SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                   FORM 10 - Q
(Mark One)

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

               For the quarterly period ended October 27, 1996

                                       OR

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

            For the transition period from ________ to __________.

                         Commission file number 1-13740

                               Borders Group, Inc.
             (Exact name of registrant as specified in its charter)

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

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

                                (313) 913-1100
             (Registrant's telephone number, including area code)

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

           Title of Class                  Shares Outstanding As Of
            Common Stock                      December 6, 1996
         ($.001 par value)                       37,848,548


<PAGE>






                               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

Part II - Other Information


  Item 1.  Legal Proceedings                                N/A

  Item 2.  Changes in Securities                            N/A

  Item 3.  Defaults Upon Senior Securities                  N/A

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

  Item 5.   Other Information                               N/A

  Item 6.  Exhibits and Reports on Form 8-K                  16


   Signatures




<PAGE>


                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              (Dollars in millions except per common share data)
                                   (Unaudited)


                                                         13 Weeks Ended
                                                   October 27,       October 22,
                                                     1996               1995
                                                   -------            -------
Sales                                              $  413.5           $  362.1
Cost of merchandise sold, including
  occupancy costs                                     314.3              279.4
                                                     ------            -------
Gross profit                                           99.2               82.7
Expenses, selling, general and administrative         100.0               89.1
Pre-opening expense                                     1.8                1.4
Goodwill amortization and write-down                    0.3                0.6
Operating losses of stores identified
 for closure                                           (--)               (0.4)
                                                    -------            -------
Operating loss                                         (2.9)              (8.0)
Interest expense                                        1.8                1.8
                                                    -------            -------
Loss before income tax                                 (4.7)              (9.8)
Income tax benefit                                     (2.0)              (3.8)
                                                    -------            -------
Net loss                                           $   (2.7)          $   (6.0)
                                                   ========            ========

Loss per common share data (Pro forma for 13 weeks ended October 22, 1995 - Note
 2):
Loss per common share                              $ (0.06)           $  (0.15)
                                                   =======             ========
Weighted average common shares
  outstanding (in thousands)                        41,855              40,401
                                                   =======            =======

     See accompanying Notes to Unaudited Condensed Consolidated Financial
                                   Statements.

<PAGE>







                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
              (Dollars in millions except per common share data)
                                   (Unaudited)


                                                         39 Weeks Ended
                                                   October 27,       October 22,
                                                    1996               1995
                                                   -------            -------
Sales                                             $ 1,231.8          $ 1,079.5
Cost of merchandise sold, including
  occupancy costs                                     941.6              836.6
                                                    ------             ------
Gross profit                                          290.2              242.9
Selling, general and administrative expenses          294.3              263.7
Pre-opening expense                                     3.8                3.3
Goodwill amortization and writedown                     0.8              185.1
Operating losses of stores identified
 for closure                                           (--)               (2.7)
                                                     -----             -------
Operating loss                                         (8.7)            (206.5)
Interest expense                                        5.3                2.1
                                                     -----             -------
Loss before income tax                                (14.0)            (208.6)
Income tax benefit                                     (5.6)             (10.1)
                                                     -----             -------
Net loss                                           $   (8.4)         $  (198.5)
                                                     ======            =======
Loss per common share data (Pro forma for 39 weeks ended October 22, 1995 - Note
 2):
Loss per common share                                $(0.20)          $(4.66)
                                                    =======          =======
Weighted average common shares
  outstanding (in thousands)                         41,515            42,556
                                                    =======          =======

     See accompanying Notes to Unaudited Condensed Consolidated Financial
                                   Statements.

<PAGE>


                               BORDERS GROUP, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
               (Dollars in millions except per common share data)
                                   (Unaudited)

                                                10/27/96   10/22/95    1/28/96
Assets
Current Assets
Cash                                            $   43.2   $   41.5   $   36.5
Merchandise inventories                            869.8      736.8      637.5
Accounts receivable and other current assets        50.6      104.6       66.2
                                                 -------    -------    -------
Total current assets                               963.6      882.9      740.2

