notes)
due July 30, 2006 and bearing interest at 6.31% (payable semi-annually). The
proceeds of the sale of the Notes are being used to refinance existing
indebtedness of the Company and its subsidiaries and for general corporate
purposes. The note purchase agreement relating to the Notes contains covenants
which limit, among other things, the Companys ability to incur
indebtedness, grant liens, make investments, engage in any merger or
consolidation, dispose of assets or change the nature of its business, and
requires the Company to meet certain financial measures regarding net worth,
total debt coverage and fixed charge coverage. As of April 27, 2003 the Company
was in compliance with all covenants contained within this agreement.

The Company has two lease
financing facilities (collectively, the Lease Financing Facilities),
which were amended in May 2003, to finance new stores and other property owned
by unaffiliated entities and leased to the Company or its subsidiaries. The
original facility (the Original Lease Facility) will expire in June
2004 (2005 if certain conditions are satisfied). In June 2002, the Company
established a new facility (the New Lease Facility), which will
expire in 2007. The aggregate amount of borrowings permitted under the Lease
Financing Facilities is $25.0 million. Properties to be financed after the
effective date of the New Lease Facility will be financed under that Facility,
and no additional properties will be financed under the Original Lease Facility.
The Lease Financing Facilities provide financing to lessors of properties leased
to the Company or its subsidiaries through loans from lenders for up to 95% of a
projects cost. Additionally, under the New Lease Facility, the
unaffiliated lessor will make equity contributions approximating 5% of the cost
of each project. The lessors under the Original Lease Facility have made similar
contributions. Independent of the Companys obligations relating to the
leases, the Company and certain of its subsidiaries guarantee payment when due
of all amounts required to be paid to the third-party lenders. The principal
amount guaranteed is limited to approximately 89% of the original cost of a
project so long as the Company is not in default under the lease relating to
such project. The agreements relating to both of the Lease Financing Facilities
contain covenants and events of default that are similar to those contained in
the Credit Agreement described above. The Company is in compliance with these
covenants. Security interests in the properties underlying the leases and in the
Companys interests in the leases have been given to the lenders. The Lease
Financing Facilities contain cross default provisions with respect to the
obligations of the company under the Credit Agreement and certain other
agreements to which the Company is a party. There also are cross default
provisions with respect to the obligations relating to the Lease Financing
Facilities of Wilmington Trust Company, as owner-trustee of a grantor trust
formed for the Lease Financing Facilities, and the unaffiliated beneficial owner
of the grantor trust.

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

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

There were 4, 33 and 7
properties financed through the Original Lease Facility at April 27, 2003, April
28, 2002 and January 26, 2003, respectively, with financed values of $22.6
million, $119.0 million and $36.3 million. The Company has recorded
approximately $19.0 million in 2003 and $50.0 million in 2002 of the amounts
outstanding under the Original Lease Facility as capitalized leases under
Other assets (for the capital lease assets) and Long-term
capital lease and financing obligations (for the capital lease
liabilities) on the consolidated balance sheets. These amounts have been treated
as non-cash items on the consolidated statements of cash flows. There were no
borrowings under the New Lease Facility as of April 27, 2003. In the first quarter of 2003, the
Company permanently financed, through long-term leases, three properties that
had been financed through the Original Lease Facility with a total value of
approximately $13.7 million, none of which had been capitalized.

18

---

Management believes that
the rental payments for properties financed through the Lease Financing
Facilities may be lower than those which the Company could obtain elsewhere due
to, among other factors, (i) the lower borrowing rates available to the
Companys landlords under the facility and (ii) the fact that rental
payments for properties financed through the facility do not include
amortization of the principal amounts of the landlords indebtedness
related to the properties. Rental payments relating to such properties will be
adjusted when permanent financing is obtained to reflect the interest rates
available at the time of the refinancing and the amortization of principal.

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

The following table summarizes
the Company's significant financing and lease obligations at April 27, 2003:

| |                              |   |       |  |   |       |  |   |       |  |   |         |  |   |         | 
| | ---------------------------- | - | ----- |  | - | ----- |  | - | ----- |  | - | ------- |  | - | ------- | 
|
|
|
|
| | Credit Agreement borrowings  | $ | 116.3 |  | $ | --    |  | $ | --    |  | $ | --      |  | $ | 116.3   | 
| | Capital lease obligations    |   | 0.4   |  |   | 19.0  |  |   | --    |  |   | --      |  |   | 19.4    | 
| | Operating lease obligations  |   | 233.1 |  |   | 574.4 |  |   | 533.6 |  |   | 2,225.2 |  |   | 3,566.3 | 
| | Senior guaranteed notes      |   | --    |  |   | --    |  |   | 50.0  |  |   | --      |  |   | 50.0    | 
| |                              |   |       |  |   |       |  |   |       |  |   |         | 
| | Total                        | $ | 349.8 |  | $ | 593.4 |  | $ | 583.6 |  | $ | 2,225.2 |  | $ | 3,752.0 | 
|
| | Lease Facility guarantees(1) | $ | 22.6  |  | $ | --    |  | $ | --    |  | $ | --      |  | $ | 22.6    | 

(1) Includes $19.0 million
treated as capital lease and financing obligations.

The Company is subject to risk
resulting from interest rate  fluctuations  since interest on the Company's  borrowings
is principally  based on variable rates.
The Company's  objective in managing its exposure to interest rate  fluctuations is to
limit the impact of interest rate changes on earnings and cash flows and
to lower its overall borrowing costs. The Company primarily  utilizes  interest rate
swaps to achieve this objective,  effectively  converting a portion of its
variable rate exposures to fixed interest rates.

A portion of the
Companys operations takes place in foreign jurisdictions, primarily the
United Kingdom, Australia, New Zealand and Singapore. As a result, the
Companys financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets where the Company operates. Most transactions in foreign jurisdictions
are denominated in local currency, including local currency borrowings through
the Companys Credit Agreement. The Company has generally not used
derivative instruments to manage foreign currency risks.

## Critical
Accounting Policies and Estimates

In the ordinary course of
business, the Company has made a number of estimates and assumptions relating to
the reporting of results of operations and financial condition in the
preparation of its financial statements in conformity with accounting principles
generally accepted in the United States. Actual results could differ from those
estimates under different assumptions and conditions. The Company believes that
the following discussion addresses the Companys most critical accounting
policies and estimates. There have been no significant changes in these during
2003 as compared to the prior year, other than the policy addressing advertising
and vendor incentive programs, as noted below.