Property and equipment, net of accumulated
   depreciation of $229.7,
  $188.9 and $218.5, respectively                  279.3      288.7      243.5
Other assets and deferred charges                   38.7       16.2       29.0
Goodwill, net of accumulated amortization of
   $41.2, $39.8, and
  $40.4, respectively (Note 3)                      38.8       74.4       39.6
                                                 -------    -------    -------
                                                $1,320.4   $1,262.2   $1,052.3
                                                 =======    =======    =======



<PAGE>


                               BORDERS GROUP, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
               (Dollars in millions except per common share data)
                                   (Unaudited)

Liabilities and Stockholders' Equity          10/27/96   10/22/95  1/28/96

Current liabilities:

Short-term debt and capital lease
  obligations due within one year             $  180.5 $  195.2  $   60.5
Trade accounts payable                           498.8    381.7     304.8
Accrued payroll and other liabilities            133.4    124.8     157.0
Restructuring reserve                              3.8     21.0       7.0
Taxes, including income taxes                       --      7.7      13.6
                                               -------  -------   -------

Total  Current Liabilities                       816.5    730.4     542.9
Long-term debt and capital lease
   obligations                                     6.5      8.7       8.1
Other long-term liabilities                       25.6     46.6      29.3
Commitments and contingencies (Note 5)              --       --        --
                                               -------  -------   -------

Total Liabilities                                848.6    785.7     580.3
                                               -------  -------   -------
Stockholders' equity:
Preferred Stock, par value $.001 per
   share; 10,000,000 shares authorized;
  no shares issued and outstanding                  --       --        --

Common stock, par value $.001 per share;
  200,000,000 shares authorized;
   37,832,899, 37,510,314 and 37,658,992
  issued and outstanding at
  October 27, 1996, October 22, 1995, and
   January 28, 1996, respectively                   --       --        --
Additional paid-in capital                       674.8    659.8     669.2
Officers receivables and deferred
   compensation                                   (0.8)    (2.1)     (3.4)
Retained earnings (deficit)                     (202.2)  (181.2)   (193.8)
                                               -------  -------   -------

Total stockholders' equity                       471.8    476.5     472.0
                                               -------  -------   -------
                                              $1,320.4 $1,262.2  $1,052.3
                                               =======  =======   =======
      See accompanying Notes to Unaudited Condensed Consolidated Financial
                                   Statements.




<PAGE>



                               BORDERS GROUP, INC.
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                     FOR THE 39 WEEKS ENDED October 27, 1996
                              (Dollars in millions)
                                   (Unaudited)



                                         Officers
                                           Rec.     Add'l   Retained
                          Common Stock   Deferred  Paid-in  Earnings
                        Shares  Amount     Comp    Capital  (Deficit)    Total

Balance at 1/28/96      37,658,992  $--    $ (3.4)  $ 669.2  $ (193.8)  $ 472.0
Net loss                    --       --         --       --      (8.4)     (8.4)
Issuance of common
   stock                   173,907   --         --      3.9        --       3.9

Tax benefit of equity
   compensation             --       --         --      1.7        --       1.7

Payment of receivable
   and deferred
   compensation             --       --       2.6        --        --       2.6
                        ----------  ---    -------  -------  --------    ------

Balance at 10/27/96     37,832,899  $--    $ (0.8)  $ 674.8  $  202.2    $471.8
                        ==========  ===    =======  =======  ========    ======


      See accompanying Notes to Unaudited Condensed Consolidated Financial
                                   Statements.


<PAGE>


                               BORDERS GROUP, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Dollars in millions)
                                   (Unaudited)

                                                   39 Weeks Ended
                                              October 27,   October 22,
                                                 1996           1995
Cash provided by (used for):
Operations
Net loss                                         $(8.4)      $(198.5)
Adjustments to reconcile net loss
  to operating cash flows:
Depreciation and goodwill amortization and
   writedown                                      30.0         213.1
Other non-cash charges                             --            9.5
Increase (decrease) in other long-term assets
   and liabilities                               (12.8)          1.8
Cash provided by (used for) current assets
   and current liabilities:
Increase in inventories                         (232.3)       (209.3)
Decrease in restructuring reserve                 (2.1)        (25.3)
(Increase)decrease in property held for
  resale                                          15.4         (31.1)
Increase in accounts payable                     194.0         110.5
Other, net                                       (29.1)         10.6
                                                ------        ------
Net cash used for operations                     (45.3)       (118.7)
                                                ------        ------
Investing
Capital expenditures                             (71.9)        (89.9)
Proceeds from asset sale                           2.0           ---
                                                ------        ------
Net cash used for investing                      (69.9)        (89.9)
                                                ------        ------

Financing
Net funding from credit facility                 120.0         195.0
Issuance of common stock                           3.9           9.7
Repayment of long-term debt                       (2.0)         (6.9)
Purchase of shares held by Kmart                    --         (72.7)
Repayment of Kmart intercompany borrowings          --        (112.0)
                                                ------        ------
Net cash provided by financing                   121.9          13.1
                                                ------        ------
Net increase (decrease) in cash                    6.7        (195.5)
and equivalents
Cash and equivalents at beginning
of year                                           36.5         237.0
                                                ------        ------
Cash and equivalents at end of period          $  43.2       $  41.5
                                                ======        ======
          See accompanying Notes to Unaudited Condensed Consolidated
                              Financial Statements.


<PAGE>


                               BORDERS GROUP, INC.

                          NOTES TO UNAUDITED CONDENSED
                        CONSOLIDATED FINANCIAL STATEMENTS
               (Dollars in millions except per common share data)



Note 1 - Basis of Presentation

      The accompanying  unaudited condensed consolidated financial statements of
Borders  Group,  Inc. (the  Company) have been prepared in accordance  with Rule
10-01  of  Regulation  S-X and do not  include  all the  information  and  notes
required by generally  accepted  accounting  principles  for complete  financial
statements.  All adjustments,  consisting only of normal recurring  adjustments,
have been made which,  in the opinion of  management,  are  necessary for a fair
presentation  of the results of the interim  periods.  The results of operations
for such interim periods are not necessarily indicative of results of operations
for a full year.  The  unaudited  condensed  consolidated  financial  statements
should  be  read  in  conjunction  with  the  Company's  consolidated  financial
statements  and notes  thereto for the fiscal  year ended  January 28, 1996 (the
1995 consolidated financial statements).

      The  Company's  fiscal year ends on the Sunday  immediately  preceding the
last Wednesday in January.  At October 27, 1996, the Company operated a chain of
966 mall-based bookstores,  142 book superstores,  and 5 music stores throughout
the United States.

      Certain reclassifications of previously reported October 22, 1995 balances
have been made to conform with the 1995 change in reporting presentation.

Note 2 - Public Offering of Common Stock

      An initial  public  offering of the  Company's  common stock (the IPO) was
completed  June 1, 1995.  Prior to the IPO,  the  Company  was a  majority-owned
subsidiary  of  Kmart.  As a  result  of the  IPO and a  subsequent  transaction
completed  in August 1995,  Kmart no longer  holds an interest in the  Company's
common  stock.  See the  1995  consolidated  financial  statements  for  further
discussion.


<PAGE>


      Weighted average shares outstanding are calculated as follows:
                                                                       Pro Forma
                                                  13 Weeks      13 Weeks
                                                    Ended        Ended
                                                  10/27/96      10/22/95
                                                  --------      --------
Shares outstanding at beginning of period          37,776         42,867
Purchase of Kmart's remaining interest                            (3,981)
Shares issued during the period                        38             15
Common stock equivalents                            4,040          1,500
                                                   ------         ------
Weighted average common shares outstanding         41,854         40,401
                                                   ======         ======
The pro forma  earnings per common share data are based on actual  common shares
outstanding  after the IPO and  assume the IPO took  place at the  beginning  of
fiscal 1995.

Note 3 - Accounting for Goodwill

     In the second and fourth  quarters  of 1995 the  Company  recorded  pre-tax
charges to operations of $182.0 and $19.8,  respectively,  to reflect the change
in the method of  evaluating  the  recoverability  of goodwill and its continued
application.  These noncash  write-downs in goodwill were the result of a change
in policy  by the  Company  after  the IPO to  evaluate  the  recoverability  of
goodwill  based on a fair value method.  There was no write-down  required under
this policy in the quarter or year-to-date period ended October 27, 1996.