19

---

| | Asset
Impairments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
carrying value of long-lived assets is evaluated whenever changes in
circumstances indicate the carrying amount of such assets may not be
recoverable. In performing such reviews for recoverability, the Company compares
the expected cash flows to the carrying value of long-lived assets for the
applicable stores. If the expected future cash flows are less than the carrying
amount of such assets, the Company recognizes an impairment loss for the
difference between the carrying amount and the estimated fair value. Expected
future cash flows, which are estimated over each stores remaining lease
term, contain estimates of sales and the impact those future sales will have
upon cash flows. Future sales are estimated based upon a projection of each
stores sales trend of the past several years. Additionally, each
stores future cash contribution is based upon the most recent years
actual cash contribution, but is adjusted based upon projected sales trends.
Fair value is estimated using expected discounted future cash flows, with the
discount rate approximating the Companys borrowing rate. Significant
deterioration in the performance of the Companys stores compared to
projections could result in significant additional asset impairments.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Goodwill Impairment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Upon
adoption of FAS 142 on January 28, 2002, the Companys goodwill was tested
for impairment, and no impairment existed. The carrying amounts of the net
assets of the applicable reporting units (including goodwill) were compared to
the estimated fair values of those reporting units. Fair value was estimated
using a discounted cash flow model which depended on, among other factors,
estimates of future sales and expense trends, liquidity, and capitalization. The
discount rate used approximated the weighted average cost of capital of a
hypothetical third party buyer. Changes in any of the assumptions underlying
these estimates may result in the future impairment of goodwill. The
Companys annual tests of goodwill impairment are based upon the
methodology described above and are subject to the same risks and uncertainties.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
carrying value of the Companys inventory is affected by reserves for
shrinkage and non-returnable inventory. Projections of shrinkage are based upon
the results of regular, periodic physical counts of the Companys
inventory. The Companys shrinkage reserve is adjusted as warranted based
upon the trends yielded by the physical counts. Reserves for non-returnable
inventory are based upon the Companys history of liquidating
non-returnable inventory. The markdown percentages utilized in developing the
reserve are evaluated against actual, ongoing markdowns of non-returnable
inventory to ensure that they remain consistent. Significant differences between
future experience and that which was projected (for either the shrinkage or
non-returnable inventory reserves) could affect the recorded amounts of
inventory and cost of sales.                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
Company includes certain distribution and other expenses in its inventory costs,
particularly freight, distribution payroll, and certain occupancy expenses. In
addition, certain selling, general and administrative expenses are included in
inventory costs. These amounts totaled approximately $81.0 million and $84.6
million as of April 27, 2003 and April 28, 2002, respectively. The extent to
which these costs are included in inventory is based on certain estimates of
space and labor allocation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | All
leases, including those for properties financed through the Lease Financing
Facilities, are reviewed for capital or operating classification at their
inception under the guidance of Statement of Financial Accounting Standards No.
13, Accounting for Leases (FAS 13), as amended. The leases of
certain properties financed through the Original Lease Facility were capitalized
based upon this and other guidance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Furthermore,
properties financed through the Lease Financing Facilities are evaluated under
various accounting literature including EITF 92-1, Allocation of Residual
Value or First-Loss Guarantee to Minimum Lease Payments in Leases Involving Land
and Buildings, EITF 97-1, Implementation Issues in Accounting for
Lease Transactions Including those Involving Special Purpose Entities,
EITF 97-10, The Effect of Lessee Involvement in Asset Construction,
among others. Based on the results of analysis performed by the Company, leases
of the properties financed through the Original Lease Facility at April 27, 2003
are recorded as capital leases in the consolidated financial statements of the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Advertising and Vendor Incentive Programs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The
Company receives payments and credits from vendors pursuant to co-operative
advertising programs, shared markdown programs, purchase volume incentive
programs and magazine slotting programs. These programs continue to be
beneficial for both the Company and vendors, and the Company expects continued
participation in these types of programs. Changes in vendor participation
levels, as well as changes in the volume of merchandise purchased, among other
factors, could adversely impact the Companys results of operations and
liquidity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

20

---

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant
to co-operative advertising programs offered by vendors, the Company contracts
with vendors to promote merchandise for specified time periods. Pursuant to the
provisions of Emerging Issues Task Force Issue No. 02-16, Accounting by a
Customer (Including a Reseller) for Certain Consideration Received from a
Vendor (EITF 02-16), which the Company adopted effective January 1, 2003,
vendor consideration which represents a reimbursement of specific, incremental,
identifiable costs is included in the Selling, general and
administrative line on the consolidated statements of operations, along
with the related costs, in the period the promotion takes place. Consideration
which exceeds such costs is classified as a reduction of the Cost of
merchandise sold line on the consolidated statements of operations. Prior
to the adoption of EITF 02-16, all consideration and costs pursuant to
co-operative advertising programs were included in the Selling, general
and administrative expenses line of the consolidated statements of
operations. The Company has reclassified the prior years vendor
consideration to conform to current year presentation and EITF 02-16.
Additionally, the Company recorded $0.3 million of excess vendor consideration
as a reduction to its inventory balance at April 27, 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | The
Company also receives credits from vendors pursuant to shared markdown programs,
purchase volume programs, and magazine slotting programs. Credits received
pursuant to these programs are classified in the Cost of merchandise
sold line on the consolidated statements of operations, and are recognized
upon certain product volume thresholds being met or product placements
occurring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

## New Accounting
Guidance

As discussed above, the
Emerging Issues Task Force issued EITF 02-16 in November 2002, which is
effective prospectively for all vendor arrangements entered into after December
31, 2002. As previously discussed, the Consensus requires that consideration
received from a vendor be considered a reduction of the prices of vendors
products and shown as a reduction of cost of sales in the income statement of
the customer. If the consideration represents a reimbursement of specific
incremental identifiable costs incurred, these amounts should be offset against
the related costs with any excess consideration recorded in cost of sales. In
fiscal 2003, the Company has reclassified the prior years vendor
consideration to conform to current year presentation and EITF 02-16.
Additionally, the Company recorded $0.3 million of excess vendor consideration
as a reduction to its inventory balance at April 27, 2003.