Note 4 - Restructuring Program

      In 1993, the Company implemented a restructuring plan pursuant to which it
planned  to close 187  underperforming  Walden  stores  and to  combine  certain
distribution  and  headquarters  functions  of Borders and  Walden.  The Company
recorded a restructuring  charge of $142.8 to provide for the estimated costs of
implementing the plan. The Company recorded an additional  charge of $6.4 in the
fourth  quarter of 1994 to reflect  revised  estimates of the cost of completing
the  restructuring  plan. As of January 28, 1996, the program was  substantially
complete. For the 13 weeks and 39 weeks ended October 27, 1996, $0.5 and $2.1 of
cash expenditures were charged to the restructuring reserve.



<PAGE>



Note 5 - Commitments and Contingencies

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

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

      The  Company  does not  believe  that the note  purchase  would have had a
material effect on the Company's financial position or earnings.

Note 6 - Financing

     Credit Facility:  The Company has a credit agreement which provides a $300,
five-year  working capital  facility.  Borrowings under the credit facility bear
interest at a base rate or an increment over LIBOR at the Company's option.  The
credit agreement contains operating  covenants which limit the Company's ability
to  incur  indebtedness,  make  acquisitions,   dispose  of  assets  and  issue,
repurchase  in excess of $50 million of its common  stock,  pay dividends on its
common  stock,  and  require  the  Company to meet  certain  financial  measures
regarding fixed charge  coverage,  leverage and tangible net worth.  The Company
had borrowings  outstanding  under the credit  facility of $180.0 at October 27,
1996 and $215.0 at December 9, 1996.

Lease Financing  Facility:  On November 26, 1995 the Company entered into a five
year, $150 lease financing  facility ("the  Facility") to finance new stores and
other property through operating leases.  The Facility will provide financing to
Lessors through loans from a third party lender for up to 95% of a project cost.
It is expected that Lessors will make equity  contributions  approximating 5% of
each  project.  Independent  of its  obligations  as lessee,  the  Company  will
guarantee payment when due of all amounts required to be paid to the third party
lender.  The principal amount guaranteed will be limited to approximately 89% of
the  original  cost of a project so long as the Company is not in default  under
the lease relating to such project.  There was $84.1 outstanding under the lease
facility at October 27, 1996 and $95.5 at December 9, 1996.

      In February  1996,  the Company  entered into  interest  rate swaps with a
total  notional  amount  of $140,  which  effectively  converted  variable  rate
borrowings  to a fixed rate based on 3 month LIBOR.  These swap  agreements  all
expire within 12 months of the date the Company entered into the agreements.



<PAGE>






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

General

      The Company,  through its subsidiaries,  is the second largest operator of
book superstores and the largest operator of mall-based bookstores in the United
States  based upon both sales and number of stores.  At October  27,  1996,  the
Company operated 142 book superstores under the Borders name, 966 mall-based and
other  bookstores  primarily under the Waldenbooks  name, and 5 stores under the
names Planet Music and CD Superstore.

      The  Company's  third  quarter of 1996 and 1995  consisted of the 13 weeks
ended October 27, 1996 and October 22, 1995, respectively.

Reporting  Format.  During 1995, the Company  changed its reporting  format from
prior years to reclassify  certain occupancy costs and exclude buying costs from
cost  of  sales.  Previously  reported  October  22,  1995  balances  have  been
reclassified to conform to the revised presentation.

Results of Operations

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

                                       13 Weeks Ended            39 Weeks Ended
                                       ---------------           ---------------
                                      10/27/96   10/22/95    10/27/96  10/22/95
                                       -----      -----       -----     -----


Sales                                    100.0%     100.0%    100.0%     100.0%
Cost of merchandise sold, including
occupancy costs                           76.0       77.2      76.4       77.5
                                         -----      -----     -----      -----
Gross margin                              24.0       22.8      23.6       22.5
Selling, general and administrative
expenses                                  24.2       24.6      23.9       24.4
Pre-opening expense                        0.4        0.4       0.3        0.3
Goodwill amortization and writedown        0.1        0.2       0.1       17.1
Operating losses of stores identified
for closure (1)                            --        (0.1)      --        (0.3)
                                          -----      -----    -----      -----
Operating loss                            (0.7)      (2.2)     (0.7)     (19.1)
Interest expense                           0.4        0.5       0.4        0.2
                                          -----      -----    -----      -----
Loss before income tax                    (1.1)      (2.7)     (1.1)     (19.3)
Income tax benefit                        (0.5)      (1.0)     (0.5)      (0.9)
                                          -----      -----    -----      -----
Net Loss                                  (0.7)%     (1.7)%    (1.6)%    (18.4)%
                                          =====      =====    =====      =====
Net Loss excluding writedown              (0.7)%     (1.7)%    (1.6)%     (1.5)%
                                          =====      =====    =====      =====

(1)  Operating  losses from stores  included  in the  Waldenbooks  restructuring
program are charged against the reserve for such losses in 1995.

<PAGE>



Store Activity

The Company's store activity is summarized below:

                                          Quarter Ended         Year Ended
                                       October 27,  October 22, January 28,
                                           1996        1995         1996
                                         --------     -------     -------
Borders Superstores
Beginning number of stores                   127          88           75
Openings                                      15           9           41
                                           -----       -----        -----

Ending number of stores                      142          97          116
                                           =====       =====        =====

Walden Mall Bookstores
Beginning number of stores                   966       1,037        1,102
Openings                                       5           3            5
Closings                                      (5)        (17)        (115)
                                           -----       -----        -----
Ending number of stores                      966       1,023          992
                                           =====       =====        =====

CD Superstores/ Planet Music
Superstores:
Beginning number of stores                     7          10           10
Closings                                      (2)        ---           (1)
                                           -----       -----        -----
Endings                                        5          10            9
                                           =====       =====        =====


13 Weeks Ended October 27, 1996 and October 22, 1995

      Sales in the third quarter of 1996 were $413.5  million,  a $51.4 million,
or 14.2%,  increase  over  third  quarter  1995  sales of $362.1  million.  This
increase  reflects  a $63.0  million,  or  42.3%,  increase  in  Borders'  sales
resulting from new store openings and a comparable store sales increase of 8.6%.
This  increase  was  offset in part by a decline  in  Waldenbooks  sales of $7.8
million due to store closings and a 0.2% decrease in comparable store sales.

      Cost of merchandise sold, including occupancy costs, was $314.3 million in
the third quarter of 1996, as compared with $279.4  million in the third quarter
of 1995. Gross margin as a percentage of sales was 24.0% in 1996 versus 22.8% in
1995. This 1.2%  improvement  reflects the impact of  consolidated  distribution
operations  and improved  buying  resulting in higher  initial  product  margin,
reduced  depreciation  as a result of the fourth quarter 1995 SFAS 121 write-off
and tighter control of inventory shrinkage.

      Selling, general and administrative ("SG&A") expenses in the third quarter
of 1996 were up $10.9 million, or 12.2%, over SG&A expenses in the third quarter
of 1995 ($100.0  million versus $89.1 million).  As a percentage of sales,  SG&A
expenses  fell from 24.6% to 24.2% in 1996.  This 0.4% decrease is primarily due
to the leveraging of corporate overhead over the Company's expanding sales base,
as well as headcount and wage savings resulting from the move of the Waldenbooks
headquarters  from  Stamford,  Connecticut  to Ann Arbor,  Michigan in the third
quarter of 1995 and higher marketing allowances.

      Pre-opening  expense  in the third  quarter  of 1996 was $1.8  million  as
compared to $1.4 million in 1995.  Pre-opening  expense consists  principally of
grand-opening  advertising expense and store payroll related to the opening, and
is expensed in the first full fiscal month of a store's operations.  Pre-opening
expense per store  varies  primarily  as a result of  differing  levels of grand
opening  advertising,   depending  on  the  presence  of  the  Company  and  its
competitors in the market and differing  levels of labor costs  associated  with
merchandising  the  store.  The  Company  opened 15  Borders  superstores  and 5
Waldenbooks  mall-based  store in the third  quarter  of 1996 as  compared  to 9
Borders  superstores  and 3 Waldenbooks  store in the third quarter of 1995. The
increase  in  pre-opening  expense  is a result of the  timing of the 1996 store
openings.

      Goodwill  amortization  was $0.3  million  in the  third  quarter  1996 as
compared to $0.6  million in 1995.  The decrease in goodwill  amortization  is a
result of the goodwill write-down taken in 1995.