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

The Company leases four
properties from unconsolidated variable interest entities (VIEs) that had
borrowings outstanding under the Original Lease Facility at January 26, 2003 and
April 27, 2003. Third parties have invested capital at risk equal to or in
excess of 5% of the assets of the VIEs, with the remainder being financed
through borrowings under the Original Lease Facility. This, and certain other
criteria, allow the Company not to consolidate the VIEs in the Companys
financial statements at April 27, 2003. Rather, the Company accounts for these
arrangements as capital leases. Accordingly, the capitalizable portion of the
leased facilities and the related borrowings are reported in the Companys
accompanying balance sheets. Independent of the Companys obligations
relating to these leases, the Company and certain of its subsidiaries guarantee
payment when due of all amounts required to be paid to the third-party lenders.
At April 27, 2003, the maximum loss that the Company could incur under these
guarantees approximated $22.6 million.

The Company also leases two
properties from unconsolidated VIEs that had borrowings outstanding under the
Original Lease Facility at January 26, 2003, but whose borrowings had been
permanently financed through long-term leases during the first quarter of 2003.
Third parties have invested capital at risk equal to 5% of the assets of the
VIEs, with the remainder being financed through borrowings unrelated to the
Lease Financing Facilities. This, and certain other criteria, allow the Company
not to consolidate the VIEs in the Companys financial statements at April
27, 2003. Rather, the Company accounts for these arrangements as operating
leases. Accordingly, neither the leased facilities nor the related debt is
reported in the Companys accompanying balance sheets. Independent of the
Companys obligations relating to these leases, the Company and certain of
its subsidiaries guarantee payment when due of all amounts required to be paid
to the third-party lenders. At April 27, 2003, the maximum loss that the Company
could incur under these guarantees approximated $6.0 million.

21

---

The Company anticipates
permanently refinancing two of the properties with borrowings outstanding under
the Original Lease Facility at January 26, 2003 and April 27, 2003 through
long-term leases. The Company expects to begin consolidating the remaining four
VIEs in the quarter ending October 26, 2003, because it believes it is the
VIEs primary beneficiary under FIN 46s requirements. At October 26,
2003, consolidation of these VIEs would have the effect of increasing property
and equipment by $7.1 million, net of accumulated depreciation of $1.5 million,
and increasing long-term capital lease and financing obligations by $6.9
million. Minority interests of $1.7 million would also be reported, and the
Company would record a charge of $1.0 million, net of tax, as a cumulative
effect of change in accounting principle.

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

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

## Related Party
Transactions

The Company has not engaged
in any related party transactions which would have had a material effect on the
Companys financial position, cash flows, or results of operations.

## Forward
Looking Statements

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

## ITEM 4.
CONTROLS AND PROCEDURES

## Controls and
Procedures

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

## Changes in
Internal Controls

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

22

---

## PART II -
OTHER INFORMATION

## ITEM 1. LEGAL
PROCEEDINGS

The Companys Form
10-K Annual Report for the fiscal year ended January 26, 2003, describes pending
lawsuits and claims against the Company. The status of such litigation and
claims has not changed in any significant respect except as follows:

Mediation of the California
overtime litigation did not result in a resolution of the matter, and the
Company will continue to vigorously defend the action. Given current factual and
legal uncertainties, the Company is not in a position to reasonably estimate
the amount of the loss, if any. The
trial has been scheduled for March 15, 2004.

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

In addition to the matters
described or referred to above, the Company is from time to time involved in or
affected by other litigation and claims incidental to the conduct of its
businesses. The Company does not believe that any such other litigation or
claims will have a material adverse effect on its liquidity, financial position
or results of operations.

## ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS:

| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                 | 
| | --- | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                
| |     |                      | 10.51                                                                                                                                                                                                                                                                                             | Amendment No. 2 to the  Multicurrency  Revolving Credit  Agreement dated
as of May 20, 2003 among Borders Group Inc.,  certain of its subsidiaries and
other Parties thereto.                                                                                                                                                   | 
| |     |                      | 10.52                                                                                                                                                                                                                                                                                             | Omnibus  Amendment  No. 2 dated as of May 20, 2003,  relating to the
Amended and Restated  Participation  Agreement,  the Amended and restated  Credit
Agreement,  the Amended and Restated Guarantee Agreement,  and certain other agreements
among Borders Group Inc., certain of its subsidiaries and other Parties thereto. | 
| |     |                      | 10.53                                                                                                                                                                                                                                                                                             | Amendment No. 1 to the Master Agreement dated as of May 20, 2003 among
Borders Group Inc., certain of its subsidiaries and other Parties thereto.                                                                                                                                                                               | 
| |     |                      | 99.1                                                                                                                                                                                                                                                                                              | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                                                                                                                                                                                         | 
| |     |                      | 99.2                                                                                                                                                                                                                                                                                              | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            | 
| |     |                      | 99.3                                                                                                                                                                                                                                                                                              | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                              | 
| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                 | 
| | (b) | Reports on Form 8-K: |                                                                                                                                                                                                                                                                                                  
| |     |                      | Subsequent
to the 13 weeks ended April 27, 2003 and prior to the filing of this Form 10-Q,
one report was filed on Form 8-K under Item 9. Regulation FD Disclosure. This
report, filed on May 22, 2003, furnished a press release with earnings information
for the quarter ended April 27, 2003. |                                                                                                                                                                                                                                                                                                                                 | 

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:        June 11, 2003 | By: /s/ Edward W. Wilhelm
|-------------------------- | -------------------------
|                           | Edward W. Wilhelm        
|                           | Senior Vice President and
|                           | Chief Financial Officer  
|                           | (Principal Financial and 
|                           | Accounting Officer)      

24

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# CERTIFICATIONS

| |                                         |                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                   | 
| | --------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | I, Gregory P. Josefowicz, certify that: |                                                                                                                                                                                                                                                                                                                                                                                                         
| | 1)                                      | I have reviewed this quarterly report on Form 10-Q of Borders Group, Inc.;                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                  
| | 2)                                      | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
     material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
     misleading with respect to the period covered by this quarterly report;                                                                 |                                                                                                                                                                                                                                                                                                                  
| | 3)                                      | Based on my knowledge, the financial statements, and other financial information included in this quarterly report,
     fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
     and for, the periods presented in this quarterly report;                                                                                    |                                                                                                                                                                                                                                                                                                                  
| | 4)                                      | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                  
| |                                         | a)                                                                                                                                                                                                                                                                                                                                                                                                       | designed such disclosure controls and procedures to ensure that material information relating to the registrant,
         including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
         period in which this quarterly report is being prepared; | 
| |                                         | b)                                                                                                                                                                                                                                                                                                                                                                                                       | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
         the filing date of this quarterly report (the "Evaluation Date"); and                                                                                                            | 
| |                                         | c)                                                                                                                                                                                                                                                                                                                                                                                                       | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
         based on our evaluation as of the Evaluation Date;                                                                                                                                  | 
| | 5)                                      | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
     auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                  
| |                                         | a)                                                                                                                                                                                                                                                                                                                                                                                                       | all significant deficiencies in the design or operation of internal controls which could adversely affect the
         registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
         auditors any material weaknesses in internal controls; and  | 
| |                                         | b)                                                                                                                                                                                                                                                                                                                                                                                                       | any fraud, whether or not material, that involves management or other employees who have a significant role in the
         registrant's internal controls; and                                                                                                                                                   | 
| | 6)                                      | The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
     significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to
     the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
     weaknesses. |                                                                                                                                                                                                                                                                                                                  

| |                         |                                  | 
| | ----------------------- | -------------------------------- | 
| | Date:     June 11, 2003 | By:     /s/Gregory P. Josefowicz | 
| |                         | Gregory P. Josefowicz            | 
| |                         | Chairman, President and          | 
| |                         | Cheif Executive Officer          | 