      Interest  expense was $1.8 million in both the third quarter of 1996 and
1995.

       Income  tax  benefit  in the third  quarter  of 1996 was $2.0  million as
compared to a benefit of $3.8 million in 1995.

39 Weeks Ended October 27, 1996 and October 22, 1995

      Sales for the 39 weeks ended October 27, 1996,  were $1,231.8  million,  a
$152.3 million, or 14.1%, increase over sales for the 39 weeks ended October 22,
1995, of $1,079.5 million.  This increase  reflects a $194.0 million,  or 46.0%,
increase in Borders'  sales  resulting  from new store openings and a comparable
store sales  increase of 9.2%.  This increase was offset in part by a decline in
Waldenbooks  sales of $34.5 million due to store closings and a 1.2% decrease in
comparable store sales.

      Cost of merchandise sold, including occupancy costs, was $941.6 million in
the first 39 weeks of 1996, as compared  with $836.6  million in the same period
of 1995. Gross margin as a percentage of sales was 23.6% in 1996 versus 22.5% in
1995. This 1.1% improvement  reflects the impact of higher initial margin due to
improved  buying,  tighter  control of  inventory  shrinkage  and  savings  from
consolidated distribution operations.

      Selling,  general  and  administrative  ("SG&A")  expenses in the 39 weeks
ended October 27, 1996 were $294.3  million  versus $263.7  million for the same
period of 1995. As a percentage of sales,  SG&A expenses fell from 24.4% in 1995
to 23.9%  1996.  This  0.5%  decrease  is  primarily  due to the  leveraging  of
corporate overhead over the Company's expanding sales base, as well as headcount
and wage savings  resulting from the move of the Waldenbooks  headquarters  from
Stamford,  Connecticut  to Ann Arbor,  Michigan in the third quarter of 1995 and
higher co-op advertising rebates.

      Pre-opening  expense  in the  first 39  weeks  of 1996  was  $3.8  million
compared to $3.3 million in the same 1995 period.  The Company opened 26 Borders
superstores and 8 Waldenbooks  mall-based  store by the end of the third quarter
of 1996 as compared to 22 Borders  superstores  and 4  Waldenbooks  store in the
first 39 weeks of 1995.

     Goodwill  amortization  was $0.8  million  in the first 39 weeks of 1996 as
compared to $185.1 million of goodwill  amortization  and writedown in the first
39 weeks of 1995,  which  included  the  $182.0  writedown  taken in the  second
quarter  of 1995.  The  decrease  in  goodwill  amortization  is a result of the
goodwill write-down taken in 1995.

      Interest expense was $5.3 million in 1996 as compared to $2.1 in 1995. The
increase is due  primarily  to  borrowings  outstanding  during the period ended
October 27, 1996 used to fund the Kmart share  purchase in the third  quarter of
1995.

       Income  tax  benefit  for the first 39 weeks of 1996 was $5.6  million as
compared to a benefit of $10.1 million in the same 1995 period.

Liquidity and Capital Resources

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

      Net cash used for  operations  for the 39 weeks ended October 27, 1996 was
$46.3 million as compared to $118.7 million in the  corresponding  period in the
prior year.  The current  year  activity  primarily  reflects a net loss of $8.4
million  combined with an increase in payables of $194.0  million and a decrease
in  property  held for resale of $15.4  million  offset by a  decrease  in other
current  liabilities  of $27.1 million and an increase in  inventories of $232.8
million.  The decrease in cash used for operations as compared to the prior year
is primarily attributable to the decrease in inventory, net of accounts payable,
over the prior year  representing the Company's focus on reducing its investment
in inventory at mall stores and improving inventory  management  resulting in an
increase  in vendor  funded  inventory.  Other  operating  cash  flow  primarily
represents  decreases  in  accrued  liabilities  and  other  non-trade  accounts
payable.  The Company  expects to complete  the sale of  properties  included in
property held for resale during 1996 and 1997.

      Net  cash  used for  investing  for the  first 39 weeks of 1996 was  $69.9
million as compared to $89.9 million in the first 39 weeks of 1995.  The Company
opened 26 new superstores and 8 new Waldenbooks  stores in the first 39 weeks of
1996 versus 22 new  superstores  in the first 39 weeks of 1995.  The decrease is
due primarily to the use of the company's lease facility to construct  developer
financed store locations.