25

---

| |                                     |                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                                                                                                                                                                                                                                                   | 
| | ----------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | I, Edward W. Wilhelm, certify that: |                                                                                                                                                                                                                                                                                                                                                                                                         
| | 1)                                  | I have reviewed this quarterly report on Form 10-Q of Borders Group, Inc.;                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                  
| | 2)                                  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a
     material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
     misleading with respect to the period covered by this quarterly report;                                                                 |                                                                                                                                                                                                                                                                                                                  
| | 3)                                  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report,
     fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
     and for, the periods presented in this quarterly report;                                                                                    |                                                                                                                                                                                                                                                                                                                  
| | 4)                                  | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
      procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                  
| |                                     | a)                                                                                                                                                                                                                                                                                                                                                                                                       | designed such disclosure controls and procedures to ensure that material information relating to the registrant,
         including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
         period in which this quarterly report is being prepared; | 
| |                                     | b)                                                                                                                                                                                                                                                                                                                                                                                                       | evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to
         the filing date of this quarterly report (the "Evaluation Date"); and                                                                                                            | 
| |                                     | c)                                                                                                                                                                                                                                                                                                                                                                                                       | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures
         based on our evaluation as of the Evaluation Date;                                                                                                                                  | 
| | 5)                                  | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's
     auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                  
| |                                     | a)                                                                                                                                                                                                                                                                                                                                                                                                       | all significant deficiencies in the design or operation of internal controls which could adversely affect the
         registrant's ability to record, process, summarize and report financial data and have identified for the registrant's
         auditors any material weaknesses in internal controls; and  | 
| |                                     | b)                                                                                                                                                                                                                                                                                                                                                                                                       | any fraud, whether or not material, that involves management or other employees who have a significant role in the
         registrant's internal controls; and                                                                                                                                                   | 
| | 6)                                  | The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were
     significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to
     the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
     weaknesses. |                                                                                                                                                                                                                                                                                                                  

| |                         |                               | 
| | ----------------------- | ----------------------------- | 
| | Date:     June 11, 2003 | By:     /s/ Edward W. Wilhelm | 
| |                         | Edward W. Wilhelm             | 
| |                         | Senior Vice President and     | 
| |                         | Chief Financial Officer       | 

26

---

## EXHIBIT INDEX

## DESCRIPTION OF EXHIBITS

| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                 | 
| | --- | -------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | (a) | Exhibits:            |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                
| |     |                      | 10.51                                                                                                                                                                                                                                                                                             | Amendment No. 2 to the  Multicurrency  Revolving Credit  Agreement dated
as of May 20, 2003 among Borders Group Inc.,  certain of its subsidiaries and
other Parties thereto.                                                                                                                                                   | 
| |     |                      | 10.52                                                                                                                                                                                                                                                                                             | Omnibus  Amendment  No. 2 dated as of May 20, 2003,  relating to the
Amended and Restated  Participation  Agreement,  the Amended and restated  Credit
Agreement,  the Amended and Restated Guarantee Agreement,  and certain other agreements
among Borders Group Inc., certain of its subsidiaries and other Parties thereto. | 
| |     |                      | 10.53                                                                                                                                                                                                                                                                                             | Amendment No. 1 to the Master Agreement dated as of May 20, 2003 among
Borders Group Inc., certain of its subsidiaries and other Parties thereto.                                                                                                                                                                               | 
| |     |                      | 99.1                                                                                                                                                                                                                                                                                              | Cautionary Statement  under  the  Private  Securities
Litigation  Reform  Act of  1995 - "Safe  Harbor" for
Forward-Looking Statements.                                                                                                                                                                                         | 
| |     |                      | 99.2                                                                                                                                                                                                                                                                                              | Statement
of Gregory P. Josefowicz, Chairman, President and Chief Executive Officer of
Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                            | 
| |     |                      | 99.3                                                                                                                                                                                                                                                                                              | Statement
of Edward W. Wilhelm, Senior Vice President and Chief Financial Officer of Borders Group, Inc. pursuant to Section
906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                              | 
| |     |                      |                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                                                                                                                                                 | 
| | (b) | Reports on Form 8-K: |                                                                                                                                                                                                                                                                                                  
| |     |                      | Subsequent
to the 13 weeks ended April 27, 2003 and prior to the filing of this Form 10-Q,
one report was filed on Form 8-K under Item 9. Regulation FD Disclosure. This
report, filed on May 22, 2003, furnished a press release with earnings information
for the quarter ended April 27, 2003. |                                                                                                                                                                                                                                                                                                                                 | 

27

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