      Net cash  provided by  financing  in the first 39 weeks of 1996 was $121.9
million versus cash used for financing of $13.1 million in the first 39 weeks of
1995.  Net cash  provided  by  financing  in 1996  resulted  primarily  from net
borrowings under the credit facility.

      The Company  anticipates that planned closings of Waldenbooks  stores will
decrease  Waldenbooks'  annual working capital  requirements.  On a consolidated
basis,  the Company  expects its working  capital  requirements to increase as a
result of its expansion program for its Borders books and music superstores.

      In 1995 the Company entered into a $300 million, five-year working capital
line of credit,  with a syndicate  of banks.  The Company had $180.0  million in
outstanding borrowings under the Credit Facility as of October 27, 1996

      On November  26, 1995 the Company  entered  into a five year $150  million
lease  financing  facility  to finance  new stores  and other  property  through
operating  leases.  The lease facility will provide financing to Lessors through
loans from a third party lender for up to 95% of a project  cost. It is expected
that Lessors will make equity  contributions  approximating  5% of each project.
Independent  of its  obligations as lessee,  the Company will guarantee  payment
when due of all  amounts  required  to be paid to the third  party  lender.  The
principal amount guaranteed will be limited to approximately 89% of the original
cost of a  project  so long as the  Company  is not in  default  under the lease
relating to such project.  There were 24 properties  financed  through the lease
facility,  with a  financed  value  of  $84.1  million,  at  October  27,  1996.
Management believes that the rental payments for properties financed through the
lease facility may be lower than those which the Company could obtain  elsewhere
due to, among other  factors,  (i) the lower  borrowing  rates  available to the
Company's  landlords  under the facility,  and (ii) the fact the rental payments
for properties financed through the facility do not include  amortization of the
principal  amounts of the  landlords'  indebtedness  related to the  properties.
Rental  payments  relating to such  properties  will be adjusted when  permanent
financing is obtained to reflect the interest rates available at the time of the
refinancing and the amortization of principal.

      During  1994,  the Company  entered into  agreements  in which leases with
respect to four  Borders'  locations  serve as collateral  for certain  mortgage
pass-through  certificates.  These mortgage pass-through  certificates include a
provision  requiring the Company to repurchase the underlying  mortgage notes in
certain  events,  including  the failure by the Company to make payments of rent
under the related leases,  the failure by Kmart to maintain required  investment
grade  ratings or the  termination  of the  guarantee by Kmart of the  Company's
obligations  under the related  leases  (which would require  mutual  consent of
Kmart and Borders).  In the event the Company is required to  repurchase  all of
the  underlying   mortgage  notes,   the  Company  would  be  obligated  to  pay
approximately  $36.6 million.  The Company would expect to fund this  obligation
through  its line of  credit.  Kmart has  failed to  maintain  investment  grade
ratings,  and  therefore,  these notes are now subject to put by the holder.  To
date, the holder has not exercised its right to put the notes.

      In addition to the  contingent  repurchase  obligations  described  above,
leases relating to two other Borders  locations served as collateral for certain
mortgage  pass-thru  certificates.  On March  11,  1996  Kmart was  required  to
repurchase the underlying  notes. The Company purchased the notes from Kmart for
approximately  $12.1 on June 18,  1996,  which  fully  satisfied  the  Company's
contingent obligation.

      The Company  does not believe  that the note  purchase  has had a material
effect on the Company's financial position or earnings.


<PAGE>






                           PART II - OTHER INFORMATION

Item 6. Exhibits and reports on form 8-K

Exhibits:

(a)   Exhibits: 11.1  Statement of Computation of per share earnings
                27.0  Financial Data Schedule
                10.35 Amendment No. 7 and Consent to Credit Agreement among
                      Borders Group, Inc., its Subsidiaries and Parties Thereto

(b)   Reports on Form 8-K: None



<PAGE>



                                   SIGNATURES


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

                               BORDERS GROUP, INC.
                                  (Registrant)



Date:   December 10, 1996                 By:         /s/
                                             -------------------------
                                             George R. Mrkonic
                                              Vice Chairman and President
                                              (Principal Financial and
                                                Accounting Officer)
<PAGE>